In economic life there are two choices.

One choice is to become a participant in mass markets where products are standardized and where many producers find they can't gain an advantage over others, essentially becoming price-takers. Survival is then determined by meeting the standard product criteria and otherwise containing costs sufficiently to be able to turn a profit at offered prices.

The more lucrative choice is to differentiate, acquiring special product or distributional features no one else provides, allowing higher prices to be charged and thereby making super profits.

Mostly every economic agent tries to specialize and differentiate, becoming capable of making higher profits. But imitation beyond copyright limits tends to erode such advantages, in many instances entirely.

Thus in a large economy, many producers effectively can't escape gravity, can't find unique ways to differentiate and ultimately find themselves price-takers rather than price-makers.

With demand limited and many new hungry mouths wanting to join on the supply side, price discipline is created that encourages cost reduction and technological innovation.

This is the most efficient manner in which taste and income decide demand needs, and scarce production factors are allocated to supply and meet these needs.

Sometimes inefficiencies arise in such a system. A few producers can organize themselves into a band of brothers intend on cornering their market. If successful, their market power allows them to become price-makers. Now it is consumers who have to take whatever price producers decide to charge for their product.

Opec has always been such a band of brothers, but they never yet controlled their entire industry. Besides, they had conservative members such as Saudi and Kuwait, whose very large oil reserves made them inclined to take a long view. Rather not overprice and find that customers conserve, become innovative, find alternative substitutes and ultimately move away from a product that has priced itself out of reach, yet has 200-years to run.

These conservative oil producers for long kept Opec disciplined, only asking oil prices that would optimize oil output on a 200-year view, reflecting the interest of the dominant large-reserve producers.

But of late something seems to have fundamentally changed. Global oil demand seems to have become less crude price-sensitive, partly because it is burdened with high taxes (making crude cost an insignificant part of the total cost in especially rich countries) or because it is subsidized or price-controlled (in poor countries).

Demand is no longer falling off even as oil prices rise. Not indefinitely so, but certainly to a remarkable degree that was foreseen by few.

The great counter to Opec was always non-Opec

But then also there was a change on the supply side. The great counter to Opec was always non-Opec. If oil prices rose too high, new supply was being stimulated in non-Opec, sufficiently for it to gain market share at the expense of Opec. This made Opec careful.

But in recent years it was becoming obvious that non-Opec's ability to raise output was constrained, mainly for technical reasons. Old oil fields were running down while new ones were not coming into production fast enough to meet incremental demand growth.

Thus the global playing field was apparently changing. Less ability of consumers to move away and less ability in non-Opec to gain advantage as oil prices rose.

This doesn't mean competitive limits on Opec have completely ended. They just seem to be now sitting at much higher price levels, or will take longer to become active again.

It is the kind of situation where the lucky producer is invited to start experimenting with prices. How high can we drive this baby before rediscovering the new limits?

This price discovery has effectively been underway since 2003 from a starting level of $30/b. We have now reached $125/b, yet with the global inventory buffer of 2.5mbd being lower than it was in 2000, and being only half the comfortable buffer of five mbd that would promise ultimate price discipline.

So at what price level will global oil demand become sufficiently price-sensitive again to stop these games?

And at what price level will new supply or alternative technologies kick in decisively?

These are good questions to which nobody currently seems to have the answer. There seem to be many geopolitical and environmental constraints on fossil fuels (oil, gas, coal) to prevent a quick solution. Alternatives face costly technical limitations. Leapfrogging to the next revolutionary energy source (large scale solar harvesting or hydrogen fusion) seems to be distant and costly.

Meanwhile the Opec tax on global GDP is steadily being increased.

Thus there is a massive redistribution underway, from global consumers to favoured Opec citizens. As Opec cannot absorb its newly found riches in the short-term, the super profits so earned are being reinvested in the world economy. At least that circle flow keeps the global economy ticking over rather than grinding to a halt.

A second feature of this energy event is that it has created an opportunity for global farmers to join non-Opec and to supply biofuels to the world as an oil-substitute. The volume of these new biofuel supplies is unlikely to fundamentally change the oil equation. But they are changing the food equation.

