Countries such as India benefit from low oil prices. What determines commodity prices is, therefore, of great interest for us. What is the relation of commodity prices to global growth? What’s more important for commodity prices—demand or supply? Is growth in emerging markets the main determinant of commodity prices? These are some of the questions as the world starts recovering from the effects of the financial crisis.

Why do the authors look at two very different commodities—crude oil and fine wine—in their paper?

They find a remarkable correlation between the two prices and wish to arrive at the common factors that explain the similar price variations between these two dissimilar commodities.

There are three competing explanations about the recent spurt in commodity prices—global demand growth, financial speculation in commodities and accommodative monetary policy. For wine prices, however, the usual approach has been to consider climatic conditions, grape quality and other micro factors.

The authors find that macroeconomic factors have been the main determinant of both oil and fine wine prices. While the limitations of supply do have an impact, the overwhelming reason for price fluctuations lies in demand growth. Moreover, what matters is demand growth in the emerging markets, rather than in the developed world. The paper points out that “emerging market economies made the greatest contribution to the upsurge in global crude oil demand, accounting for 69% of the increase in world oil consumption between 1990 and 2008 and more than 100% of the change in global crude oil demand since 2000 as oil consumption in OECD countries declined during that period". There has been a sustained shift towards less energy-intensive growth in the advanced countries and the source of energy demand has therefore shifted to the emerging market economies.

In the wine trade, too, demand from emerging markets has increased due to higher incomes. Per capita wine consumption has been declining in mature markets such a Italy and France, but is rising from a very low base in emerging markets.

The paper’s conclusion: “Even though advanced economies account for more than half of global oil and wine consumption, the rate of aggregate demand growth emanating from emerging economies is the key factor influencing commodity prices. Emerging economies grew at an average of 6.4% per year—more than three times the rate of growth in advanced economies, thereby making up the bulk of the incremental change in global commodity demand." The authors agree, however, that conditions of excess liquidity in the global economy have exacerbated the rise in commodity prices, not only because of capital flows into commodities, but also by leading to above-trend gross domestic product growth in the emerging economies.

The findings of this paper have two main implications. One, with emerging market economies continuing to grow strongly, despite the financial crisis, commodity prices are likely to continue to see upward pressure. And two, what’s true of oil and wine is likely to be true of a host of other commodities—the Food and Agricultural Organization’s Food Price Index, for instance, has gone up from 122 in 2006 to 215 in December 2010. That will mean inflation is likely to continue to be a bugbear, especially in emerging economies.

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