Sunday, November 11, 2007
Food for thought as prices soar
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


So many potential subjects this week. There was Mervyn King’s Northern Rock interview and the kerfuffle at the Treasury when he said Alistair Darling had the final say (on King’s recommendation) in not supporting a Lloyds TSB takeover of the troubled bank.

There was the Bank of England’s decision to leave interest rates at 5.75%. And of course there was that pesky oil price, whose flirtation with $100 a barrel was enough to push a litre of unleaded above £1 for the first time. I remember my dad filling the entire tank of our elderly Hillman with leaded petrol for £1.

I’ll come back to the Bank and oil. But I want to fulfil a promise by writing about something else that is rising strongly in price, food.

Food prices in dollar terms are up by more than 30% on a year ago, according to the Economist commodity-price index. The rise in sterling and most other currencies is less, but still significant.

Associated British Foods, one of Britain’s biggest food manufacturers and owner of the discount fashion chain Primark, says prices for four of its most important food commodities – wheat, corn oil, malting barley and dairy products – have doubled in a year.

In some countries such as Mexico and Italy rising prices for staple foods have become a hot political issue. In all countries they have complicated matters for central banks. “There’s little central banks around the world can do to prevent food prices from rising,” Mexico’s central-bank governor, Guillermo Ortiz, said last week. Mexico has just raised interest rates, as has Australia, in response to the commodity-price boom.

Analysts at Credit Suisse First Boston point out that German food prices are up nearly 5% on a year ago and will push euroland inflation to 3% in the coming months, which could prompt a further rate rise from the European Central Bank. As a frequent purchase, rising food may have more impact on people’s inflation expectations than other goods.

In Britain, food prices were up by nearly 4% in September compared with a year earlier, but milk, cheese and eggs prices rose 6% in that month alone and margarine and butter were up 15%.

Why are food prices rising so strongly? They are highly volatile, driven by the success of harvests, weather conditions and other short-term factors. A shortage one year is often followed by a glut the next, as farmers respond to the price signal and plant more of the crop for next time. So a sharp rise in food prices in 2000-1 was followed by years of weakness.

Much of the analysis of current high food prices confuses these short-term factors with longer-term trends. So the sharp rise in China’s inflation to more than 6%, a 10-year high, is not due to the fact that Chinese consumers have suddenly discovered meat. It has more to do with the fact that pork supply has been hit by a nasty outbreak of blue-ear disease.

The Chinese, in fact, are already big meat eaters, with average consumption per head close to that of Britain, and not far behind America. Half of the world’s pigs, after all, are in China. This is not to say that rising prosperity will not increase China’s protein consumption – it will – but it is not happening overnight.

China, with 20% of the world’s population but only 7% of its farmland, much of it poor quality, is perhaps the least appropriate nation to be developing a greater fondness for meat. As Jing Ulrich of JP Morgan pointed out last week, much of China’s production of corn and soyabeans goes for livestock feed. It takes 5kg-7kg of grain to produce 1kg of pork.

A recent report from UBS, What’s Up With Food Prices, does a good job in disentangling short-term from long-term factors. “While rising Asian affluence or climate change are likely to have important influences on food prices over time, recent price jumps appear to have more in common with historic factors, such as poor harvests or animal disease, than they do with 21st century phenomena,” writes Larry Hatheway, the report’s author. “Even demand for biofuels appears to have had only a modest impact on prices.”

This is confirmed by figures from the Department for Environment, Food and Rural Affairs (Defra). Only 2.25m tonnes of wheat, 1.5% of EU production, will be used globally for bioethanol production in 2007-8.

Even so, some long-term trends – a rising population of affluent people in Asia, a gradual increase in demand for biofuels and the impact of climate change – point to rising food prices over time.

There is an echo in some current analysis of the fears of the early 1970s, when the Club of Rome think tank warned that we were heading for a Malthusian crisis of insufficient food to feed the world’s growing population. But, without going too far down that route, there will be significant pressures.

There is also an important interaction between the high price of oil and higher food prices. Expensive oil adds directly to the costs of growing, harvesting and distributing farm produce. It also increases the incentive to turn over crops to biofuels.

Some would say we have had cheap food for too long. The National Farmers’ Union notes that, if food commodities had kept up with inflation over the years, wheat prices would be several times their current level. It is also true that the impact of higher food prices is most serious in poor countries – and for poor people in rich countries.

