Turning Oil Into Salt (4): Selective thinking on fungibility

The authors recognize that:

Oil is a globally traded, fungible commodity, so stifling U.S. purchases from the Persian Gulf and buying from other regions like Africa would just mean that someone else would buy more from the Persian Gulf with no impact on price and availability, certainly not on oil’s status as a strategic commodity.

This is one of their multiple (and good) arguments against the “Cheney plan” of diversifying America’s oil imports to non-OPEC countries.

Unfortunately, they don’t extend this level of understanding to their analysis of agriculture and biofuels:

How could that drastic increase in the price of food commodities from fish to rice possibly be attributed to ethanol? Nobody was growing corn in rice paddies or making biofuels out of fish.

Yikes. Agricultural commodities are largely fungible from both the supply and demand sides. Increased corn cultivation reduces the land available to grow other cereals like wheat, and higher prices affect the prices of substitutes like rice as consumers shift their consumption patterns in response. Farmed fish are often fed corn, as are industrially-raised cattle, pigs and poultry, which are meat substitutes for fish. Ethanol is certainly not responsible for all of the rise in food prices, but the most credible estimates link it to ~30% of the rise in grain prices (more for corn and less for wheat and rice).

Not only are the crops themselves fungible commodities, some of the resources required for production are fungible and, like oil, fundamentally scarce (think arable land and water). Like diversifying away from Middle Eastern oil, diversifying into biofuels is no free lunch.