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U.S. too vulnerable to rising oil and food prices

By Patrick Doherty, Special to CNN
  • Patrick Doherty: Oil costs were rising even before Libya, U.S. economy very vulnerable
  • Drought, oil supply disruption, growing demand in Asia signal costs will keep rising, he says
  • Unemployment, higher food and gas costs hurt middle-class families, Doherty says
  • Doherty: America needs strong strategies to deal with rising commodity prices

Editor's note: Patrick Doherty is the director of the Smart Strategy Initiative at the New America Foundation.

(CNN) -- Last Friday, oil contracts traded in New York closed at $104.42 per barrel, levels not seen since September 2008. This second spike in as many weeks comes after fierce fighting in Libya has raised fears of an extended civil war and the shutdown of what the International Energy Agency estimates might be more than 1 million barrels of oil production per day.

Reuters is also reporting that hedge funds and big speculators have weighed into the market, seeing the real possibility of sustained high prices for petroleum.

They appear to be right. The spike did not begin with oil at $30 or $50 per barrel. Rather, the benchmark West Texas Intermediate started out already high, closer to $90, just before the protests began in Tunisia. Assuming that the revolutionary fervor across the region subsides after Libya stabilizes -- a scenario that is not a given -- prices will only retreat into the $90s, resting on the extremely strong "fundamentals" of global demand, especially from Asia.

At either of those levels, continued crisis in Libya and additional disruptions in oil supply -- from always-unstable Nigeria, Iran or elsewhere in the Arab world -- could wreak havoc on our oil-dependent economy. In particular, as happened in 2007-2008, higher gasoline prices domestically could trigger a new round of mortgage defaults. With persistent high unemployment; oil fueling well more than 95% of America's transportation system; and transportation costs running 24% of income in suburbia, and in exurbia, 35%, America's middle class is extraordinarily exposed.

Our domestic economy is quite vulnerable to price shocks.
--Patrick Doherty
Tapping US oil reserves a possibility
Where are gas prices heading?

That's bad enough, but oil is what we call the "keystone" commodity, meaning higher energy costs translate to higher costs for all other commodities. Unfortunately, demand is strong here as well. According to International Monetary Fund data, in early 2006, global nonfuel commodity prices -- such as food and industrial materials -- broke free of their post-Cold War trading range, increasing 37% before receding in the Great Recession. Since bottoming out in December 2008, these same essential economic inputs have risen another 78%, for an increase of 149% in the last decade.

Food, in particular, is trading at all-time highs. Corn and soybeans are at near-record prices. Wheat, hit badly last summer by the Russian heat wave, is still trading 30 percent higher, even after fears have eased over a major Chinese drought.

High global food costs, radiating out from drought-stricken Asia, could further destabilize other developing nations, democratic or not, whose populations are upset that their governments are unable to protect them from the disruptive forces of the global marketplace. Here at home, higher basic food and other costs would erode the accounts of middle-class families even more.

What is driving this new era of high commodity prices?

Over the last decade, while America's attention was focused elsewhere, China, India and Brazil woke up. China went from export-led growth to construction-led growth supported by a powerful export machine. India unshackled its highly educated and English-speaking middle class from the oppressive regulation known as the "Permit Raj," and Brazil succeeded in electing a competent, growth-oriented, center-left government after decades of tragic mismanagement. All three nations had growth rates of more than 7.5% in 2010.

The growth story in these rising powers, however, is less about exports and more about urbanization and the increasing domestic consumption that comes with it. China and India alone will need to build residences, workplaces and infrastructure for 750 million new city dwellers in less than 20 years, according to recent studies from the McKinsey Global Institute. That means massive increases in demand for energy, food, water and building materials as the cities go up. Indeed, we've never before attempted such a large construction project as a planet. Under business as usual, we just won't have the resources to pull it off.

Combined with the deeply intertwined challenge of ecological sustainability, the coming decades are looking grim if America stays on its current course.

The U.N. Development Program found that two-thirds of the world's critical ecosystem services, such as fresh water, fresh air, fisheries and flood control, are being depleted faster than they are replenished. Droughts, like the one threatening China's wheat; floods, like the one that devastated Pakistan; and hurricanes, like the one that transformed New Orleans, will only get worse and more frequent.

In short, these high and rising global prices are signaling the arrival of a new strategic era for which America is dramatically ill-prepared. Our domestic economy is quite vulnerable to price shocks, and our national security toolbox is oriented toward violent, not economic, challenges.

The good news is that America has overcome such great global challenges before. To do so, however, we have to look beyond the drama of the Arab street and recognize that leading the free world now requires America to become a sophisticated steward of a sustainable global order.

The opinions expressed in this commentary are solely those of Patrick Doherty.

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