Increases in the price of commodities account for only a small part of the rise in food prices. Defra calculates that bread prices need to rise by only 6% even if the doubling of wheat prices is fully passed on. Most of the cost of the food we buy is in processing, production, labour costs, transport and margins.

But to return to where I started, rising food prices – like the high price of oil – are something the Bank could do without. It is possible that these high prices will be balanced by lower prices for other goods and services, but that is asking quite a lot.

The Bank will probably say in its inflation report this week that it left interest rates unchanged because the downside risks to growth were balanced by upside risks to inflation. “Agflation” – those rising food commodities – won’t give us stagflation but they could complicate things. The danger is that internationally generated food and energy-price increases keep inflation and interest rates in Britain too high for comfort, preventing the Bank from responding to the slowdown.

PS: I am a great fan of BBC Radio 4. But I felt like Disgusted of Tunbridge Wells the other day when I listened to the Thought for the Day slot. In it, Martin Palmer, secretary-general of the Alliance of Religions and Conservation (founded in 1995 by the Duke of Edinburgh) was opining on the credit crisis.

It was, he suggested, all down to “usury” and that Christianity had changed tack – like Islam and Daoism (or Taoism) it had once opposed the charging of interest on money. “Sadly, Christianity started abandoning its opposition to usury in the Reformation in the 16th century, so opening the floodgates to capitalism,” he said.

Note the floodgates. Note also what he said a couple of sentences later: “You see, if people want more and more, it can only lead to disaster.” At a time when the government is concerned about the kind of message young people are getting from inflammatory clerics, this kind of barking message from the Radio 4 pulpit is worrying. If people didn’t want more, that really would be an economic disaster.

Anyway. Lots of entries to my Freakonomics competition – films that had real-life consequences – are coming in. Martin Dedman reminds us that the Mrs Miniver stories, and the 1942 film starring Greer Garson, hardened American attitudes against Germany. Churchill said it did more for the Allied cause than a flotilla of battleships. I will review all entries in a couple of weeks. There may even be a prize.

From The Sunday Times, November 11 2007


People not wanting "more" would be an economic disaster because without economic growth we cannot hope to pay back the interest on yesterday's loans. If there were no interest on loans, as Palmer is suggesting, there would be no need to perpetually inflate the currency and perpetually grow the economy in order to pay back prior borrowing plus interest.

This ties in nicely with the oil and food prices - how long before the infinite-growth economic paradigm collides head on with natural resource constraints? Are we nearly there yet?

Maybe we need to rethink this idea of debt-based money, before it's too late.

Posted by: Minh at November 11, 2007 01:00 AM

Minh - Spot on. I couldn't agree more. Two comments:

"Are we nearly there yet?"

In the case of oil, we are already there. See e.g.

World oil production has been static since 2005. It is this geological reality which underpins the recent price rises, as much as the fall of the US dollar and geopolitical tensions.

"Maybe we need to rethink this idea of debt-based money, before it's too late".

It already is too late. We have constructed a system which cannot be sustained by available global natural resources.


Posted by: Boris at November 11, 2007 08:33 AM


Only a few months ago I thought you were of the opinion that the dragon was slaid?

Posted by: Pete Balchin, Solicitor at November 11, 2007 09:45 AM


Only a few months ago I thought you were of the opinion that the dragon was slaid?

Posted by: Pete Balchin, Solicitor at November 11, 2007 09:46 AM

So food price inflation is primarily down to supply-side factors... right.

I guess the rise in oil prices is also down to a global supply shortage. The rise in industrial metal prices too. I was even reading about rising helium prices the other day - not just a vital part of any children's party, but also an important input to many manufacturing processes. Must be supply-side issues again.

OR perhaps there's a common theme here. Maybe, just maybe, the fact that the global demand has grown at rates not seen since the 1960s for 5 consecutive years means any disruption to supply is having a disproprtionate effect on prices? Coincidentally, global demand slowed quite sharply in 2001-2. Wonder is that had anything to do with the subsequent weakness in food prices...

Posted by: Sell Everything at November 11, 2007 09:56 AM

I'm surprised anybody responding on this site can seriously contemplate a world without economic growth and then argue that it is all about short-term arguments on servicing debt. If you don't have economic growth, you have mass unemployment and a return to the economic dark ages. The modern era of global economic prosperity, from the 18th century, has all been about new demand being created and satisfied. Surely only the sandal wearers can regard a world without growth as a good thing.

