The Shifting Terms of Trade Between Grain and Oil

[Indiana_Dem]

http://www.earth-policy.org/Updates/Update38.htm

SAUDIS HAVE U.S. OVER A BARREL
The Shifting Terms of Trade Between Grain and Oil

Lester R. Brown

In 1970, a bushel of wheat could be traded for a barrel of oil in the world market. It now takes nine bushels of wheat to buy a barrel of oil. The two countries most affected by the dramatically shifting terms of trade between grain and oil are the United States and Saudi Arabia.

The United States, the world's largest importer of oil and its largest exporter of grain, is paying for this shift in the wheat-oil exchange rate with higher gasoline prices. The nine-fold shift is also driving the largest U.S. trade deficit in history, which in turn is raising external debt to a record level, weakening the U.S. economy. In contrast, Saudi Arabia, the world's leading oil exporter and a high-ranking grain importer, is benefiting handsomely.

During the early 1970s before the oil price hikes by OPEC, the United States largely could pay its oil import bill with grain exports. But in 2003, grain exports covered only 11 percent of the staggering U.S. oil import bill of $99 billion. While the exchange rate between grain and oil was deteriorating, U.S. domestic oil output was falling and oil consumption was rising, which means that oil imports were climbing. In 2003, oil imports accounted for 60 percent of total use.

The shift in terms of trade between the price of wheat, a surrogate for grain prices, and that of oil, is both dramatic and ongoing. From 1950 to 1973, the prices of wheat and of oil were remarkably stable as was the relationship between the two. At anytime during the 23-year span, a bushel of wheat could be traded for a barrel of oil in the world market. (See table and additional data.)