Celebrate St. Patrick's Day with a "green" book! Our March discount pick is The Green Paradox: A Supply-Side Approach to Global Warming by Hans-Werner Sinn. Hans-Werner Sinn is Professor of Economics and Public Finance at the University of Munich and President of the CESIfo Group. Author of Can Germany Be Saved? The Malaise of the World’s First Welfare State and other books, he is former president of the International Institute of Public Finance, and former chairman of the German Economic Association.
Follow this link, which will automatically apply the discount, to get your copy of The Green Paradox. *In the (unlikely) event that the discount doesn't appear when you click the link, have no fear--simply manually enter the discount code "SGPFRI12" in the shopping cart to get the discount.*
Here's an excerpt from The Green Paradox. Check back on the first Friday of April (4/6) for our next "Thirty Percent-Off Friday" pick.
The coupling of oil and food prices occurred in the past few years with astonishing force and abruptness. Apart from the political influence…the abruptness can be explained by the fact that crude oil and foodstuffs aren’t substitutable in both directions: foodstuffs can be turned into fuel, but fuel can’t be converted to foodstuffs, at least not in a direct, chemical sense. We can’t use the oil we buy at a filling station to fry food or to spice up a salad, and even with sophisticated bio-chemical methods we can’t turn it into animal feed. However, when the price of diesel fuel peaked in 2007 and 2008, some people bought vegetable oil in grocery stores and ran their old diesel cars on it. Modern diesel cars have trouble running on vegetable oil, but chemistry can easily circumvent them and convert the vegetable oil to biodiesel. Most gasoline engines can tolerate a certain blend of bioethanol, and Brazilian flex-fuel engines can even run on pure ethanol.
This one-sided substitutability implied that the energy equivalent prices in the two markets couldn’t converge when the price of oil still hovered below the price of food, measured in energy equivalents. It was tempting to convert crude oil to food, but all chemists who tried to do it failed. The situation changed dramatically when all of a sudden the price of oil caught up with the price of food and even hinted that it would go above it. In that situation, the two markets became coupled, as farmers and energy companies were able to make profits by using energy crops as feedstock for the production of gasoline and diesel fuel. Oil prices were linked to food prices in a way akin to the link between a bicycle’s pedals and its rear wheel. But if you pedal faster, the gears engage and the force applied to the pedals is transferred to the wheel. It is a sort of ratchet effect.
In the aftermath of the worldwide financial crisis, with sharply declining oil prices, the bike was coasting once again, but this was only a temporary phenomenon, disappearing when the world’s economy recovered and oil prices perked up again. In all likelihood, the coasting periods for food prices will become increasingly rare in the years and decades to come, if they don’t disappear altogether, as oil prices, because of the finite nature of that resource, will trend ever upward, exerting increasing upward pressure on food prices.
In real life, of course, this coupling isn’t as rigid as that between a bike’s pedals and its wheel. But one need not be an economist to see that the farmers and energy companies will have an incentive to redirect land from the production of food to the production of biofuels if the price of oil tends to exceed the price of food. And it is also easy to understand why this implies that the price of oil will pull the price of food along, while the reverse can’t be the case because fossil oil tastes bad on a salad. In view of this, we should indeed be afraid that our farmers will be tempted to hold hands with OPEC.