As for food. As the piece explains, there are cyclical and structural elements, which means prices will rise and fall within a rising trend. This period of super-growth for the global economy has boosted demand for food, though not as much as it has lifted demand for oil. I'll take on the subject of peak oil head-on in a piece soon but you'll already know of my scepticism. The apparent plateau in production over the past couple of years proves nothing at all, as I'll explain, but you'll have to wait for that one.

The only dragons I remember talking about are those associated with elephants. If you mean did I say inflation would come down. Yes I did, and it did.

Posted by: DAVID sMITH at November 11, 2007 10:46 AM


Whether economic growth is 'good' or 'bad' is debatable. What isn't debatable is that continued global economic growth requires massive inputs of raw materials and especially energy, and there is growing evidence that demand for these is exceeding supply.

I look forward to your piece on peak oil.


Posted by: Boris at November 11, 2007 10:59 AM

I recall reading an essay written in the 1960's where the author opined that more and more consumption and growth, coupled with overpopulation would mean an eventual environmental crisis and possible catastrophe for the world. Now that was prophetic.

"Capitalism is not sustainable by its very nature. It is predicated on infinitely expanding markets, faster consumption and bigger production in a finite planet." ("It's capitalism or a habitable planet - you can't have both." Robert Newman, Guardian, 2/2/06)

Posted by: walt at November 11, 2007 11:10 AM

"If you don't have economic growth, you have mass unemployment and a return to the economic dark ages."

Yes, because of the fact that all money is now created as debt. If there's no economic growth, activity is not increasing and interest on past debts cannot be repaid. That is the "system" we currently live with, but it doesn't have to be like that. When economic growth can no longer be forced, we'll realise pretty quickly that the system needs changing (only then it will be too late). Servicing debt is not "short term", it's a continual, ever increasing, ongoing obligation.

Read "The Grip of Death":

Posted by: Minh at November 11, 2007 11:12 AM

Wow - I didn't realise what I was opening up here. As I've pointed out before, on many occasions, recent UK spending growth has been 90%-plus financed out of rising real incomes. Debt has increased, but mainly to acquire assets whose value has risen much more - about three times more - than debt. In the absence of the rise in debt, UK economic growth in recent years would have been weaker, but not much weaker.

But this is a more fundamental point which, as I say, I'm surprised anybody on this site should have any trouble with. Modern economies grow, in the case of the UK roughly doubling in size every 25 years or so. They do this in periods when debt is rising and they do it when debt is flat. The supply-side driver of growth in productivity, which has a trend rate of growth of about 2.25% a year (output per hour) and was a little higher - 2.8% - in the 2001-2006 period. Now what happens if there is no demand. If productivity carries on growing, there is mass unemployment. If productivity stops, you get economic stagnation and inefficiency. This is about as basic as it gets.

What about economic growth, natural resources and global warming? Should the world go ex-growth to save itself? Some argue that, but I think they're wrong, as Malthus was wrong 200 years ago. In my view the world will be better-placed to respond to these challenges when it is generating wealth, not when it is having to cope with the problems of sharply rising poverty and mass unemployment.

Posted by: David Smith at November 11, 2007 02:45 PM


“In my view the world will be better-placed to respond to these challenges when it is generating wealth, not when it is having to cope with the problems of sharply rising poverty and mass unemployment.”

Doubtless this is true in the infinite resource space of neoclassical economics. Unfortunately, we live on a finite planet and the consequences of the existence of absolute limits to resource availability, and of the ability of the planet to process waste, are becoming increasingly clear. For an example close to home, I recommend contemplation of the state of North Sea oil production, which is declining at around 7% per year. The dire implications of this for the UK economy are demonstrated, convincingly in my opinion, by the analysis of Euan Mearns

And for those who are blasé about the dangers of climate change I recommend James Lovelock’s recent public lecture at the Royal Society

His views may seem extreme, but there was not a single nay-sayer amongst the questioners!

Malthus may not have been wrong – just premature.


Posted by: Boris at November 11, 2007 03:42 PM

Out of all money (sterling) currently in existence, how much of it carries the obligation to one day be repaid to someone, plus interest?

