Sobering Price Increases

Richard Ha writes:

Aloha Airlines—which has flown all of us between the Hawaiian Islands since 1946—terminates their passenger service today, after filing for bankruptcy protection 10 days ago. We knew the airline was in trouble, but we never expected it would come to this.

Talk about coming to grips with reality. Kimo and I had a meeting with our fertilizer distributor a few days ago, who told us that fertilizer prices have gone up again. Just by itself this fact would not be especially worrisome. But nitrogen fertilizer prices are related to energy prices, and energy prices are likely to keep rising as far into the future as we can see. 

The distributor told us some farmers are actually dipping into their savings to buy fertilizer. Not only nitrogen fertilizer, but potassium fertilizer is also rising in price.

It rains a lot here on the east side of the Big Island; maybe 140 inches in an average year. Quite often the fertilizers we surface apply are washed away. With fertilizer prices continuing to rise, it’s just a matter of time before we will not be able to afford broadcasting fertilizer in this manner.

Then he told us that Roundup, the main herbicide we use for our banana operation, has doubled in price. We use Roundup to control the weeds in more than 400 acres of bananas.

Have you noticed there are less abandoned cars now than there used to be? I’m told that tow truck operators are finding that scrap metal prices make it worth their while to haul abandoned vehicles away. Someone told me that one catalytic converter is worth $125.

That’s the other side of the phone call that I got last week asking if I wanted to order more growing houses, because steel prices are going up.

Weyerhaeuser, the corrugated box manufacturing company on O‘ahu, closed a couple of weeks ago. More than half of Hawaii’s agricultural products were packed in Weyerhaeuser boxes. WE used their boxes for many years.

Last week I saw in the paper last week that O’Keefe Bakery here in Hilo is being badly affected by this record increase in electricity costs.

Most of the electricity here on the Big Island is generated using oil. I was told that rising plastic plate costs are hurting Mom & Pop plate lunch places, which cannot raise their prices enough to cover the increase. Plastic is, of course, a byproduct of petroleum.

And medical costs are rising as well. HMSA, which provides health insurance to more than half of Hawai‘i's population, just announced a substantial price hike in its rates.

It is very sobering to see these cost increases going on all around us.

Most worrisome to me is that farmers cannot control their prices. We are told all the time that farmers are not price makers—they are price takers. In other words, they merely take the price that wholesalers or retailers give them.

We know what is happening. We live in a finite world, and resources are limited. Do we just sit in the pot and watch ourselves cook?

Comments

[Ben Discoe]

Richard,

There's a few ways to look at these rising costs. The first is, it's just inflation. The dollar is rapidly losing value against anything you can compare it to (gold, oil, euros..). If that's true, then real costs are actually not going up much, it's just more dollars because dollars are worth less. Then the only real mystery is why the CPI used to estimate inflation hasn't gone up proportionally.

Another way to look at it is, rising oil prices are pointing out all the ways we need to change our oil-dependent ways. Each of the problems you usefully identified has a low-oil solution. There are agricultural alternatives to chemical urea and roundup, as you know well, they just cost more (so far). O'Keefe's could bake their bread without oil-based electricity - there are many other ways to do it on our resource-rich island. Plastic plates have obvious alternatives. And as for keeping the fertilizers from leaching away in 140"/year of rain, UH Manoa actually invented a brilliant solution (flash carbonization of biomass to increase adsorption). Hopefully a biocarbon plant will be coming to our island very soon.

So - either it's just inflation, in case we just have to adjust our mental picture to larger numbers on every pricetag - or it's economics urging us to quit our oil-dependent ways, which as you have wisely pointed out, we should be doing anyway (the frog in the pot...)

-Ben

[James Weatherford]

Oil price is increasing faster than CPI, which is most often reported (in fine print) as "excluding energy" because energy price is already in everything else and the reckoning is that to include it in CPI would double count.

Inflation in 2008 is double-barreled:
'cost push' in terms of the price of energy going up.
'demand pull' in terms of the China boom (bubble?) sucking resources from across the globe.
Having both 'cost push' and 'demand pull' simultaneously is tough, much like 1970's.

[richard]

James and Ben;

And this time, we may not be saved by a giant oil field discovery. Dr Makena Coffman from the UH Economic Research Organization did a modeling entitled Oil Shocks and Hawaii's Economy, Jan 2007. It concluded that Hawaii had the ability to absorb oil shocks up to a 30% increase in oil costs. That would have occured at $80 per barrel. We are now at $110.

I found this interesting. http://www.financialsense.com/Market/cpuplava/2007/1003.html.
In the 70's the country went into recession due to oil shock. Real price of oil was around $102 per barrel. How come we have not gone into recession yet? This article say's that we are now a more service oriented economy using less oil per dollar of GDP. But, this will occur somewhere toward $160 per barrel--four years of $15.00 hikes. Less?

If supply of oil cannot keep up with demand causing continuous rise in prices, Could it mean permanent recession/depression at some point around $162 per barrel?

The key is to change our behavior. Can we do this and still retain a good lifestyle? Will we have order?

Scary thing to contemplate.
Thanks for your comment, James.

Richard