Guess what IMFs first working paper of the year was all about: crude oil and wine. One might quickly dismiss it for not being the best punch. But the paper titled, "A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?" unveils the relationship between their prices.
The authors found that elements such as weather, quality of grapes, and age are not key drivers for wine prices. Instead, "the statistical behavior of crude oil and fine wine prices has shown remarkable similarity, with a correlation of over 90 percent" during the sample period of 2002-2010.
And if the correlation is true for wine, it could also be true for grapes, and other wine ingredients like rice, wheat, potato, and onions, as well as for food other those used to produce wine. This is because, as investors throng to alternate avenues in a commodity-rush, food commodities, just like wine, start attracting huge investment portfolios. (See graph)
In other words, there are strong reasons to be wary over the long-term.
Led by China and India, the bigger growth engines of the wo-speed global recovery, emerging market economies have made the greatest contribution to the upsurge in global crude oil demand.
The composition of crude oil consumption has shifted from advanced to emerging market economies, as the crude oil demand of non-OECD countries surged 52 percent between 1990 and 2008, compared with an increase of 14 percent in OECD countries.
According to IMFs calculations, emerging economies accounted for 69 percent of the increase in world oil consumption between 1990 and 2008 and more than 100 percent of the change in global crude oil demand since 2000 as oil consumption in OECD countries declined during that period.
The International Energy Agency expects Chinese energy demand to surge to a whopping 75 percent by 2035, which, along with supply constraints and demand pressures from India and other emerging economies, is seen pulling the price of global oil beyond $200 a barrel in the next two and half decades.
While the investment correlation between food and fuel implies costlier dining, if fears of $200/bbl of oil materialise, there are other reasons why food prices could squeeze wallets.
One factor is of course the rising middle class in Asia, which is seen gobbling up the worlds food resources. The other factor is fuel itself.
Agreed that there are still huge swathes of farmland left to be mechanised, the catch is that increased mechanisation leads to increased usage of hydrocarbons, in the form of feedstock for fertiliser, and in the form of tractor usage and transportation. This means that with oil making record highs, the benefits of increased mechanisation could be less than expected.
So, while all of it could be exaggerated doom seeing, don be too surprised if the era of fine dining starts to wane in the years ahead.
Comments
Comments are closed for this article.