All of it.

How can you repay 105% of the money currently in existence?

Create more money (as debt).

How can you carry on perpetually creating more and more debt and still pay back yesterdays debt?

Grow the economy.

Stop growing the economy, and the whole plan falls apart. The reason for this is the money system we have today. Change the money system, solve the problem.

Posted by: Minh at November 11, 2007 04:05 PM

Some people would argue that there has been and is much wealth being created now. However, to give an example of how meaningless that can be, when Julie Gerberding, the director of the U.S. Centers for Disease Control and Prevention, testified before the Senate Environment and Public Works committee (the Committee was holding its first-ever session on the health impacts of climate change), her report was censured by the White House with sections that talked about some of the health implications of global warming, including the effects of heat waves, increases in infectious diseases and worsening allergic diseases, entirely removed. Could it be that the US government is so beholden to corporations and big business, they are living in denial of in spite of all the evidence of global warming and its causes? Our own government has thus far done nothing that would result in significant greenhouse gas reductions. The problem that wealth creation and what is good for the environment is in conflict.

Posted by: Walt at November 11, 2007 04:31 PM

"Whether economic growth is 'good' or 'bad' is debatable"


Where has this Anarcho-primitivist response come from? You should start collecting IPs and send them back to Econ 101. As far as i can see this has very little to do with our monetary system of exchange. Minh's suggestion that economic growth originates from a desperate attempt to service debt is plain wrong.

On oil, the idea that these supply issues were suddenly realised in 2004 (sub $40) is ludicrous, the oil price story has far more to do with the real interest rate and rate/cost of extraction stories, (the latter story aka the Hotelling model) especially over the last decade or so.

Martin Palmer's message, which smacks of quasi-religious determinism and not much else, seems to deny some of the greatest achievements of economics, financial innovation and the theory of comparative advantage for example which in a sense allow us to live 'beyond our means' or beyond our PPFs at least. Co-incidental with the birth of this great science we have the industrial revolution and the start of economic growth outstripping population growth, the end of subsistence living.

To counter Palmer on an ideological note, surely economic growth and "wanting more" is not a sordid prol fantasy, as it is an inherent aspirational human quality:

"The uniform, constant and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement." (Smith of course)

Now i'm pretty sure that didn't lead to disaster.

Posted by: Johnny Blaze at November 11, 2007 05:17 PM

Oh really, why is it "plain wrong"?

The requirement to repay last years debt plus interest means an ever increasing money supply is the only way to keep the system alive.

The requirement for an ever increasing money supply mandates more economic activity i.e. a requirement for continuous growth. This is why periods of low or negative growth are so painful.

What part of this is wrong and why?

Posted by: Minh at November 11, 2007 05:30 PM


"the oil price story has far more to do with the real interest rate and rate/cost of extraction stories, (the latter story aka the Hotelling model) especially over the last decade or so".

Please provide references to support this argument.

How will "financial innovation and the theory of comparative advantage" deal with 7 metres of global sea-level rise if the Greenland ice sheet melts?

Posted by: Boris at November 11, 2007 05:36 PM

As I said earlier, I'm surprised that the direction this has gone. The idea that we only need economic growth to service our debt is about as far off the point as it is possible to be. As Johnny says, the debt obsessives need to go back to their first-year textbooks. Of course all the debt isn't covered by the amount of sterling in circulation - we've come a long way from cowrie shells - but neither, by a far greater margin, is the amount of wealth. As I say, some very odd views around today from people who should know better.

We can debate whether the world can cope with rising population and rising prosperity but given that we are going to have both, it is more productive to talk about how we can ensure it does cope.

I haven't read the Mearns paper in detail but on a quick scan it seems to me to take a mercantilist view of trade - implying we have to be self-sufficient. Few countries are self-sufficient in energy - even Iran needs petrol imports - other energy-rich countries both export and import to achieve the desired energy mix. The loss of the North Sea surplus, which has been happening over a number of years, has not caused any notable problems for the UK economy so far. Economies adjust. They also probably build a lot more nuclear power stations.

People are obviously troubled about the reliability of gas imports from Russia, and I share some of that concern. But Britain is in the same boat as many other countries in that regard.

Posted by: David Smith at November 11, 2007 08:32 PM


Thanks for the reply.

