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Planning for higher food and energy prices, and their wider impacts

Over the years, we have become accustomed to a rising standard of living. One of things that has helped this happen is a gradually declining ratio of food costs to total personal expenditures. Energy costs have not followed as clear a trend, but are higher again now, and seem likely to be higher in the future as well.

Figure 1. Food (excluding restaurant food) and fuel as percentage of personal income, based on Bureau of Economic Analysis data, Table 2.5.5

As long as the sum of food and energy costs were declining, an increasingly larger percentage left over after covering “the basics” could be used for other purchases. This no doubt contributed to a rising standard of living, because a larger share of income could be used for education, and for recreation, and for new homes. The greater share of income that was available to spend on new homes no doubt contributed to the long-term rise in home prices.

Now, it looks like this long-term trend of lower food and energy prices in relationship to personal expenditures is turning around because of higher oil prices and higher food prices (and lower employment figures). Higher food prices are partly the result of higher oil prices, since oil is used in the production and transport of food. Other contributing factors include more land use for biofuels, rising meat expectations from “emerging market countries,” and weather “issues.”

How do we plan for this new situation, in which food and energy seem likely to again be rising in relationship to incomes, and as a result, living standards quite likely declining? The following are a few of my thoughts:

1. Plan as if one of the big issues in the years ahead is likely to be job loss in the conventional oil-dependent market.

Figure 2. Number of jobs from US Bureau of Labor Statistics non-farm employer; oil consumption is "Product Supplied" from US Energy Information Administration

I have shown previously that the number of jobs held by workers tends to follow oil consumption closely. This is not unexpected, given the way today’s economy is constructed: If a worker produces goods or services, this process often uses oil. Furthermore, if the worker has a salary from his job, he/she can afford to buy goods produced with oil. If the job moves to, say, China, the energy use for the job moves over there, and the Chinese employee, (rather than the US employee), will have the income to buy goods and services made with oil. If the Chinese employee’s salary is lower, he/she will be able to buy less goods produced with oil than the American employee, but will still raise the total amount of oil consumed in China.

Figure 3. US Bureau of Labor Statistics employer non-farm employee counts divided by US Census Bureau resident population estimates

It seems to me as though what we should expect is another step down in the percentage of the population that is employed, probably led this time by a reduction in government employees and in jobs funded by “stimulus” programs, as governments find that tax revenue is not sufficient to pay for everything. Note that in Figure 1, a rise is the ratio of food and energy consumption to total personal income can come in two ways: (1) Food and energy costs rising and/or (2) Fewer people employed, and those who are employed working fewer hours or for less pay. It seems to me that we are likely to see a combination of these effects, and it may be that (2) is the bigger issue.

A traditional response to job loss is to move together into large family or friendship groupings. Then those who have formal jobs can help support those without jobs. Very often, people to start providing more services for each other outside the formal economy, including raising a garden, caring for each other’s children, caring for elderly parents, and making crafts for sale.

I should note that the employment count used in my calculations are for “non-farm employees.” Years ago, if people raised their own food on a farm (even if they traded it with others), no one counted their employment. If more people start raising their own food outside of the traditional system, this would seem to be more or less a reverse of what happened in the past.

2. Stay as flexible as possible, since we don’t know how things will turn out.

If you are able to move quickly as conditions change, this flexibility has its advantages. Losing your job is probably the biggest risk right now. Think about how you might deal with the situation.

Also, we don’t know how things will change in the future. One area may be affected by a lack of water; another by an electrical system that no longer works, and can’t be repaired in any reasonable time frame, perhaps after a storm. If you are not too tied to where you are, you can make better decisions regarding changes.

Of course, flexibility comes with its downsides. In many ways, it may be better to stick with family and friends that you know, in order to have a suitable support system.

3. Take advantage of what you can do now; things may not be as good in the future.

While we don’t know about the future, we do know about today. If there are things you have wanted to do, now would be a good time to do them, while you still can. I visited China. There are shorter trips, and easier-to-do things possible as well. You can study a language, or visit family.

4. Find ways to be happy, even without material wealth.

Learn to enjoy nature, and the company of family and friends. Join a church or a club of others with similar interests. Start doing things to help other people. Learn to sing, or to play a musical instrument. It is not good to focus on all the bad things that might happen.

All of our worrying is not going to change anything, so we might as well make the best of a less than ideal situation, and do things we can do, even with very limited resources.

5. Plant a garden, if that is convenient for you.

Ideally, you will want to have a garden that can be maintained with little outside inputs other than those provided by nature. If water from your roof can be used for watering, that can be helpful. But don’t assume that you can drive to the store for all the amendments and sprays you have been used to in the past, even if they are “organic.” If you can learn seed saving, that is good too.

6. Consider buying a home with some land, where you can have a garden.

Obviously, such a choice is not for everyone, since for one thing, many people cannot afford this option, and for another, buying such land may make commuting to work difficult and expensive. Also, having a large garden is likely to require a considerable time commitment and will require learning many new skills. However, for some this may give peace of mind, and way to feel that they are making the situation better.

7. Don’t count on paper investments to do well.

We keep being told by investment planners that if you do this or that, and you will have plenty of funds for retirements. If there are fewer goods and services produced in total as energy resources decline (perhaps not starting immediately, but at some point in the future), then it is pretty likely that most of us will find our share of what is available is smaller than what investment planners have led us to believe. For example, pension plans are not likely to be able to pay out as planned, Social Security and Medicare will need to be cut back (or replaced with something that pays less), bonds are likely to have high default rates, stocks are likely to decline in value (at least relative to the things you need to buy), and bank deposits may prove unreliable.

You will probably need to expect to work longer, and to rely more on family and friends. Keep up good relations with your children. As times get worse, consider encouraging one or more to move back in with you, or offer to pay to move in one of them.

Concluding Thoughts

It is easy to get depressed when thinking about the future, but this is not really helpful. It is probably best if we can find ways to be happy now, even if it means ignoring the subject of what may happen in the future altogether. So don’t be too hard on family and friends who “deny” that the situation is likely to go downhill. Denial is a coping mechanism for many people.

If we want to see what may happen in the future, there are a number of countries around the world that seem to be leading the way. Right now, following what happens in Greece and Spain may give an idea what other debtor countries may be facing. With respect to oil countries that are producing less and less oil, Mexico, Egypt, and Yemen are models. Seeing what happens in these countries may give us an idea of where world economies are headed.

What do you think? Leave a comment below.

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