The Silver Lining in High Commodity Prices

Cambridge – Today’s soaring commodity prices scream a fundamental truth of modern life that many politicians, particularly in the West, don’t want us to hear: the world’s natural resources are finite, and, as billions of people in Asia and elsewhere escape poverty, Western consumers will have to share them. Here is another truth: the price mechanism is a much better way to allocate natural resources than fighting wars, as the Western powers did in the last century.

The United States’ ill-considered bio-fuels subsidy program demonstrates how not to react. Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for bio-fuel production. Never mind that this is hugely inefficient in terms of water and land usage. 

Moreover, even under the most optimistic scenario, the US and the world will still be relying mainly on conventional fossil fuels until the hydrocarbon era comes to an end (which few of us will live to see). Last but not least, diverting vast tracts of agricultural land into fuel production has contributed to a doubling of prices for wheat and other grains. With food riots in dozens of countries, isn’t it time to admit that the whole idea was a giant, if well-intentioned, mistake?

Another wrong turn is the proposal recently embraced by two American presidential candidates to temporarily scrap taxes on gasoline. As laudable as it may be to help low-income drivers deal with soaring fuel costs, this is not the way to do it. The gas tax should be raised , not lowered. The sad fact is that by keeping oil prices high, OPEC is doing far more for environmental conservation than Western politicians who seek to prolong the era of ecologically unsustainable Western consumerism.