“We can debate whether the world can cope with rising population and rising prosperity but given that we are going to have both …”.

This is by no means certain. Any consideration of human history, or indeed that of the planet, shows that it is unwise to extrapolate existing trends indefinitely into the future. It is probable that the UK Government did not imagine that their North Sea bounty would prove quite so ephemeral.

“The loss of the North Sea surplus, which has been happening over a number of years, has not caused any notable problems for the UK economy so far.”

This is true – so far. However, production is falling steeply and Mearns’ projections point to a severe negative trade balance by 2010. Use of the model data of Kemp suggests a less gloomy scenario – but there is the same negative, and worsening, trend. This is the problem with the ‘peak oil’ phenomenon – you can go very quickly from the point of maximum oil production to steeply falling production.

“Economies adjust”.
Indeed they do. Ours will be forced to do so.

“Few countries are self-sufficient in energy”.

Indeed not. They do not have to be as long as energy can be imported from elsewhere. However, this implies both the physical availability of such resources elsewhere, and the willingness of the exporters to sell them. Unfortunately neither condition can be guaranteed in the future.

“They also probably build a lot more nuclear power stations.”

Unfortunately, like oil, uranium is a finite resource. There is an ongoing debate as to whether or not there is sufficient uranium ore for nuclear energy to provide a viable alternative to depleting hydrocarbons. A recent report by the German Energywatch group

concludes that discovered reserves are not sufficient to guarantee the uranium supply for more than thirty years.

Posted by: Boris at November 11, 2007 09:29 PM

Here's a review of the book I'm referring to:

Chapter 3, entitled "Forced Economic Growth", is mentioned in the review:

"By analysing money in action, the flows and tensions, he enables the reader to see the role and responsibility of the financial system for the nature of modern growth. Forced economic growth is shown to derive from intense competition for money, lack of purchasing power and near total wage dependency. Demonstrating these in action he demolishes the suggestion that growth is responsive to the aggregate desires of people either as consumers or workers."

As a practical analysis of what actually occurs when money flows around the economy, and the imbalances in the system overall, it's worth reading. A simple example:

* Business borrows money to pay for wages and raw materials to produce products
* Business then sets prices to recoup money borrowed plus interest
* Total prices are therefore higher than than the total of money for wages and raw materials given to be spent back into the economy
* Therefore taken as a whole, those paid for wages / raw materials cannot afford to buy the goods that were produced
* Therefore they need to borrow a bit to cover the shortfall
* The cycle then repeats, exacerbated each time, so the gap between prices and incomes grows
* As overall the gap has grown a bit, overall people ("the economy") have to do a bit more work the next year in order to meet that gap - and there you have your forced economic growth.

Where is the hole/flaw in this theory?

Posted by: Minh at November 11, 2007 10:37 PM

A couple of points: As I said earlier, I'll tackle the peak oil argument in detail soon. I would not claim to be an expert on uranium resources but, while those who are opposed to nuclear power argue that reserves will be exhausted in the foreseeable future, most experts say this is a red herring. UK governments have always known North Sea oil was a finite resource - it has only minor implications for UK GDP and Exchequer revenues these days. The initial effect of the rise of North Sea oil was to exacerbate the decline of manufacturing. Recently, the decline of North Sea exports has been offset, in part, by improved performance in services, particularly financial services. The peak oilers use UK North Sea oil as a proxy for the world. It isn't.

As for Rowbotham, I haven't read the book, but on the basis of the review and your description, I'm not surprised it has remained obscure - it is as full of holes as a colander. Yes of course business sets its prices to more than cover its wages and raw material costs --- it's called making a profit. The genius of capitalism is that entrepreneurs organise labour and materials to generate efficiencies, create new products and add value - think of Adam Smith's pin factory. Can the workers in the pin factory, productive though they are, afford to buy all the pins produced? Of course not, but other workers in other factories do and the pin workers, in turn, buy products from their factories. It is, of course, the multiplier. Productivity growth, meanwhile, creates the real-world fact of life that income growth normally outstrips prices. What kind of world do you think is possible? One where wages equal GDP? If you've described it accurately this is oddball approach - a misleading leap from the micro to the macro - and I urge you to come back to something closer to the mainstream.

