The price of a barrel of oil to be delivered in December 2008 fell to $63.22 on the New York Mercantile Exchange on Monday, the lowest mark since May 2007. Gas prices under $2-a-gallon have been spotted in Texas.
But we all know why, right? Demand destruction popped the speculative bubble. The prospect of the worst global recession in many decades has convinced oil traders that betting on rising prices in the near future would be suicidal. This is not to say that anything truly fundamental has changed with respect to the peak oil thesis, but just to underline that the future trajectory of fossil fuel prices will be bumpy.
But what about other commodities? Specifically, grains and other food staples? Corn, soy, rice and wheat prices have also dropped sharply in recent months, as if shackled to the price of oil. But why? One would presume that people are still going to eat, right? And federal ethanol production mandates haven't changed one whit.
In fact, the good folks at BioPact are convinced that the collapse in world food prices is evidence that biofuels were not a primary factor in the great food scare of the last year.
A whole army of biofuel critics may have been wrong: contrary to what they said, it is now becoming clear that green fuels like ethanol and biodiesel have played virtually no role in the recent global surge in food prices. The spectacular trends in agricultural commodity markets prove it...
The correlation between the rapid decline of oil prices -- which fell from a record $147 to below $65 today -- and crashing agricultural commodity prices is obvious. The movements of all the internationally traded grains were part of a bigger speculative commodity boom, tied to oil, which itself fluctuated alongside the value of the dollar (and possibly in anticipation of the credit crunch). Biofuels output rose only very gradually over the course of the past two years, whereas prices for feedstocks jumped and then crashed. Today, the same amount of biofuels is being produced, world wide, than before the food price crash, and people are not eating less. But prices of feedstocks and food are in free-fall.
BioPact isn't alone in making the case that biofuels did not provoke the food crisis. Last Thursday, The U.K. Guardian also acknowledged that the food vs. fuel thesis might not be holding up:
Heavy demand for corn from ethanol makers was seen as a key driver of corn futures to record highs in June, but since then the sharp decline of corn along with other commodities shows that belief was mistaken.
There's some irony to be mined here. The Guardian was the same paper that broke the story, in July, about the internal World Bank report arguing that biofuels were responsible for 75 percent of the rise in global food prices.
To be fair, one leg of the World Bank report's argument was the theory that the rush to biofuels encouraged financial speculation in commodity prices, based on the thinking that as biofuel production grew, demand for feedstocks would also grow. So, just as oil speculation was pinned to a narrative that depended on demand continuing to rise, so too did commodity feedstock speculation rest on the assumption that biofuel production would ramp up dramatically. The collapse in oil prices is likely to reduce investment in biofuels, which means that explanatory narrative has also popped.
Still, 75 percent does seem a bit high, given how food prices are down, but biofuel production is not.