Along with greatly increased global demand for protein as the world experiences catch-up growth in poor regions, the biofuel demand is doing to global food prices what Opec is doing to oil prices.

In addition, there are also supply limitations in global agriculture, effectively allowing only relatively slow expansion of output.

Thus there is also a global food squeeze in the works.

World consumers therefore face two monstrous price changes, for energy (oil, but also coal and gas) and for food. And weight-wise, food is by far the more important in poor country consumption baskets.

Within consumer countries, a massive change is therefore underway, which can best be described as a tax being levied on consumers.

Oil imports are more costly, as higher prices are paid to foreign suppliers. And other local sources of energy and food are also higher priced, with the advantage accruing to local producers. Some of these producers (farmers) in turn are highly dependent on inputs with an energy content (fertilizer, transport), finding that their higher earnings being gained through higher food prices is mostly again drained away through higher input costs.

But there can be little doubt about what households are facing. Either higher direct costs (petrol, food) or indirectly higher priced products of all kinds as many producers face higher transport and other costs, which they have to pass on to consumers through higher prices if they can’t absorb these costs through cost-reduction or lower profits.

It is at this point that something fascinating happens. These increased oil and food price burdens have been compared to a tax that accrues to either foreign or local producers. It is a form of redistribution, where producers so favoured can decide what to do with their newly gained income. For instance Arabian sheiks are currently inclined to buy more global assets.

If our minister of finance had been the party instigating the change, in his case raising income or other taxes, two things would have happened. Those who had to pay more would have raised a hue and cry, but in political terms. And the minister would have decided what to do with the extra boodle. Fund a foreign war? Buy more infrastructure? Spend more on social delivery such as housing, education and health? Give the poor more money?

But it isn't the minister of finance who is raising this tax on society. It is select producers, specifically foreign ones, who are doing it and who need to be paid in foreign currency (dollars). Thus we need to earn more exports, spend less on imports, borrow overseas or sell some assets to obtain such means.

Borrowing to pay petrol bills is not a good idea. We may earn some more export income (coal and other commodities), which may partly solve our external problem. But this would still leave a domestic problem.

For those earning the extra dollars would be miners and farmers mostly. While it is households who see a portion of their disposable income siphoned off. These aren't the same people.

If it was the minister raising income tax or VAT, there would be a political outcry but little else, for what are you proposing to do? Refuse to pay your taxes? It isn't a course of action that is recommended.

But how different a reaction we get when oil and food producers raise their prices, and households are poorer. Now they are also up in arms, but economically. And they turn to their employers instead to give them a raise in income to compensate for their lost disposable income.

This may look rational, but isn't. You have become poorer as outsiders have raised their cost to you. You know you can't get oil sheiks to lower their prices, but why think that employers can somehow pay you more?

This is where experience comes in. If employees ask employers more wages, this pushes up the cost of production. If employers can pass that on to households by way of price increases for their products, that would make it okay to employers. Households would lose out a second time. But that's alright. For households can for a second time demand more wages, and employers can for a second time redistribute this pain all round.

In essence this is a paper pushing exercise. Nobody supposedly gets poorer, for on paper new money is every time created to keep the circle flow going.

All that is really necessary is that the friendly uncle at the SARB keeps accommodative by allowing the supply of credit and money to increase sufficiently for this musical dance to keep going.

And externally, of course, we must somehow find the dollars, earning them or borrowing them or getting them through asset sales, for the SARB can't manufacture dollars yet themselves. Someone, though, is reportedly working on a secret scheme to turn lead into gold and solve all our problems that way, after a similar scheme not yet fully instituted – dollar debt securitization – recently blew up overseas, though happily not our doing.

Unfortunately, it is at this point that one encounters White Fang. Know the character in the old Jack London novel 'Call of the wild'? The wolf? Or was it the Husky? Doesn't matter.

A central banker can be quite catlike or wolf-like when he encounters something he doesn’t like. More specifically, he also can bare his fangs, when society wants to embark on money musical chairs, something that is in nobody’s interest except powerful speculators.

That by the way is one of the central bank's primary roles. One is to keep the banking system liquid and operating. The other is to restrain the speed of the monetary treadmill to a low single-digit pace.

