Tuesday, September 12, 2006

The Great Arbitrage

Whenever I want to convey how big the global energy industry is, I compare it to the only other human endeavor on a similar scale, agriculture. In an op-ed in Sunday’s Washington Post, a noted environmentalist expressed concern about the connection between the two, manifested in the growing demand for biofuels. In “Starving the People To Feed the Cars,” Lester Brown of the Earth Policy Institute sees great dangers for the world’s poor in the prospect of diverting crops to power our transportation and industry. While I would dispute his conclusions, he offers some useful insights for how such competition might actually work.

This topic comes up periodically in my coverage of renewable energy and in comments from my readers. Typically, these remarks have focused on the degree to which constraints on arable land, water resources, or other agricultural inputs might limit ultimate biofuel production. As Mr. Brown implies, though, the main interaction between energy and food will play out in day-to-day, season-to-season decisions about which crops to grow, and whether to commit them to ethanol or biodiesel manufacture, or to animal feed or human food. Those choices will largely be guided by the relationships between the various commodity futures markets. As a result, whatever the long-term impact on total global agricultural capacity and distribution channels, expanding our capacity to turn crops into fuel must inevitably drive up the price of the former, as long as demand for the latter remains high.

Mr. Brown goes on to draw analogies to the downfall of previous societies, along the lines of Jared Diamond’s “Collapse,” suggesting that high oil prices and our desire to replace oil with ethanol might be signposts of a looming systemic breakdown. This view appears to bias his interpretation of last week’s news of Chevron’s dramatic oil discovery in the deep waters of the Gulf of Mexico. He’s not alone in missing its importance in demonstrating new technology that enables companies to drill deep and accurate wells under salt domes and other obstacles. If this is truly the beginning of a new oil trend, rather than a lucky one-off, then it could force us to revise upward our estimate not just of US oil reserves, but of the total global oil endowment, perhaps by enough to stave off Peak Oil for an extra decade.

In opposing the shift to biofuels, the op-ed falls back on the efficiency default used to counter so many other energy projects: if we only saved a little of the vast amounts of energy we use today, we could forego biofuels--or drilling in the Arctic, or coastal LNG terminals, or anything else of which we disapprove. Unfortunately, the international trends in population and economic growth make it clear that these are false dichotomies: we will certainly need more energy and greater efficiency, in order to avoid a larger future crisis. The future energy mix must be broader than today's, and we must use it more wisely.

Meanwhile, energy experts will have to educate themselves about agriculture, and those who follow agricultural trends must learn to keep energy markets firmly on their radar screens. While this growing interconnection may raise the stakes for disruptions in either market, it should also provide some great opportunities, and not only for market speculators and rich investors. Rather than hurting the global poor, it might just provide them with better outlets for their products, and the capital with which to invest in producing more food and more fuel.

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