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Petrocapita Update October 1, 2012

Petrocapita Update

Let me propose a thought experiment. Are we in a global environment where food prices can drive energy prices rather than the more typical relationship where energy prices tend to drive food prices? Key oil producing and/or middle eastern countries spend disproportionate amounts of household income on food. SHARE OF HOUSEHOLD SPENDING ON FOOD United States United Kingdom Canada Germany Bahrain Kuwait United Arab Emirates Japan Turkey China Mexico Iran Saudi Arabia India Venezuela Russia Egypt Nigeria Jordan Georgia Pakistan Belarus Algeria Azerbaijan Source: FAO, USDA, CIA Factbook - 2010
1

% 6.6 9.7 9.8 11.0 14.3 14.5 14.5 14.8 21.4 22.3 22.7 23.4 23.7 27.7 28.9 29.0 38.0 39.8 40.6 41.3 41.9 42.1 43.7 45.3

Petrocapita Update (continued)

FOOD PRICE INDEX


Algeria (4), Saudia Arabia (1) Haiti (5), Egypt (3), Mauritania (1), Sudan (1), Yemen (300+) Cote dIvoire (1) Somalia (5) Oman (2), Morocco (5) Sudan (3) Tunisia (1) Egypt (800+) Iraq (29), Bahrain (31) Libya (10000+) Syria (900+) Cameroon (40) Uganda (5) Tunisia (300+) Yemen (12) Mozambique (6)
1990 1995 2000 2005 2010

260 240 220 200 180 160 140

240 220 200 180 160 140 120 100 80

India (1), Sudan (1) Mozambique (13)

Mauritania (2) India (4) Somalia (5)

Brundi (1) 120 2004 2006 2008 2010 2012

Consequently, residents in such places are heavily exposed to price increases in basic food-stuffs. Does this matter? More specifically, does this create a higher risk of civil unrest? Apparently the answer is yes and it happens predictictably once prices move beyond a certain level. According to research by Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam (The Food Crises and Political Instability in North Africa and the Middle East, New England Complex

Systems Institute) - the timing of violent protests in North Africa and the Middle East in 2011 as well as earlier riots in 2008 coincides with large peaks in global food prices. We identify a specific food price threshold above which protests become likely. These observations are consistent with a hypothesis that high global food prices are a precipitating condition for social unrest. ...More specifically, food riots occur above a threshold of the FAO price index of 210.

Petrocapita Update (continued)

Where is the FAO index now? 213. It would appear that unrest in the middle east is set to continue... ... and if it continues and/or grows, does this mean higher oil prices are ahead as investors are forced

to price in even higher risk premiums and importing nations deal with potential and perhaps real supply dislocations?

FAO FOOD PRICE INDEX 2002-2004=100 260 210 170 130 90 50 Real* Nominal

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
* The real price index is the nominal price index deflated by the World Bank Manufacturers Unit Value Index (MUV)

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