Biofuel and the great disruption


The commodity with the greatest potential to create economic and social disruption is not oil but food. In more than 30 countries food riots and protests have signalled international tensions since 2007. The world food market is not only growing fast due to emerging big economies but is also more concentrated than even the oil market, meaning that supply problems easily ripple through the world market. Whereas the top five oil producers supply only 43% of the global oil market, the top five corn suppliers muster 77%, rice producers 73% and beef and wheat producers 66 %. Bio-fuel mandates by many Western governments have proven particularly disruptive, as the example of the United States shows:

U.S. law requires that ethanol make up at least five percent of vehicle fuel (rising to 22 percent by 2022), and 30 percent of U.S. corn went toward ethanol production last year. The U.S. government has claimed that bio-fuel demand is responsible for only three percent of the increase in global food prices over the past year, but a recent World Bank report estimated that figure to be 75 percent. Moreover, the price hikes of the past three years threaten to push 100 million people back into poverty, erasing seven years of progress.

Market forces are expected to bring the food prices down eventually but according to the pundits not to the level where the hike started. This is because of distorting government intervention. We are entering a new era of food pricing, one that will probably discredit the whole issue of renewables, not only bio-fuels. The lesson: green policy hurts poor people in developing countries most and is not compatible with the social credentials of liberal politics.