Rising Prices, Rising Crises

Every now and then, my hyperactive mind runs the film of the Federal Reserve changing its policy, and an unexpected chain of events happens, triggering a war a long way away. Sound farfetched? US monetary policy with its unending bias toward stimulus, since we are the global reserve currency (for now), pushes inflation out into the countries that lend to us and into the commodity markets as well. (What do you expect from a negative real interest rate?) This has political impacts as the prices for energy, food and related goods rise.

Nigeria is a basket case because of the light sweet crude buried there. Venezuela gets its share of troubles because nationalized oil gives extra power to their government. Same for Russia, though the politics are different. Now there might be a movement for autonomy in the part of Bolivia where the natural gas is located. I sometimes think that Iran will have internal difficulties once their oil production falls to the degree that they can no longer subsidize their populace.

These are some of the difficulties driven in part by rising energy prices. Now, even in the US rising energy prices pinch. Summer travel will be less (though I will still take my family to the 50th anniversary of my parents — I expect to spend at least $600 on gas… cheaper than plane fare.)

Now, some allege that the energy markets are being manipulated. It is impossible to manipulate a resource market successfully over a long period. The Hunt Brothers learned that on the silver market, and OPEC learned that in the mid-80s on energy. Our government should not worry about the energy market getting manipulated. It can’t be done over the intermediate-term. Here’s one (of many) reasons why: When the price rises, new sources of supply show up, even the recovery of marginal amounts of energy in places where it was too expensive to extract.

Food and energy inflation are linked in several ways:

• A growing global middle class creates demand for both.
• Rising input costs, such as energy and fertilizer push up the costs of growing food.
• We grow crops for their energy content. That has spillover effects on crops that are displaced.
• There are even spillover effects in China, and other countries that are feeling the pinch.

Rationing of rice and other staples is happening globally, even in the US to a limited degree. Personally, I think it will lead to higher prices still and a lot more planting (on land previously considered marginal) for food, not energy purposes.

There are other spillover effects in the US, whether it is pricing/portions in restaurants, or the general rise in price for meats that may come. Remember the meat shortage in the 70s? (Ugh, I am dating myself…) First grain prices rose. Then, ranchers culled their herds/flocks. Meat prices fell. (That may be where we are now.) Once the excess meat was purchased, meat prices rose as well, creating the “meat shortage.”

My endgame for the foolishness for the past 20 years has resembled a repeat of the 1970s, minus country music, truckers being cool, disco, etc. It will have its difficulties; just be grateful to God that you don’t live in Nigeria, or any other place that is coming under stress that is even more severe.

Comments

[Paul Lopez]

The world has figured out Americans can afford $5/gal gasoline. We need more refineries, reduced strategic reserves and more places to drill in our hemisphere.

[CaptBob]

Paul: "The World" does not hang a price tag on gasoline. There are more Chinese that can afford $5 gas that are bidding against us, + other emerging economies as well.

More refineries yes, more drilling yes even if we sell it to Japan like Alaskan oil now.
Use strategic reserves?? Iran will vote for that one.
We have entered the Alternative energy age!, it may be painful but get used to it.

[rocknbob]

Hey CaptBob... I think the word does hang a pricetag on oil/gasoline. its traded on major financial markets, no?
oh the woes of commodity trading....and speculating, booo.