I recently attended a seminar by Agricultural Economist, Brian Wright, in which he spoke on price volatility in storable commodity markets. His major point (and I'm paraphrasing and probably grossly misrepresenting what he said) is that supply shocks alone are not enough to cause price volatility. Supply shocks in times of low storage cause price volatility. The impetus for the recent run-up in food prices may be ethanol mandates or drought or...fill in the blank. But we've seen such supply shocks before. Why the volatility now? Storage. Or lack thereof.
Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields.
"We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries," he said.
If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008.