Cheap Energy About To End As Commodity, Gas Prices Rise

The foot bone’s connected to the, leg bone. The leg bone’s connected to the, knee bone. The knee bone’s connected to the, thigh bone. And if we’re remembering the old song correctly (Dem Bones), the thigh bone’s connected to the, backbone.

The poor global backbone must be about ready to break. And by backbone we mean cheap energy, the gift responsible for cheap consumer goods, huge waistlines, and bright shiny lights all over the planet. That backbone, like the spine of a middle-aged man who’s made a career of drinking too many beers and doing too few sit-ups, is under a lot of stress.

Here in Australia, the water shortage in Victoria and Queensland is forcing coal-fired electricity plants to idle, and increasing usage of gas. Prices for gas are up. All over the world, agricultural commodity prices are rising, too. Part of the rise comes from increased demand from the usual suspects, China and India. As per capita incomes rise, so do appetites for animal protein and calories consumed per day.  Food prices are growing at 6.7% in the U.S. and 6.2% in China in the first quarter, according to Michael Steib, a food analyst at Morgan Stanley.

You would think the investment angle on this is obvious: buy the people who sell food! But it’s not so obvious. Not everyone who makes food can pass the rising cost of wholesale food on to the retail consumer. You can, however, have a general rise in food prices as demand goes up, and the inputs into producing food (namely energy) rise in price, too.

Energy is connected to everything in the world. It’s the bone, the ligament, the cartilage, the blood vessel, and the capillary of global commerce. With energy in abundance, the whole thing hangs together. With energy in demand, when wars are fought over it, things tend to fall apart. We are tempted to believe that you can get something for nothing in the modern world. But everything must come from something. And it takes energy to produce nearly everything.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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