Iowa Public Television


Pundits Blame Oil for Higher Commodity Prices

posted on March 7, 2008

Several reports released this week demonstrated the depth of the housing industry's weakness and point to choppy economic waters ahead.

The Federal Reserve reported owner equity in their homes has fallen below 50% for the first time since 1945.

According to the National Association of Realtors, pending home sales in January fell nearly 20 percent from 2006, to their second-lowest tally on record.

And the Mortgage Bankers Association reports home foreclosures soared to an all-time high in the final quarter last year, with California and Florida accounting for 30% of mortgages in foreclosure.

But, while the Sunbelt struggles with the housing meltdown, America's rural economy is booming. Blistering demand from the biofuels industry and tight global supplies have pushed all of the major commodities into record territory this spring, though that development isn't viewed positively by everyone.

Some critics blame higher commodity prices for a concurrent, albeit smaller, rise in food prices. But renewable fuels proponents claim "it's all about the oil."

Pundits Blame Oil for Higher Commodity Prices Over the past year, energy prices have shot up 60 percent with the highest increase coming in the past 3 months. This week, crude oil topped $105 per barrel. And, as the price of oil rises, the cost of everything from raw commodities to processed foods also has pushed higher.

While some items including fruits and vegetable and dairy goods have risen more, on average, food prices have increased about 5 percent from last year, while raw commodities like corn have more than doubled in price.

The price escalation has left pundits and industry analysts looking for a place to lay blame. Some, like Jerry Taylor of the CATO Institute, a conservative think-tank, point the finger at biofuels.

Jerry Taylor, CATO Institute: "...the ethanol program has finally delivered on the promise that its always had which is we promise that with this ethanol program we will induce enough demand for corn that corn prices will go up and thus farm revenues or at least corn farm revenues are going to go up."

But Monte Shaw, Director of the Iowa Renewable Fuels Association says food prices are heavily affected by growing transportation costs and the energy sector.

Monte Shaw, Iowa Renewable Fuels Association: "...only about 15 to 18 percent of what you pay at the store for a food product has anything to do with what that farmer got paid for the corn. All of the packaging and processing and transportation and read that as oil, oil, oil that goes into it actually has a much bigger impact. I don't think there's a conflict here. "

Another factor raising energy costs and, potentially the price of food is the increased demand for gasoline in new markets like India and China. Despite any direct impact the increased demand has on higher energy prices, the Organization of Petroleum Exporting Countries, or OPEC, is not planning to pump out additional crude supplies. OPEC, the intergovernmental agency that controls the majority of the world's crude oil production, stated this week it will hold production levels at their current mark because of what officials are calling "falling demand."

Tags: housing industry news oil