FAO Food Price Index Vs. Oil Price

By Andrew Butter

This is a chart of oil prices (Nominal-Brent-30 Day Moving Average) superimposed on the FAO Food Price Index (Nominal) as of April 2011.

chart

Three points:

  • Given that energy (mainly oil) accounts for 30% of the cost of food, it’s not surprising that when oil prices went up by a factor of about five since the average in 1990 to 2000, food prices about doubled (5/3 = 1.67…plus whatever).  
  • In spite of the dire predictions, the world probably isn’t coming to an end…just yet.  
  • The peak in food prices in 2008 slightly preceded the peak in oil prices (by about a month)…so perhaps the food price index (one measure of what the world is ready to pay for oil), is a leading indicator for the oil price?

That’s a thought.  The Saudi’s are saying that the current spike is all because of speculators and that the “fair price” is about $90 (they changed their minds on that one, a year ago they were saying $75 was “fair”).

Perhaps they are getting freaked-out by Donald Trump whose big idea is to TAKE THE OIL! His argument is that (a) the correct price of oil as far as he is concerned is $40 and that (b) it doesn’t make any sense to have the largest army in the world, and spend trillions in wars, if you don’t make a profit on the enterprise. One wonders how much the price will have to go up before he starts winning votes.

There is a certain logic in that argument, although another option might be to stop spending trillions of dollars, and to either drill more oil in USA and/or persuade Americans to drive Fiat’s or Lambrettas.

Meanwhile, in my humble opinion, the correct price of oil right now is $90 (Brent), that’s as determined by “Parasite Economics” (where America is “Daisy” and the oil producers are the parasites).

I’m sure Donald would love that analogy.

And unless the schizophrenia about replacement cost takes hold, that story-line says oil prices are going to $70, someday soon.

About the Author – Andrew Butter is Managing Partner of ABMC, an investment advisory firm, based in Dubai that he set up in 1999, and has been involved advising on large scale real estate investments, primarily in Dubai.

The views and opinions expressed herein are the author’s own and do not necessarily reflect those of EconMatters.

EconMatters, June 15, 2011 | Facebook Page [Twitter [Post Alert [Kindle

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