That way we get less distortion between consumption and investment, between rich and poor, and less disturbance entering from the outside world. Peace in the valley as wage slaves and others beaver away in the satanic mills to improve their lowly lot the hard way.

A century ago there was an US president, Teddy Roosevelt, who coined the phrase 'walk softly but carry a big stick'. That was his way of conducting geopolitics. In rugby we also used to have a comparable slogan: Nail him, Dawie! Or words to that effect.

Central bankers also carry big sticks (interest rates), but like cats and wolves they also from time to time like to bare their fangs in warning fashion when things threaten to get unruly, warning their wards that they are getting way out of line and beyond their station.

In this role, the SARB is no different from SARS representing the Minister of Finance at tax-paying time. We tend to forget perhaps too often that macroeconomic policy is really a team of two huskies running in tandem.

One of the problems we face is that like producers in the economy as described in the opening paragraphs, labour also tries to differentiate and charge more for its services, or otherwise combine into larger organizations called unions and become price-makers rather than price-takers.

Any ordinary Joe is a price-taker. If oil and food prices go up there is little he can do about it. His remaining income available for other purchases is reduced. He has to tighten the belt, find cheaper substitutes or simply spent less.

A highly skilled employee in short supply can renegotiate his wage. Not easily, but employers realize what is the more costly option, losing the employee or paying more.

But such employees are only a small minority, though depending on the type of operation a company is running.

Large unions representing millions of employees are a different proposition. Employers may cut their workforces if faced with higher labour costs. But this won't prevent the union of demanding higher compensation, for it is acting on behalf of the majority who would gain from such a benefit, even if it were to come at the expense of a minority who lose their job.

So when White Fang bares its fangs in a warning to all and sundry that the general cost increase will not be accommodated by way of money supply expansion, quite an egg dance gets underway.

Employers will get the message that demand in the economy is going to suffer, which limits their ability to do things. They in turn can tell employees that there will be no wage compensation for the increased cost of living brought on by the oil and food price shocks.

At least half of all employees in the economy are so inconvenienced, having to absorb the fact there has been a tax increase that has lowered their standard of living. Not by the minister of finance but by foreign oil and food producers, with employers not prepared to offer a bailout.

For the remainder of labour force, employers face critically-important skilled staff and powerful unions. The unions are not entirely insensitive to pain. Employers can hire fewer union staff when cutting head count, causing the union to lose members who will not go without an outcry of their own. The fear of being one of those will influence the larger membership.

To the extent that employers have to accommodate key staff and unions, they have to cut other costs, improve productivity or accept lower profits.

The greater the squeeze, the more intense this egg dance

The greater the squeeze, the more intense this egg dance. As a rule of thumb, the cost of the externally imposed burden (commodity tax) is roughly split three ways overall in the economy. One-third is absorbed by unprotected employees, one-third by key staff and unions and one-third in reduced business income.

The independent SARB is one of the key policy institutions in the local economy, if necessary at times forcing all economic agents to face up to the fact that they are going to lose something. Either by cajoling, threatening and actually raising interest rates, the SARB can force economic participants to fight it out among themselves as to who incurs how much pain.

The strong will incur less pain than the weak. This is where government still comes into the picture, politically activated to prevent too much fallout.

The wrong way is to distort the pricing mechanism still further by handing out protection through subsidies or controlling prices and penalising producers (who may decide to produce less), lower VAT on food or the fuel levy on petrol (and mainly favour the middle class).

But the government can increase welfare allowances, thereby strengthening the social safety net for the poor.

As for the large number of unprotected, have you considered the plight of for instance your gardener and domestic worker? No government is looking after them in this present squeeze. Yet such employees are facing food and taxi cost pressures which are intimidating. Each of us faces his own social responsibility as employers on this score.

Clearly, with oil through $125/b and heading who-knows-where, with food in tow, these are challenging times indeed in which sacrifices will be made. All that is in doubt is how the sacrifices will be allocated.

Watch out for the SARB doing its share of making sure we don't try to dodge the bullet by trying to escape into a generally costly inflation wage-price spiral.

Cees Bruggemans is chief economist of First National Bank.