Friday, June 13, 2008

Food, Industry & Energy Memo: Analysis and Commentary: What to do About the Soaring Cost of Oil and its Effects on the Food Industry and Consumers?

Despite a growing diversification into renewable energy sources like bio fuels, solar and wind power by many food and grocery industry companies, oil remains the lifeblood of the industry.

The transportation fleets which transport crops from the farm to food processors, from the processors to distributors and retail chain warehouses, and from these distribution facilities to the stores, all are powered by diesel fuel, which currently is nearly $6 gallon in the U.S. and even higher in Europe. Just one year ago diesel fuel, as well as gasoline, was half today's cost in the U.S., for example.

Most farms, food processing plants, distribution facilities and grocery stores throughout the world, and particularly in the U.S., run primarily on fossil-fuel based energy in the form of electricity produced from burning fossil fuels. In Europe, much of this energy is now produced from nuclear power plants rather than fossil fuels, but in the U.S. only 20% of the nation's energy needs are from nuclear power, while a mere 2% are from renewable energy sources like solar and wind, according to the U.S. Energy Department and independent sources.

In the case of fuel, ethanol and bio fuels aren't even a significant contributor to global trucking fleets at this point in time. Ironically, the primary reason U.S. and other nation's trucking fleets are powered by diesel rather than gasoline, is because historically diesel fuel has been cheaper than gasoline. Not any more.

Gasoline also is integral to the global food and grocery industry. The vast majority of consumers drive gasoline-powered automobiles to do there grocery shopping in the developed world; and an increasing number of them are doing so in the developing world, especially in China and India, the globe's two most-populus nation's, as well as having both country's having the two fastest-growing economies in the world.

Oil is currently at nearly $140 a barrel. The investment banking firm Lehman Bros., along with other oil industry analysts and experts, are predicting today that oil will hit $150 a barrel by July 2, which is only three weeks away.

At $150 a barrel for oil, the per-gallon cost of diesel fuel is predicted to hit slightly over $6 a gallon on average in the U.S., and substantially over that in states like California, for an increase of about 50 cents a gallon from today's cost. Add that 50 cents a gallon premium to the current per-gallon cost of diesel in Europe and elsewhere in the world, and you will have the realities at the pump of $150 a barrel oil globally, which is on the way.

The soaring cost of oil is global not only in it's geographical effects, but in how it effects every aspect of the food and grocery industry and the price of food at the supermarket. Farmers, food processors, distributors, trucking firms and retailers are all feeling the effects daily from the soaring cost of fuel and energy.

Consumers are feeling it not only at the pump when they fill their cars with gasoline, but at the supermarket checkout counter as well when they pay for their groceries. The biggest contributor to food inflation, which is the highest it's been in decades, is the soaring cost of oil and the related fuel and energy produced from it.

Even though much of the food and grocery industry is moving rapidly to diversify its energy sources with biomass plants, solar, wind and other alternative energy methods, it's going to be many years from now until renewables contribute even somewhat significantly to the overall energy mix in most of the world's nations, particularly in the U.S.

Meanwhile, fossil fuel-based fuel and energy remain the lifeblood of the food and grocery industry. Regarding the cost of oil, most experts and analysts say it isn't going down in price anytime soon. In fact, the opposite is their analysis--they see it continuing to increase in price for sometime before possibly stabilizing.

In California, $5 a gallon gasoline is near reality, as some service stations in Los Angeles and the San Francisco Bay Area are currently selling regular unleaded gasoline for $4.80 a gallon. A $10 jump in the cost of a barrel of oil by July 4, as numerous experts are predicting, will easily push the price at those stations to $5 a gallon and over.

The average price per-gallon also hit $4 this week throughout the U.S., according to the American Automobile Association. A $10 jump in the cost of a barrel of oil in the next few weeks should send that average per-gallon cost closer to the $5 a gallon mark nationally.

Associated Press business writer Emma Vandore has a story today which provides a good global overview on what numerous oil industry analysts and experts believe is the status of oil pricing and where it's going--up. Read the AP piece, "Today's high oil prices could be here to stay." here.

The long terms solution for the food and grocery industry--and global society and national governments as well--is clear: a massive renewable energy program on the order of America's Manhattan Project and the respective 1960's era races to put a man on the moon by Russia and the U.S. is needed. The jobs it could bring also are needed.

What to do in the medium to short-run though, especially for purposes of this piece in the U.S. where the food and grocery industry finds itself caught in a spiral of increasing fuel costs which are dramatically increasing the cost of business for the industry and the price of food and groceries consumers are paying at the supermarket, is the big question?

Western Europe--particularly France and Germany--have taken the nuclear energy option route as the primary way to diversify away from using fossil fuels to provide energy for businesses and consumers in those nations, while focusing on the medium to long-term on renewable energy sources.

The nuclear power option does nothing to help in providing fuel for trucks or cars though, at least until and unless nuclear power plants are used to produce hydrogen fuel for hydrogen-powered automobiles, if and when they come on line, which will be well over a decade from now.

In the U.S., even talking about increasing nuclear power is a near-taboo topic, despite the fact both France and Germany are far more politically left countries than the U.S., but still have managed to increase the number of nuclear power plants and the overall contribution to national energy needs it provides in both countries.

