The US’ ill-considered bio-fuels subsidy programme demonstrates how not to react. Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for bio-fuel production. Never mind that this is hugely inefficient in terms of water and land usage.

Moreover, even under the most optimistic scenario, the US and the world will still be relying mainly on conventional fossil fuels until the hydrocarbon era comes to an end (which few of us will live to see). Diverting vast tracts of agricultural land into fuel production has also contributed to a doubling of prices for wheat and other grains. With food riots in dozens of countries, isn’t it time to admit that the whole idea was a giant, if well-intentioned, mistake?

Another wrong turn is the proposal recently embraced by two US Presidential candidates to temporarily scrap taxes on gasoline. But this is not the way to do it. The gas tax should be raised, not lowered. The sad fact is that by keeping oil prices high, OPEC is doing far more for environmental conservation than western politicians who seek to prolong the era of ecologically unsustainable western consumerism.

It is not just oil prices that are high, but all commodity prices, from metals to food to lumber. Prices for many have doubled over the past two years. Oil prices have risen almost 400 per cent in the past five years. The proximate cause is a global economic boom that has been stronger, longer, and more broad-based than any in modern history.

Some politicians also complain about speculators who, more and more, are trading commodities on complex and growing markets that allow them to bet on whether, say, future demand from emerging markets is likely to outstrip growth in future supply. But why is this a bad thing? If ‘speculators’ are bidding up today’s commodity prices because they realise that future generations are going to want commodities, too, isn’t that a healthy development? High prices for commodities today mean more supply for future generations, while at the same time creating an incentive to develop new ways to conserve on consumption. Again, high prices are helping in ways that western politicians seem afraid to contemplate.

Admittedly, the global commodity price boom has had profound, albeit enormously complex and uncertain, effects on poverty. While surging commodity prices are helping poor farmers and poor resource-rich countries, they are a catastrophe for the urban poor, some of whom spend 50 per cent or more of their income on food.

One element of the solution is to compensate the very poor for the higher cost of survival. Over the longer term, more money for fertilizer, and other aid to promote self-sufficiency, is also essential. The World Bank, the United Nations, and even the Bush administration have moved to help, albeit in small measure relative to the scale of the problem. Of course, it should be noted that if economic reform in resource-rich Africa had been proceeding at the same pace as in Asia, the era of soaring commodity prices might have been postponed for another century.

For now, though, instead of whining about high commodity prices, governments should be shielding only their very poorest citizens, and letting the price spikes serve as a wake-up call for the rest of us. The end to western consumerism is not yet at hand, but high commodity prices are a clear warning that big adjustments will be needed as Asia and other emerging nations begin to consume a larger share of the global pie.

True, when today’s global economic boom ends, commodity prices will plummet, easily 25 per cent, quite possibly 50 per cent or more. Western politicians will cheer, and many pundits will express relief that less money will be flowing to undemocratic countries in the developing world. High prices send a real message about scarcity in a globalizing world. Those who ignore it, especially by blocking market forces, are making a tragic mistake.

The author is Professor of Economics and Public Policy at Harvard University. Copyright: Project Syndicate, 2008.

(Businessworld issue 13-19 May 2008)