How Oil Prices Affect the Price of Food

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How Oil Prices Affect the Price of Food
By Post Carbon | Wed, 21 December 2011 18:07
The current global food system is highly fuel- and transport-dependent. Fuels will almost certainly become less affordable in the near and medium term, making the current, highly fuel-dependent agricultural production system less secure and food less affordable. It is therefore necessary to promote food self-sufficiency and reduce the need for fuel inputs to the food system at all levels.  

The connection between food and oil is systemic, and the prices of both food and fuel have risen and fallen more or less in tandem in recent years (figure 1). Modern agriculture uses oil products to fuel farm machinery, to transport other inputs to the farm, and to transport farm output to the ultimate consumer. Oil is often also used as input in agricultural chemicals. Oil price increases therefore put pressure on all these aspects of commercial food systems.

Figure 1: Evolution of food and fuel prices, 2000 to 2009
Sources: US Energy Information Administration and FAO.
 
Thus there is concern that high and volatile prices of crude oil may cause food prices to continue to increase (Bloomberg, 2011).   
Moreover, as oil prices rise, so does demand for bio-fuels, which are the only non-fossil liquid fuels able to replace petroleum products in existing combustion engines and motor vehicles. But bio-fuels are often made from corn and other agricultural products. As demand for these alternative fuels increases, crop prices are forced upwards, making food even less affordable.  

Export-led agricultural strategies also increase the world’s vulnerability to high oil prices. Most donor agencies have encouraged the less industrialized countries to focus on the production of cash crops at the expense of staples for local consumption. As a result, people in these countries are forced to rely increasingly on imports of often subsidized cereals or those funded by food aid programmes. However, rising transport costs contribute to rising prices of food imports, making them ever less affordable. Fuel costs represent as much as 50 to 60 per cent of total ship operating costs.[1] From early 2007 to mid-2008, as fuel prices soared, the cost of shipping food aid climbed by about $50 per ton – a nearly 30 per cent increase, according to the United States Agency for International Development (Garber, 2008).    

Meanwhile, many poor farmers who cannot afford machinery, fuels and commercial farm inputs find themselves at a disadvantage in the global food economy. Compounding this are agricultural policies in industrialized food-exporting countries that subsidize domestic producers and dump surpluses onto developing countries, thus adding to the economic disadvantages of the smallholder farmers in those countries. As a result, millions of those farmers are being driven out of business annually, those countries are giving increasing priority to production for export and they are witnessing a burgeoning landless poor urban class (whose immediate ancestors were subsistence farmers) that is chronically malnourished and hungry.

Soaring food and fuel prices have a disproportionate impact on developing countries and on poor people in developed countries. Americans, who, on average, spend less than one tenth of their income on food, are able to absorb the higher food prices more easily than the world’s poorest 2 billion people, who spend 50 to 70 per cent of their income on food.  

Why are oil prices so high? Speculative investment in commodities plays a role, though there is a persuasive case to be made that oil prices would be rising even if oil futures speculation were entirely curtailed. The oil industry is changing, and rapidly. As Jeremy Gilbert, former chief petroleum engineer for BP, has put it, “The current fields we are chasing we’ve known about for a long time in many cases, but they were too complex, too fractured, too difficult to chase. Now our technology...
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