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Addicted to Oil, Scrambling for Food By: David Frum
The National Post | Tuesday, May 13, 2008

It was a routine drop-by for President Bush.

Speaking last weekend at a high-tech firm near St. Louis, Missouri, the President attempted to defend himself against the charge that his policies were responsible for rising food prices.

Bush has strongly favoured subsidies to ethanol: motor fuel made from corn. One-third of the U.S. corn crop is now used for fuel.

The President acknowledged that his ethanol policies may have contributed to the price rise. But he argued three other factors contributed far more: (1) the rising cost of the energy used to produce the food; (2) bad weather in other food-exporting nations; and (3) rising demand from India and China.

"There turns out to be prosperity in [the] developing world, which is good. It's going to be good for you because you'll be selling products into countries--big countries perhaps--and it's hard to sell products into countries that aren't prosperous. In other words, the more prosperous the world is, the more opportunity there is.

"It also, however, increases demand. So, for example, just as an interesting thought for you, there are 350 million people in India who are classified as middle-class. That's bigger than America. Their middle class is larger than our entire population. And when you start getting wealth, you start demanding better nutrition and better food. And so demand is high, and that causes the price to go up."

These words from the President triggered a political and media uproar in India. Indian newspapers have savaged Bush. Opposition politicians accused the President of racism. A spokesman for the ruling Congress party dismissed his words as "completely erroneous." Even the Indian defense minister (who spends most of his working days cultivating ever more intimate military co-operation with the United States) called Bush's words "a cruel joke."

Of course, Bush's observation was completely accurate.

As recently as 1995, meat consumption in China still averaged only 25 kilograms per person per year. Today, the average Chinese eats 53 kilograms--more than double the 1995 figure--and rapidly approaching the average U.S. consumption level of 120 kilograms.

India, with its vegetarian moral traditions, eats less meat. But consumption of poultry and eggs has been surging at 8-10% per annum, according to the UN's Food and Agriculture Organization.

Chinese meat and Indian chickens are fattened mostly on corn. It takes about four pounds of feed to produce a pound of meat. Multiplied by hundreds of millions of mouths, that ratio exerts astonishing weight on global food markets: The improvement in China's diet alone requires an extra eight billion bushels of grain per year, or more than three times as much as the U.S. ethanol industry.

These trends are mostly good news. The improvement in diet in India and China is of course a fine thing for those enjoying it. The consequent rise in grain prices brings benefits to North American farmers and food exporters.

For the world's poor, however, all these extra demands on corn add up to intensifying deprivation. Global food prices have risen by 75% since 2000. For the people of the developed world, this increase is only a very moderate nuisance. We spend only about one-sixth of our incomes on food, and most of that spending goes to pay distribution and preparation costs. A few extra cents on a bulk package of rice or a box of cornmeal--even a 30% increase in the price of a carton of eggs--do not mean very much.

But for people living on a couple of dollars a day, the shock of these price increases is sharp and painful.

Demand will eventually call forth new supply (Africa's agricultural potential remains dismayingly underdeveloped), but not immediately. Under these circumstances, ethanol--till now a costly irrationality--begins to look more and more like a moral wrong.

The United States turned to ethanol in the first place to avoid the hard facts of supply and demand. Had America imposed higher gasoline taxes in the 1990s, when gas was cheap, it would have induced consumers to conserve and manufacturers to innovate. That would have been politically dangerous. Massively subsidizing ethanol hid the cost of substituting away from oil. But because prices to consumers were unaltered, no changes of behaviour occurred. Gasoline seemed cheap, consumers bought bigger cars, manufacturers postponed innovation. Americans burned more corn, yes, but also more oil.

We have seen since 2006 that the only price that matters is the price at the pump. Sales of small cars and hybrids are surging, sales of SUVs are collapsing. Fuel consumption in 2007 grew at the lowest rate since 1991--and consumption may well decline absolutely in 2008.

Ethanol was the wrong tool. No surprise that it achieved the wrong result.

David Frum is a resident fellow at the American Enterprise Institute and writes a daily column for National Review Online.

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