In July of last year I wrote a series of articles linking Peak Oil (the increase in demand over foreseeable supply of petroleum) to our government’s revenue, tourism, food prices and availability, and in general the impact of government’s fiscal policy on inflation and the Central Bank’s open market response to this profligate spending. In summary Peak Oil has increased tremendously the US$s available to our government and by spending most of it in TT$s we have been able to ‘proudly’ increase our GDP at the expense of contracting the Dutch Disease. Though the disease does not by itself drive inflation the fact that the TT$ is tied to the depreciating US$ and the escalating costs of imports- particularly food- we are witnessing now inflation bordering on 10%.

But Peak Oil has forced the price of oil upwards, now fluctuating about US$100 a barrel (and natural gas and its products also), resulting in the search by oil importing countries for alternative sources of energy. In particular we have seen a continuous shift to the use of ethanol which has had an impact on the price of food. First, land that has traditionally been used for agriculture- growing food- is now being used progressively for growing crops from which ethanol can be made. Secondly, corn (a food crop) is also being diverted away from its uses for food and animal feed towards ethanol. (Many however think that ethanol is not the final solution because it mixes with water and will be unable to be transported using the existing delivery pipelines). These effects are aggravated by the failure of the wheat crop, particularly in Australia, because of drought. Another upshot of this is that traditional exporters are retaining more of their food for their own use. And if the above is not enough the rapid growth of China’s and India’s economies is fuelling increasing demand by them for more sophisticated imported food, besides oil and other commodities (e.g. steel).

In other words high prices for petroleum (Peak Oil) with increasing demands from India and China are driving increases in food prices world wide. In T&T then, we benefit on one hand from the increased petroleum prices (‘what is sweet in we mouth’) but on the other hand there are corresponding increases (and food shortages to come) in imported food prices (‘is sour in we belly’). Alongside the imported inflation in food prices, the spending by government on non-productive projects etc. is driving core inflation (inflation of non-food items)- this is still in the region of 5% and rising.

The response of our government with respect to combating food prices is simply to grow more food locally and regionally. Last week the Prime Minster addressed the nation and again promised to establish thousands of farms (ex Caroni) and in particular a demonstration green house project. It is now being recognised that government spending is also facilitating local increases in prices and we hear recently a government Minister asking the super markets to have a conscience and not markup the prices of food beyond the imported inflation. What the Minister failed to understand is that high unproductive government spending, in a society unable to put to productive use this money, translates into mark-up inflation.  Our food import bill is of the order of TT$2billion per year. We may be able to grow a bit locally but we will still have to import at high prices the rest. We need to put in place an instrument that will help alleviate the impact of higher food prices on people’s budget, their income, and also constrain core inflation. Also this instrument must be flexible enough so that if there was a collapse of energy prices the economy can also adapt quickly. This column has been advocating over and over that the country should save more of its energy windfall in its RSF, but of importance it should revalue the TT$ (i.e. allow it to appreciate to reflect the increased foreign exchange earnings of a petroleum producing country). The immediate effects of this action would be that the import-price of imported food in TT$ would be reduced and the inflation from government’s spending constrained.

If or when the foreign exchange income to T&T drops because of a reduction in petroleum prices or depletion of our natural resources the then economic situation would call for a devaluation of the TT$ to reflect the reduced economic situation of the country. What would prevent this subsequent devaluation is if in the meantime we were able to diversify the economy into a knowledge based on shore sector. But who is listening. (T&T Gangs next week)