Posted by: David Smith at November 11, 2007 11:49 PM

I don't know where you got your figures from to say "The Chinese, in fact, are already big meat eaters, with average consumption per head close to that of Britain, and not far behind America". The Chinese eat a similar amount of pork per capita to the Americans, however, pork is the most popular meat in China by a very significant margin. In America pork is the third most popular meat behind beef and chicken, when this factor is taken into account, on a per capita basis, the Chinese only eat about one third of the meat eaten by the Americans.

Here are the official figures for meat consumption.

Posted by: howard at November 12, 2007 05:59 AM

Thanks for the explanation, I understand it, but you don't mention anywhere where the money is coming from for these things to happen.

Anyway, you should read the book, it's more well known than you seem to think, and you might be surprised.

When you say the N. Sea isn't a proxy for the world, what do you mean? I am guessing you can't mean that the world won't eventually decline, so I assume you are suggesting that when the world does decline the loss of productivity will be offset by other areas. This is ok as long as we can close the energy gap in time, but we may not be able to.

BTW when you look at the output forecasts of various people, bear in mind that they are very optimistic, and based on taking the estimates of OPECs reserves at face value. OPECs reserves are almost certainly inflated - their quota system gives member nations a huge incentive to do this. So any prediction of peak world production occuring in 20+ years based on OPECs stated reserves isn't much use.

Posted by: Minh at November 12, 2007 07:35 AM

The figures I had for meat consumption were KCal per capita, but I'll check back with the original source.

Posted by: David Smith at November 12, 2007 09:07 AM

“those who are opposed to nuclear power argue that reserves will be exhausted in the foreseeable future, most experts say this is a red herring”.

For reference, I am not opposed to nuclear-fission based energy. I am very much in favour of it – as a temporary stop gap. Who are the experts who claim that uranium reserves will not be exhausted in the foreseeable future? Please provide references.

“UK governments have always known North Sea oil was a finite resource”.

Yes – in the sense that most people do accept that most resources are finite in the very long term. However, I think it is unlikely that the UK Government believed that it would be faced with the prospect of moving from being a net exporter to a net importer in a very few years.

“it has only minor implications for UK GDP and Exchequer revenues these days”

I wonder whether the implications will be minor when we are forced to import oil at a cost of $150/barrel and rising? $150/barrel and rising is much more realistic than the return to $40/barrel that several economic commentators have suggested.

“Recently, the decline of North Sea exports has been offset, in part, by improved performance in services, particularly financial services.”

I wonder for how much longer this country will be able to make a living from paper shuffling, AKA as ‘financial services’. The sub-prime mortgage fiasco, of which we may have seen only the tip of the iceberg, indicates that a significant component of the global financial system is indeed a house of cards. The steeply rising price of gold may be saying as much about this as about the fall in the US dollar. The global economic system is predicated on the assumption of unending economic growth. Much of this growth over the last 200 years has been fuelled, literally, by the availability of near-unlimited cheap energy. The era of cheap energy is now coming to a close and unfortunately the dire implications of this fact for the maintenance of the global economy are woefully unrecognised.

“The peak oilers use UK North Sea oil as a proxy for the world. It isn't.”

It is a fact that world oil production is dominated by output from a relatively small number of giant oil fields, most of which were discovered decades ago. We are now using significantly more oil than we are discovering, and this situation cannot continue except on the flat earth of neoclassical economics. Production from several of these giant fields is now falling steeply – Canterell in Mexico

is a good example. In addition, it is highly likely that the world’s largest field, Gharwar is very close to, or past, peak

For reference, a detailed treatment of the production prospects for the giant oil fields is provided by the comprehensive research of Fredrik Robelius

Posted by: Boris at November 12, 2007 10:22 AM

Minh wrote-

* Business borrows money to pay for wages and raw materials to produce products
* Business then sets prices to recoup money borrowed plus interest
* Total prices are therefore higher than than the total of money for wages and raw materials given to be spent back into the economy
* Therefore taken as a whole, those paid for wages / raw materials cannot afford to buy the goods that were produced”

How about this -

* You lend me £100 to be repaid with £10 interest after ten years.
* I buy seven avocado trees (raw materials).
* I pick the avocados and pay myself in avocados (wages).
* I also sell to you £110 worth of avocados over ten years. (I set the price).
* After ten years I repay you the £110.
* But I have more avocados than I need.
* I trade the surplus avocados for other goods I want more of.

