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Wednesday, May 28, 2008

High Commodity Prices Are Good

Short post due to time constraints…

I think this is the first article I’ve come across that argues that high commodity prices are good.

Commodities, Oil Bubbles Are Reason to Celebrate: Matthew Lynn: “Anyone filling up the tank of their car right now will be cursing oil speculators. Likewise, anyone loading up a shopping cart with food for a family may feel angry with hedge-fund managers pushing the cost of wheat, rice and other basics through the roof.

Prices of oil, commodities and food have exploded in recent months. Although there are some solid foundations to that, the boom has now turned into a bubble. Prices are starting to race far ahead of anything that can be justified by the fundamentals of supply and demand. Predictably, that is creating a backlash against the financial markets that are pushing prices up.

We should all leave the speculators alone. The world needs a massive change in the way it uses raw materials. Politicians are too timid to bring that about. The markets are doing the job for them, and if it takes a bubble to change people's energy consumption, then so be it.

First, oil production needs to expand. The International Energy Agency estimates global oil consumption will rise to 98.5 million barrels a day by 2015 from 84.6 million in 2006. By 2030, it will be up to 116.3 million. To get that out of the ground and into the pumps is going to involve more exploration, production, refining and distribution. There is only one way that scale of investment will be mobilized: by causing a price increase that starts a buying frenzy in oil assets.

Next, the developed world has to start making itself more fuel-efficient. If China and India begin using as much oil as Europe and the U.S., we won't just need more supply -- we'll need lower consumption in rich countries. And if we are to combat climate change, we'll need to cut down on pollution as well.

Lastly, agricultural policies need to change. Again, if India and China are to become as wealthy as Europe and the U.S., the world will need a lot more food. That means modifying the way we run agriculture, which, in Europe at least, has been more about preserving farming jobs, and caring for the landscape, than maximizing output. Countries such as Germany with lots of fertile land and falling populations should be turning themselves into major food exporters. But, again, it's not going to happen unless a massive price increase forces it.”

I would have to agree. The cure for high prices is high prices.

5 comments:

Scott Finch said...

not to rain on your parade or anything, but should prices be a "good" or "bad" thing? Maybe they should just "be".

If we could get rid of all the two-statistic presenting editorialists we would all be better off.

Check out the COT data on light sweet crude...if you haven't already.

Ben Bittrolff said...

Scott,

By 'good' I meant that these high prices force us all to re-evaluate our priorities and are the catalyst for change...

For example, it is damn near impossible, short of making them illegal, to convince Joe Sixpack that owning a giant SUV while living in the city is just plain stupid. BUT, the market sure took care of that 'fad' right quick.

Perplexo said...

Price is a behavior-modification signal.
Money serves to incentivize and thereby multiply the ends (and means) of human endeavor.
But Oil costs a lot because the world's always-#1 reservoir of Oil has had war brought to it by their natural best customer...

Perplexo said...

I meant "cheap" oil...

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