Again though, even if the U.S. were to dramatically increase the percentage of energy produced from nuclear, it would do nothing to address the need to diversify away from oil-based fuels like diesel and gasoline.

Consumers can buy smaller cars if they can afford to, drive less, and do other things to decrease the amount of gasoline they need to use. However, the food and grocery industry can't merely conserve its way out of this serious problem. It can look at alternatives such as using more rail and even when possible the waterways, like Tesco is doing in the UK, to transport food and grocery products in the supply chain, but there's still the matter of getting the goods from the plants and distribution centers to the stores; and that takes trucks.

The distribution and retail sectors also can more rapidly convert their trucking fleets to bio fuels, like California-based Safeway Stores, Inc. is doing with its trucking fleet, which we think is a very good idea. However, that takes time, and as more and more industry distributors and retailers do so, the demand for bio fuels is going to outstrip the supply, sending the cost of the fuel soaring at least for a while.

One short to medium-term solution to the soaring price of oil in the United States is to launch a massive new oil exploration and drilling program in the states. Proponents of doing this say it will not only provide America with more oil in the short term, while medium and longer term renewables programs are accelerated, but also will send a signal to the major exporting oil-producing nations of the world that prices are too high.

One of these proponents is the respected scholar and writer Victor Davis Hanson, who in addition to being a scholar in residence at Stanford University's Hoover Institution, is a classics scholar and a farmer in California's Central Valley.

Hanson says in an opinion piece today titled, "Why liberals should support drilling for oil," that's it is imperative the U.S. drill for more oil for the short term, while aggressively launching renewable energy programs for the medium and longer term. Read Hanson's opinion piece here.

Hanson's opinion is a growing one among some sectors in the U.S. However, like with nuclear power, there's a strong anti-oil drilling lobby in the U.S. which is so strong for example even Democrats who might want to support increased drilling for various reasons--like they come from oil-producing states for example--are afraid to do so.

These folks argue primarily from an environmental perspective that increased oil drilling in places like the Arctic Wildlife Refuge and off-shore in the U.S. pose grave environmental consequences. In other words, the environmental risks of doing so far outweigh any benefits, they say.

Others argue against increased drilling for oil in the U.S. from a more resource-based and economic perspective, saying the cost of drilling for what they claim is very little more oil in the continental USA just isn't worth it. Rather, they say the money would be put to better use dramatically accelerating renewable energy development. Many from this sector also argue for increased nuclear power plants along with the renewable energy strategy.

An April, 2008 article in Popular Mechanics magazine, a respected U.S. scientific publication, disagrees with this argument however, saying with today's new oil drilling technologies a substantial amount of oil can be taken from even the current U.S. oil fields in a relatively environmentally harmless manner. Read the Popular Mechanics piece here.

Conversely, this May 23 story from U.S. News and World Report magazine quotes U.S. Department of Energy staffers as saying it would take ten years to even get the oil flowing from new drilling in the Arctic National Wildlife Refuge area, the place sighted most often by new drilling advocates as holding the most promise for new domestic oil for the U.S. Further, the U.S. Government experts quoted in the piece say even then the output from the Arctic Wildlife Refuge region oil fields wouldn't amount to much; it's impact being minimal.

Ten years is hardly a good short or even medium-range solution to soaring oil prices, and if the results after a decade of drilling are merely modest ones, perhaps the cost-benefit analysis of the anti-drilling pragmatist faction in correct?

For another view on increasing oil drilling and production in the U.S. vs not doing so, read this May 30, 2008 piece from CNN

What is clear from a food and grocery industry perspective, and thus a consumer perspective because everybody has to eat, is that the soaring cost of oil is having a ripple effect throughout the industry. Take away the doubling of the price of oil over what is less than the last year, and you will see modest food inflation, rather than the record-breaking food price increases currently occurring.

Something has to give in the short to medium run. Food manufacturers, distributors and retailers have been holding the line somewhat on food and grocery prices, despite the high food inflation globally, by in the case of manufacturers and marketers holding back in many cases on price increases, and in the case of food retailers not always reflecting the total penny price increases they receive on a given item in their stores, taking a slight margin hit in the process.

Since fuel produced from oil is the lifeblood of today's modern food distribution and transportation system, food and grocery prices at the shelf are only going to continue to increase as the per-barrel price of oil increases, at least in the short to medium term, until alternative fuels can make a significant impact on America's transportation fleet.

The issue poses far more questions than it has answers. But we know what's needed is a massive medium to long term renewables program, combined with conservation all around. For the short term, increased oil drilling along with increased nuclear power should be debated calmly and intelligently in the U.S. like it is in most of Europe.

Natural~Specialty Foods Memo believes the "era of cheap food" as we've know it in the U.S. is over.

However, unless the energy situation is addressed, and more aggressive medium-term and longer -term renewable energy programs are put into place fast, along with short-term programs being put into place as well, we're going to jump from the end of the "era of cheap food," right into the era of prohibitively expensive food, which is something that will not only cause serious economic problems, but also will begin to break down the very fabric and fiber of U.S. society even more than has already been happening.

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