Taken as a whole, we’ve both bought the goods produced without the need for further borrowing. As a business, I’ve produced growth in the economy. And as an individual I can have more and more without leading to disaster.

That’s an example of wealth being created from the energy of the sun. If you have a problem with hydrocarbon reserves I can turn my avocados into fuel oil.

Posted by: sandid at November 12, 2007 10:38 AM

Time prevents me keeping up this dialogue and, as I say, I'll address the peak oil issue you keep coming back to in detail soon. $150 a barrel oil would, by the way, make Britain's extensive coal reserves look very viable. On uranium, here's one assessment from the IAEA:
As you'll see, it thinks there is a probably a lot more uranium than commonly thought, and that on favourable assumptions supply could last 2,500 years. There is also, plainly, a price factor here.

Posted by: David Smith at November 12, 2007 10:47 AM


Thanks for the uranium reference. One might imagine that part of the IAEA's brief is to promote the use of nuclear energy and therefore I prefer the independent research of the Energywatch group. However, I take this reference seriously and will read it.

I too need to get on with some work and probably won't keep checking this blog.

Posted by: Boris at November 12, 2007 11:01 AM

Sandid - that's all well and good, but you need to come at this from the angle of money to see what I'm talking about. Where do I get my £110 from to buy your avocados in the first place? The point is that, as all money (or the 97% of it that isn't notes and coins at least) is created as a debt, there is always a shortage of money, which means we need to create ever more of it (as a debt).

I've set up a forum thread to discuss this here:

Posted by: Minh at November 12, 2007 11:14 AM

$150/bbl oil does indeed make coal look very viable, and in fact there are tentative signs that we are about to return to coal in the UK, with the opening of a new coal mine in Wales a few weeks ago, which will become one of the largest in Europe.

Unfortunately turning back to coal has similar issues to turning to the oil-sands in Canada, or oil shale in the US. Namely that it is simply not practical to produce these resources at the rates required (n million barrels of oil equivalent per day) to fill the flow-rate gap that peak oil will cause. The world coal energy peak is expected to occur around 2025. Plus of course there is the problem of carbon emissions, and all the political tensions surrounding that.

Posted by: Minh at November 12, 2007 11:24 AM

Minh, I wish you'd get off this one - it really does not make any sense and, given that most of your contributions to the site have shown a lot of knowledge, I'm rather surprised. Have a look at my book Free Lunch, which explains in very simple terms how we moved from a world without credit to a world with credit.

Posted by: David Smith at November 12, 2007 06:39 PM

Here are a few recent/planned UK biofuel related developments:

ScottishPower recently announced a massive UK energy crop project - the company is looking to contract Scottish farmers to produce 250,000 tonnes of energy crops for Cockenzie and Longannet power stations.

It has been estimated that this project alone will take up to "12% of Scotland's agricultural land" out of food production.

Meanwhile I'm seeing UK companies scouring mainland Europe for land to grow biofuels - one company I know of is taking over 65,000ha of first class arable land in the Ukraine to provide feedstock for the biodiesel market.

Whatever the crop, be it wheat, maize, oilseed rape, miscanthus, coppice, there's ever-increasing demand that's being driven by incredibly ambitious biofuel targets set by the EU and Congress.

Posted by: Mr Naresh Radson at November 12, 2007 10:26 PM


Re uranium reserve controversy. I contacted one of the co-authors of the Energy Watch Group's report on uranium and asked him to comment on the seeming discrepancy between the IAEA estimates and their own. Given the probability that we all agree on the importance of future energy supplies I provide his reply in full.

In short, it would seem that the prospects for uranium are much less rosy than the IAEA report implies.


"The press release which you sent me relates to the latest Report of NEA/IAEA on uranium resources. These were included in our analysis. However, for obvious reasons in the analysis we exclude so called undiscovered resources which are divided into undiscovered prognosticated and undiscovered speculative. Actually both categories are speculative (or would you call an undiscovered resource as being a proven reserve?). We also excluded phosphates or uranium from sea water or fast breeding

What we do is to analyse the data which are more reliable. In fact also proved reserves (or reasonably assured resources below 40 or 80 $/kg) are not fully reliable as can be learned, e.g., from the history of uranium resources in France or USA (see annexes in our study). It seems that as soon as the production in France or USA started to decline in 1989 , resp. 1981, the RAR were downgraded considerably. (How can a proved reserve vanish? Or wasn't it a proved reserve before?). We also take into consideration recent production patterns. It is just as with oil: The easy and most profitable resources are developed first.

