Becker’s discussion of natural resource price fluctuations presents a compelling picture of the role of demand and technology in the price of oil and natural gas. Similar fluctuations, with varied causes (though reducible generally to demand and supply changes), affect other natural resources as well. The fluctuations in the natural resources that Becker describes are relatively benign, and though often steep, are kept within tolerable levels by the competing effects of increased demand, which pushes prices up, and technological advances, which pushes them down by increasing the practical availability of the resources.
The fluctuations can however be socially or politically destabilizing, sometimes in unusual ways. A striking example is the rapid rise in gasoline prices (gasoline being itself a manufactured good, but the major component of its cost is of course oil) in the summer of 2008, peaking at $4.11 a gallon. The rise helped to blind the Federal Reserve to the impending financial crisis. Minutes of the Board’s open market committee that summer reveal a preoccupation with the threat of inflation, of which the gasoline price rise was thought symptomatic, when in fact the danger to the economy was a nascent financial crisis having nothing to do with commodity prices.
But to understand the real danger to economic and political stability (and the economy and politics are closely entwined of course) that fluctuations in commodity prices can cause, we need to turn from natural resource commodities such as oil to agricultural commodities such as wheat. For the current instability in the Arab world, which has engulfed Tunisia, Egypt, Jordan, Lebanon, and Syria, appears to be traceable mainly to increases in the price of wheat and corn, though it is possible that those increases were triggers, affecting the timing of the political instability of those countries, rather than basic causes.
The Middle Eastern countries are large importers of wheat and corn, and to a lesser extent other grains. The prices of those commodities fluctuate a great deal. Between 2006 and 2008, the prices of these two grains rose by 136 percent and 125 percent respectively; the price of rice rose by more than 200 percent and the price of soybeans by more than 100 percent. The prices dipped in 2009 and 2010, as a result of the global depression touched off by the financial collapse of September 2008, but they spiked again in 2010; and the “Arab Spring” (an odd term for what seems unmitigated region-wide political disaster) ensued.
The cause of the price spikes that began in 2006 appears to have been a confluence of increased world population, increased per capita incomes in consuming nations, diversion of corn to the manufacture of ethanol, increased oil prices, and droughts. The effect on the Middle Eastern countries, where bread (made of course from grains) is the basic foodstuff, was dramatic. The governments of these countries subsidize bread, and had to increase the subsidies as the price of grains rose. But the governments have limited resources, so could not prevent the price to the consumer from rising, or shortgages if imports were reduced to save money.
The price increase was the last straw for the citizens of these countries. They had much to complain of anyway. But the idea that the protests that led to riots and the overthrow of governments and the civil war in Syria resulted from a yearning for democracy or from religious antipathies appears to be incorrect; or in any event the spark that triggered the conflagration was not political or religious discord but economic desperation. (There is by the way considerable grounds for doubting that these countries are ready for democracy.)
The irony is that agriculture is generally regarded as the poster child for the market allocation of goods, since agricultural commodities tend to be homogeneous and to be produced by very numerous independent producers, so that cartelization is infeasible and deception or confusion of consumers unlikely. Of course governments will not let well enough alone, so there is a great deal of regulation of agriculture; nevertheless the international market in agricultural commodities is highly competitive. But there does not seem to be any mechanism for smoothing price changes at the international level. In principle futures and forward contracts should enable prices of agricultural commodities to be smoothed over time, but these, though common in economically advanced countries, seem not to be employed by the nations that are most susceptible to political challenge—even to political disaster—as a result of fluctuations in the prices of agricultural commodities.