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CAUSES OF THE CRISIS 17


for these commodities has been rising since the 1970s (Figure 2.5). However, oil market experts argue that supply response is sufficiently slow that, even when rising demand is foreseen, the industry still struggles to respond. More- over, China’s economy was so flush with foreign exchange that it could afford to keep importing large volumes of oil even as prices rose, thus crowding other economies out of the market. In 2009—after the crisis—it also looks like the rebound in oil prices is intimately connected to strong growth in Chinese oil imports, as media reports have suggested.


In summary, Chinese demand looks like an important component in the surge in oil prices, although previous analyses have also shown that rises in oil prices are also closely linked to political instability in the Middle East, Nigeria, and Venezuela and to supply decisions made by the Organization of Petroleum Exporting Countries (OPEC) (WRTG Economics 2008). As for India, its contribu- tion to rising oil prices has thus far been fairly negligible, but its contribution will rise to 12 percent over the next 20 years or so (Figure 2.5). A second narrative about China is also quite indirect. Although China’s participation in oil and food markets has generally been steady, one agri- cultural commodity for which China’s demand is characterized by a strong import surge is soybeans. In the mid-1990s China appears to have made a conscious decision to move away from domestic soybean production, which was relatively uncompetitive, and to instead rely on exports from North and South America. From a position of self-sufficiency in the early 1990s and before, Chinese imports of raw soybeans steadily rose to more than 50 per- cent of global imports (Figure 2.7), while soybean oil imports have generally risen but fluctuated between 10 to 30 percent of global imports. However, Figure 2.7 also shows that this increase in demand has been accommodated by increased soybean production (almost entirely through area expansion) by Argentina, Brazil, and the United States.


This trend has contributed to U.S. farmers’ shifting large amounts of land out of wheat, maize, and other coarse grains into soybeans. In fact, USDA data suggest that soybean production area increased by more than 11 million hectares during this period. By using average yields for other crops, simple back-of-the-envelope calculations suggest that non-soybean grain production in the United States might be 3 percent higher today than would have been the case had this switch not occurred. In Brazil, soybean exports were largely fueled by expansion of total agricultural area, such that the impact on pro- duction of other crops was not strong.


It certainly seems possible that China has had some modest effect on tightening coarse-grain production in the United States, but this increased demand was spread out over many years and seems to have been sufficiently accommodated by extensive production growth among the three major


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