So our statement is: Based on the data of RAR and IR (world uranium production might peak around 2020 or 2040 (if Inferred resources (IR) are also taken into account).

Certainly, we cannot say for sure that this will be the end of nuclear energy. But we can say, these are the trends. When this should not going to become reality, these trends need to be changed considerably, meaning that:

1. New discoveries have to be made fast (real discoveries and mining developments not hopes into undiscovered speculative resources; keep in mind that cigar lake was discovered in 1981 and will start to produce in 2011, at earliest!)

2. Fast breeding reactors have to become reality

In short we base ou analysis on facts given by IAEA/NEA, ..... The
counter argument from IAEA is that if fast breeding reactors become comerical reality at large scale, if new discoveries are made, if uranium from phosphates becomes commercial reality, if if if... , then we can go on with nuclear for a longer period.

My response to this is: they are right, if IAEA's dreams become reality than they won't have a problem. But present trends give not any indication that the situation is changing towards these dreams: Fast breeding reactors are investigated since more than 30 years. Up to date not any commercial operating FBR is visible. When should it come? (By the way it is not a coincidence that the former project leader of the German Fast breeding reactor project - Klaus Traube - became one of the strongest critics of nuclear energy. One of his arguments is that the required Na cooling cycle of FBR will never work safely and economically).
Also the so called 4th generation reactor concepts as proposed by
European Industry need about 6 billion Euro R&D budget (according to the industry). Within the last three framework programs of the EU about 25-35 million Euro are spent annually. Simlpe calculations exhibits, that within the next 20-30 years not any of these reactors will become reality provided that present investments do not change dramatically ("little or no money for research give little or no results!").

What we see is , that new mining projects face large problems (Cigar Lake, Olympic Dam, Ranger...), that the EPR- reactor project in Finland is 2 years in delay after 2 years of construction time and costs are overrun considerably. Since the contract of the Finish reactor includes a fixed price this is only a problem of AREVA internally, but at the same time it means that new reactors will become much more expensive. Over the last 20 years neither in UK nor in USA any new reactor was build though political support would have been there - it is simply not
attractive for the investment community. Even at end 2006 only 3 0
reactors are under construction, 8 of them for more than 20 years - they are ruins from the soviet empire. Therefore even today the so called renaissance is not visible in increased investments for new reactors.

I hope this helps to develop an own view to the situation. But feel free to ask again if some questions are still open."

Best regards
Werner Zittel

Posted by: Boris at November 14, 2007 04:21 PM

That's extremely useful and detailed - though I suppose I'd expect him to disagree with the IAEA's findings.

Posted by: David Smith at November 15, 2007 02:25 PM

Hello, David,

I am actually very disappointed with the direction that this particular discussion has taken. I cannot believe there are people who actually invest time reading the analyses you put forward, but fail to understand the very basic foundations of standard economics.

On this website, I am used to comments of a high calibre, often ‘enriched’ with shrewd sarcasm; hence, the dogmatic pseudo-socialistic fear talk observed here makes me wonder why doesn't someone just read a book of O-level economics, way before attempting to comment on your content.

Anyway, for the sake of the rest of us, please stick to your usual levels of insight, and let questions of 'how unlimited growth can be achieved in a world of finite resources' be dealt with more simplistic, and likely sentimentally charged blogs. Meanwhile, I am really looking forward to your opinion on the oil situation.

Apologies to the people this sounds harsh to, but I am sure there is a bunch of readers who agree with me, and who, most likely, could not even be bothered with getting involved in such a discussion.


Posted by: Fiv at November 16, 2007 11:34 AM

Thanks. That's the internet, I suppose, and I feel some obligation to respond or correct, rather than just letting things lie.

Posted by: David Smith at November 16, 2007 01:41 PM


Mea culpa. However, I would suggest that my sarcasm is more than matched by David's condescension.

What amuses me is that while you accuse me of having minimal knowledge of economics (which is true) you are waiting with bated breath for David's pearls of wisdon on peak oil - from an economist with no background in geology.

David - if you've got a degree in geology, I apologise.

Posted by: Boris at November 16, 2007 07:01 PM