There is proved evidence that there is a relationship between oil price and food price experienced after the crisis of the Middle East. Through this resent crisis in the Middle East it led to increase in the price of fuel. In relation to this it led to increase in food prices in result it led to increase in the standard of living. For the countries that focus on production of oil and not food it even caused the price of food to go even higher in the Middle East. It is of significance to understand the role of crude oil in agricultural process. For instance the tractors that pull plows they only use diesel or the gasoline to run the engine. The major reason for the food price to increase as a result to an increment in the price of oil is due to the increased cost of production that in the final state is passed on to the consumers.
According to the United Nation Food Agency, food prices have recorded a high record as a result of rising cost of fuel or oil. Most of our economists have predicted that if the fuel price goes upper then the food price will also continue increasing. One of the key tools, The Food Price Index that economists use to measure inflation and economic situation has been seen to rise up to 263 in a short period of 2 months. This has been credited to the Middle East crisis and the slow economic growth in the universal economic recovery process. According to the United Nations’ Food and Agriculture Organization, this is one of the most highly recorded statistics in history. It is anticipated that future food spines could additional slow down the universal economic recovery efforts. The rise of food prices are also said to be accountable of the political turbulence that has taken place in different parts of the globe particularly the Arab countries.
As per the resent surveys, the current increase in food prices will be of great bother to the western globe where the cost of food is comparatively a small part of the family budget. Nevertheless, the condition is dissimilar in Third World countries where the cost of food accounts for almost a half of the family’s financial plan. This further means that a small raise in food prices can be overwhelming for poor countries. Such minimal raise in food prices may lead to civil turbulence which may one at a time have an effect on the economic state of affairs not only in the individual state but internationally distinctively in oil producing countries. An ideal scenario is that of Egypt where it can be said that Egypt itself is not a main oil producer hence any augment in crude oil prices will not be of benefit to the nation that much. On the other hand, an augment in crude oil prices means that the price of food imported in Egypt will rise. This is with the admiration that Egypt itself is not a self governing state in food production.
The same people who caused the downfall of Hosni Mubarak from leadership will once more face the dilemma of malnourishment due to the augmented cost of living. One thing that is obvious in the case of Egypt is that the nation sits on the Suez Canal which is one of the main canals used in the transportation process of crude oil from the Middle East to the Western countries. Any additional raise in prices of food means that the Egyptians will turn out to be so frustrated that they will try and put a ceiling on traffic on the Suez Canal. This will more create a condition where the food and oil prices will keep on increasing higher and higher exasperating the globe prices of the same. The reason why the Middle East crisis is the beat practical example in examining the relationship between oil and food prices is because most of the Arab region countries are not self-sufficient when it comes to food but most of them are oil producing countries.
According to the IMF, the towering prices of oil and the price rises levels in up-and-coming economies are a great hazard towards the universal economic recovery. A number of the economies who have show evidence of fast economic growth are economies such as China, Brazil and India. According to the IMF, up-and-coming economies are supposed to be very cautious so as to make certain that market circumstances like the current housing boom in the US do not lead to a near fall down of the economy. Regardless of showing some cryptogram of revival from the current economic downturn, most economies have not comprehended full recovery hence stipulate a lot of attention in the financial context.
The prospect of oil at $120 is professed not sufficient to point out a stable worldwide development. The majority commodity prices have augmented a condition which has seen the increasing prices of food in the comparatively on the rising nations. This augment in commodity prices is seen as the key factor that led to the current Arab globe rebellions in Yemen, Saudi Arabia, Egypt and Tunisia. The IMF foresees that the inflations levels in rising states were much probable to boost accompanied by a push for higher wages. The current Arab catastrophe which was lately experienced in oil producing states had led to a sharp predispose in oil prices in current days but these prices retreated signaling a progress in the Libyan peace talks.
The relationship sandwiched between oil and food prices was particularly obvious during the period between 2007 and 2008 when both the oil and food prices recorded a historic high figure. This rise of the fuel and food prices is specifically responsible for the acceleration of the Great recession. Between the month of July 2007 and June 2008, the prices of crude oil rose from $75 to $140 per barrel which is an increase of almost 85%. During the same period, food prices recorded a record high figure of $225 all the way from $160 according to the Food Price Index. According to the World Bank, agricultural production is relatively energy intensive implying that any changes in fuel prices impact heavily in the agricultural sector. This is a larger context implies that the increase in fuel prices led to an increase in power machinery, irrigation systems as well as an increase in fertilizers and other chemicals that are energy intensive.
The situation is further worsened by the fact that most government have embarked on a campaign to grow plants for bio-fuel instead of food crops. This is what is responsible for the increase in food prices whenever oil prices go up. The World Bank has also come up with a rather interesting data signifying that there is a 0.9% in maize prices whenever there is a 1% increase in oil prices. This is because; any increases in fuel prices increase the profitability of price increase in the agricultural sector due to inflation that greatly affects prices of basic commodities.. This can be further be demonstrated in the graph below.