Sunday, September 4, 2011

The Economic Food Chain: A Snapshot

The basis of economy is rooted in peoples' need for essential items, and their wants for discretionary items. So let's begin with the basic human needs: energy, water, and to a certain degree, shelter. At first glance it may seem that food was left out, but this is actually a subcategory of energy. Shelter was added because it is often needed to increase your energy efficiency, as in, keep you from getting too warm or cold relative to the outside temperature. Finally, fresh water is the last essential element for obvious reasons, namely, you'll die without it and so will everything else. In summary, humans need energy, food, fresh water, and shelter. At the end of the day we are all working for these basic necessities. As an example, we buy food at the grocery store, fill up our gas tanks (energy), pay rent/mortgage (shelter) and utilities (water, sewer, electric). If we lack any of these essential elements we'll at the very least be uncomfortable, and at worst, be dead, so this is the basis of economy. Essentially, all of us are willing to work for these necessities

At the very core is energy because without it none of the other essentials can be obtained. In the modern world there are three basic forms of energy that are harnessed daily: electric, combustible (food, oil, gasoline, etc.), and photosynthetic (plants harnessing the sun's energy). Food and energy form a one-way "feedback loop", meaning, you can't get food without energy. 

To clarify this point, let's take a look at a simplified supply chain:
  1. At the farm level, land must be cultivated, this requires a refined or distilled oil product (typically diesel) to operate modern machinery.
  2. Fertilizer consisting of nitrogen, phosphorus, and potassium (N-P-K) are usually applied to the soil. Nitrogen is typically made through a steam reforming process involving natural gas. Phosphorus and potassium are mined from various locations around the world and then transported to the farm. Mining operations are heavily energy intensive requiring extraction and processing followed by multiple transportation legs. Again, oil is the primary energy source.
  3. The machinery used to plant and harvest was made somewhere and is predominantly steel. Steel is a product of iron ore, which is extracted from the earth through, you guessed it, a mining operation. Once extracted, the iron ore is processed into steel at a foundry, requiring an immense amount of heat. The heat may be generated by any available energy source granted it's economical for the foundry. The steel must be fabricated into various forms that would be required to build the farm machinery (tractors, combines, etc.). Finally, the assembled product is shipped to the farm by rail (diesel) and truck (diesel). Of course, I'm being concise in this description, but one can imagine the general flow.
  4. With the machinery in place and the soil fertilized, seed can be planted. As the crop grows it requires fresh water through irrigation. Irrigation is a pressure driven operation, requiring a pump, which draws electricity.
  5. At this point we have used a large amount of energy just to plant the crop and maintain it. Our payback comes from the crop harnessing solar energy through the process of photosynthesis.
  6. Once the crop has matured, additional energy is required to harvest, process, and distribute the crop to its various users (more oil).
Even in this simplified scenario, the process is quite elaborate. It should be evident that energy, typically in the form of oil, is the Achilles' heel of the entire operation. Should the price of oil increase, multiple points in the supply chain will experience an increase in cost. Once this occurs, food prices increase and begin to move more money from the "wants" category to the "needs" category. Meaning, that nice new iPad gives way to a loaf of bread or a gallon of gasoline. The increase in oil prices can be achieved in a number of ways, typically through increased global competition for the resource (increased demand), dwindling supply, or currency debasement, which increases the cost of imported oil as the currency's purchasing power is reduced. Today we have all three components in play, which will inevitably lead to a scramble to secure energy resources. The US infrastructure has become so accustomed to cheap oil that a sudden increase in oil prices would send shock waves throughout the economy, bolstering those in the energy and food production sectors.

In this discussion energy, food, mining, and water have been highlighted as the essential elements for not only economic growth, but fundamental survival as an economy's "needs" must always come before its "wants." This is due to the simple fact that energy and food are higher on the economic "food chain." Once they become scarce, they overwhelm elements that are lower on the chain. I believe we're in the process of shifting into a resource-limited paradigm, and if so, this is where you'll want to direct your efforts for long-term gain.

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