Panicked About Expensive Food And Oil? Don't Be.(Periscope; ECONOMY)(news briefs)

Byline: Stefan Theil Patrick Falby Barbie Nadeau Barbara Kantrowitz and Pat Wingert and Larry Kaplow

Skyrocketing energy prices and food inflation have been held up as major threats to the global economy in 2008. Just last month, oil was in danger of surging past $100 a barrel, and U.N. sources say the price of food has risen an unprecedented 40 percent in the last year. Economists worry that the higher prices will bring back the scourge of inflation, a threat the world has not seen in almost 30 years. In fact, some economists argue that inflation is already here -- it's just not counted in the "core" inflation figures (which exclude food and energy) most central banks use to control the money supply.

But in the spirit of the holidays, let's look at the bright side. There are signs that oil and food prices may actually fall in 2008. If the United States is heading for a downturn, as many economists expect, slower growth would reduce demand for oil. Moreover, speculative money may have added $10 to $20 to the price per barrel in recent months, and speculators like hedge funds are starting to unwind bets that energy prices will continue to rise. Supply constraints appear to be loosening, too: nearly 3 million more barrels per day are due to come on the market as OPEC reverses cuts. "We see the possibility of pretty significant fundamental easing by the end of the year," says Michael Waldron, oil-markets analyst at Lehman Brothers. Most analysts expect oil to drop to at least less than $90 in 2008's first quarter. Many expect it to settle to as low as $60 or $70 by the end of the year.

As for food, most economists believe that prices have neared their peak. The dire forecasts tend to cite rising demand from prospering Chinese and Indians, and increasing competition for grain supplies from the ethanol industry. But the No. 1 reason for the recent spike in food prices was a string of bad harvests, thanks to floods and droughts in 2007 that are unlikely to be repeated. Already, Australian harvests are improving, and farmers in the United States and Latin America have been planting more crops. Demand should also drop now that many think producing biofuels from corn is inefficient. Some analysts even question the widespread assumption that rising consumption in developing nations will continue to force up food prices. Paul Ashworth, senior international economist at Capital Economics, calls that argument a "red herring," saying that consumption of meat in China and India has reached a plateau.

Of course, a disruption in oil production or large-scale crop damages could spike prices. But with more oil and food supplies on the way, it could be a happier New Year than many predict.

-- Patrick Falby

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