STWR - Share The World's Resources

How the food crisis and the $130 barrel killed off the myth of the weightless economy.

30th May 08 - Aditya Chakrabortty, The Guardian (UK)

Anyone here Jurassic enough to remember the late 1990s (and there are a few of you, judging by the profile pics) may recall talk of the "weightless economy". It was a phrase that neatly summed up dotcom triumphalism: a grand vision of an incoming economic model in which the free flow of information overrode all else. This was not just a hobbyhorse for the terminally wonkish. The world's most important central banker, Alan Greenspan, was a big fan of the information revolution, while the new business cliche was about how "any firm's greatest asset is its intellectual capital". Machines were obviously old hat - unless stamped with an apple sign.

Soon enough, however, the weightless economy ran into some all-too-practical problems. First, there was the dotcom bust, while even fervent cheerleaders for the "weightless corporation" (a big thing in the late 90s; perhaps you just had to be there) were given pause by Enron. But there was always more to the model than IT: underpinning it was the assumption that basic commodities such as food and oil were going to remain forever cheap. In 1999, for instance, the Economist predicted that oil, then $10 a barrel, was heading to $5 and that the world was going to have "cheap, plentiful oil for the foreseeable future".

Well, oil is now bobbing around $135 a barrel, while the prices of various grains are nearly double what they were a year ago. There are two responses to this: one is to argue that the spike is temporary. This argument takes many forms: high prices are all the fault of speculators; all we need are some more oil and a couple of good harvests. But the conclusion is usually the same: this bubble too shall pass.

These arguments aren't nonsense; there is no doubt that the prices for some grains and crude have been distorted by investors after that rare thing in today's choppy markets, a safe bet. But this is to confuse the symptom with the disease; after all, prices usually rise for a reason.

Far more convincing is the second view: that fundamental shifts are taking place which mean our basic commodities - food, oil, metals - will probably be expensive for a long time to come. That era of cheap resources, which lasted from the 80s all the way up until the early part of this decade, is over.

Just look at the Agricultural Outlook released today by the rich nations' club, the OECD. Commodity prices, it says, "will average substantially higher above the levels that prevailed in the past 10 years". Over the next decade, wheat and maize will be 40% to 60% more expensive than they were from 1998 to 2007; butter will be 60% dearer, and vegetable oil prices over 80% higher. Not only that, but they will also be far more volatile.

As that Economist cover proves, forecasters often make the mistake of believing present conditions will carry on as far as the eye can see. After all, the last time we saw a food and oil shock was in the 70s - and while it was nasty, it was followed by decades of low prices. Won't something similar happen this time? It's unlikely. The commodity crunch of the 1970s was a supply shock; this is a demand shock. As the Chinese and Indians and others from formerly poor countries eat more meat and drive more cars, so the price of food and oil rises. These people are not consuming as much per head as British or Americans, but the trajectory is fairly clear. As the OECD agricultural outlook predicts, "By 2017, developing countries are expected to dominate production and consumption of most commodities".

What could reduce prices? China and India could have an economic slowdown over the next couple of years, but it would need to be drastic and long-lasting to have a big impact on food and oil markets. There could be the sudden discovery of cheap crude, but oil executives don't sound especially hopeful about that. Most likely is that more land will be given over to farming (we could start by switching back the arable land that has been diverted to producing biofuels) and that farmers will use it more productively - but again the results would need to be pretty startling to reverse these trends, And climate change may well mean that droughts and poor harvests are more the rule than the exception.

All this means that the west is about to rediscover a harsh truth: that oil, land, and ultimately the planet are finite resources that can limit economic growth. That airy talk about a weightless economy, where information and technology trump all else, will have no place in this environment. With it will go the assumption that rich countries can leave the hard slog of production to others and get on with the fun of consumption; instead, we are likely to hear ever more about energy security and food sufficiency. For the west's well-off, the good times are, for now, over.

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