The Energy/Non-energy Price Link: Channels, Issues and Implications

One key characteristic of the recent commodity price boom has been co-movement among most prices, especially between energy and non-energy commodities. Such link is often discussed in connection (or attributed) to the use of food commodities for the production of biofuels. This chapter argues that, due to agriculture's energy-intensive nature, energy prices have played a key role even before the diversion of food commodities to the production of biofuel began. Transmission elasticity from energy to agricultural commodity prices of 0.20 is estimated for the 1960-2005 period. The econometric evidence confirms that the elasticity increased considerably when the post-2005 boom years were included in the analysis. But the chapter also finds that similar (and on some occasions larger) increases in elasticities are present in all commodity sectors, thus confirming that common factors must have played an important role during the recent boom.