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 Why the price of 'peak oil' is famine
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/02/07/cnoil107.xml

By Ambrose Evans-Pritchard International Business Editor
Last Updated: 2:54am GMT 09/02/2008

Vulnerable regions of the world face the risk of famine over the next three 
years as rising energy costs spill over into a food crunch, according to US 
investment bank Goldman Sachs.

"We've never been at a point in commodities where we are today," said Jeff 
Currie, the bank's commodity chief and closely watched oil guru.

Global oil output has been stagnant for four years, failing to keep up with 
rampant demand from Asia and the Mid-East. China's imports rose 14pc last 
year. Biofuels from grain, oil seed and sugar are plugging the gap, but 
drawing away food supplies at a time when the world is adding more than 70m 
mouths to feed a year.

"Markets are as tight as a drum and now the US has hit the stimulus button," 
said Mr Currie in his 2008 outlook. "We have never seen this before when 
commodity prices were already at record highs. Over the next 18 to 36 months 
we are probably going into crisis mode across the commodity complex.

"The key is going to be agriculture. China is terrified of the current 
situation. It has real physical shortages," he said, referencing China still 
having memories of starvation in the 1960s seared in its collective mind.

While the US housing crash poses some threat to the price of metals and 
energy, the effect has largely occurred already. The slide in crude prices 
over the past month may have been caused by funds liquidating derivatives 
contracts to cover other demands rather than by recession fears. Goldman 
Sachs forecasts that oil will be priced at $105 a barrel by the end of 2008.

The current "supercycle" is a break with history because energy and food have 
"converged" in price and can increasingly be switched from one use to another.

Corn can be used for ethanol in cars and power plants, for plastics, as well 
as in baking tortillas. Natural gas can be made into fertiliser for food 
output. "Peak Oil" is morphing into "Peak Food".

Land use for biofuels has shot up from 12m to more than 80m hectares 
worldwide over six years. Biofuel provides 3pc of global energy needs, which 
will rise to an estimated 10.6pc by 2030.

In a pure market, sugar cane would be the only viable biofuel with a cost of 
$35 a barrel (oil equivalent). The others are sugar beet ($103), corn ($81), 
wheat ($145), rapeseed ($209), soybean ($232), cellulose ($305).

Subsidies drive the business. The US offers tax relief of $1 a gallon for 
biodiesel. The EU has a 10pc biofuel target by 2010.

Graphic showing increase in land given over to biofuels

The crop switch comes just as China and India make the leap to an 
animal-based diet, replicating the pattern seen in Japan and Korea, where 
people raised their protein intake nine-fold as they became rich. It takes 
8.3 grams of soya or corn feed to produce a 1g weight gain in cattle - 
compared with 3.1g for pigs, 2g for chicken and 1.5g for fish.

Mr Currie said investment cycles in energy typically last about 10 to 12 
years as producers struggle to catch up with demand. However, this cycle has 
been short-circuited by politicians after barely six years.

"The political environment is extremely hostile. The world is looking like 
the 17th century under mercantilism when countries saw economics as a 
zero-sum game. They exported as much as they could to get gold, and erected 
enormous barriers. China looks like that, so does Russia, the Mid-East and 
most of Africa and Latin America," he said.

While the West has much of the skill for developing energy projects, it is 
blocked by nationalist petro-states from investing directly.