In the corporate world, the cost of goods is almost always directly proportional to the cost of production. This is the case more especially for manufactured goods, where the expenses incurred in the purchase of raw materials, transportation f both raw materials and finished products, and payments for labor are reflected on the price of the finished product, which is eventually footed by the end-user consumer. In this regard, oil plays a central role in the production chain of almost or industrial products. In fact, it is widely believed, and almost always true, that price fluctuations of manufactured products reflect the trends of oil prices in the world market. The centrality of oil prices to the cost of goods was demonstrated in the recent economic crisis, when most manufacturers incurred huge losses due to high costs of production, all of which were triggered by upshot oil prices.
For these reasons, the principles of economics hold that lower costs of input in the production chain should translate into lower-end products prices. In the case of manufactured goods, the costs are normally low in oil-producing countries. In countries like Libya, Iran, Iraqi and Saudi Arabia, industrial expenditure on energy is usually low due to o government subsidies and reduced expenditures on energy.
However, these hypothetical assumptions, which for a long time in the past turned out to be case, were challenged during the economic recession that began in late 2007. Although the costs of energy were considerably lower in most oil-producing countries, the costs of food were unexpectedly higher than ever experienced before. Despite the government’s interventions “to control prices of certain basic foodstuffs such as bread, milk, flour, wheat and barley” (Bourland, 2007 p. 142), high consumption led to high prices among the lower classes, “because food accounts for a larger proportion of their total spending.”
The complexity of the food situation in Saudi Arabia and other Asian countries is perpetuated by socio-economic, demographic and climatic factors which encourage high consumption against low production capacity and increasing global demand. Asia alone is estimated to be home to more than half the world’s population. The densely populated China and India, together with other Asian countries look beyond their borders for their daily bread, making Asia and the larger Middle East a vacuum towards which most of the world’s food products flow. The uniqueness of the current food crisis in the world is the inclusion into the mix of shortage and skyrocketing prices of some countries previously assumed to be cushioned by oil exports.
Nonetheless, this unprecedented departure from previous patterns where the advantage of oil did not ensure lower prices is not entirely surprising, in consideration of various economic factors whose effects overshadowed the leverage that oil had before. External factors, rather than internal economic factors played a major role in triggering high food prices. Writing in the Saudi-US Relations Information Service, Brad Bourland reports that “With agricultural commodity prices rising and food price inflation in Saudi Arabia in line with other countries in the GCC and not much above that in the US and UK, we see little evidence that local retailers have been a major cause of the price rises” (Bourland, 134). The report indicates that food prices were pinned to the patterns of agricultural production globally, whose effects were felt even in Europe. It also suggests that internal price regulation policies did not in any way impact food prices. In this light, it seems only appropriate to argue that factors of production, supply, and demand had a direct impact on high food prices, with the effects more pronounced in countries that relied heavily on external sources. In fact, it is this latter factor- the over-reliance on food imports by most Asian and oil-producing countries, more than anything else, that created acute shortages and subsequently, high prices. Nonetheless, other factors such as unfavorable climatic conditions, high population, importation costs, high demand and lower supply in the international market also contributed to the crisis. This essay examines these socio-economic and climatic factors which led to high food prices in oil-producing countries, despite lower industrial costs on energy.
By the dictates of nature, most oil-producing countries are essentially vast terrains of dry land. The immediate implication of this scenario is that productive agriculture for food crops farming is essentially impractical since rain s the sustenance factor of agriculture. Asian countries that enjoy the blessings of the ‘back gold’ are also cursed in terms of weather. The bitter truth is that the decomposition processes that lead to the transformation of fossils to oil are possible under very high temperatures, which, on the other side of the coin, proves very unfavorable to agriculture. This is why all the major oil wells are spread across the world’s hottest parts, such as the Arabian Desert in the Middle East and the Sahara desert of Africa. But since the conditions that favor oil formation are at the same time unfavorable for farming due to the total absence of rain, most oil-producing countries do not rely on domestic agricultural activities for food supplies. Consequently, there is virtually no farming in these countries, which means that they rely on agriculturally endowed nations to feed their populations. Thus, even if the costs of industrial manufacturing of goods are lower, the primary raw materials are imported in which case importation costs will have a direct bearing on the finished product.
In Saudi Arabia, for instance, food is regarded as the most highly demanded import commodity, and it has subsequently become the main variable measuring inflation rate. This is because food products make the bulk of imported goods, with a constant and perennial high demand. The Saudi Arabian Minister for Finance, Pranab Mukherjee said in March that “If you look at the current trend in the inflationary pressure, it is not because of substantial monetary expansion but because of supply bottlenecks in respect of certain essential commodities particularly the food items,” (Commodity Online 2010). This means that there is nothing short of self-reliance the affected nations could do to change global trends. The Saudi-US Information Service notes that the sharp rise of food prices in 2007 was attributed to “Structural shifts in patterns of consumption and use of agricultural products have been aggravated by temporary factors such as poor weather conditions to push up food prices throughout the world” (Bourland 165). What is further implied by this report is that climatic changes that which case poor harvests in the major food-exporting countries could create domestic shortages in those countries, which in turn cuts on their exports to satisfy domestic demands. Thus, even in countries with a high agricultural potential, climatic changes led to drastic reductions in global output, which meant that those countries dependant on the world market for food had to grapple with the little that was available in the world food market, for which, to worsen the situation, they had to dig deep into their pockets to feed their populations. At the same time, oil-producing countries were not the only buyers, as they were. Other industrializing giants with equally limited potential for domestic production demanded their share. In this category are China and India, the industrial leaders of Asia, who also share the same fate of agriculturally unfriendly climatic conditions.
One of the major suppliers of food in the world market is Australia, which in 2006 experienced its worst dry spell in a century, causing a drop in food production by almost half. In effect, its exports dwindled significantly as domestic demand rose drastically. As one of the world’s major granaries, the resultant domestic shortage spilled into the international arena, as it was felt worldwide, hitting hardest in Saudi Arabia and other big spenders on food imports. Therefore, one of the prime factors was that “even if production in Saudi Arabia’s main import markets is not directly affected by poor weather, strong demand from countries elsewhere in the world seeking to make up for weather-affected supplies forced up the price Saudi importers pay for food commodities” (Bourland, 164).
Another determinant factor in the costs of food in oil-producing countries is the additional costs involved in irrigation farming. For any reasonable farming to take place, millions of tonnes of water have to be pumped from underground wells and channeled into the farms. However, even with the aid of advanced irrigation schemes through mechanization, only a few crops such as wheat and rice could be grown under cultivation. On the other hand, the major food crops such as corn require more demanding climatic conditions, which could not be achieved through irrigation alone. It is telling that even Israel, the world’s most advanced nation in irrigation farming, could not muster the climatic conditions necessary for the cultivation of corn. Instead, it produces low water crops like tomatoes and flowers, which they export and with the proceeds, join their fellow beggars from the East in the long queue of food importers.
Similarly, underground water in desert areas is highly saline, which requires desalination processes leading to increased costs. Besides drainage costs, these additional expenses to be incurred overshadow any gains to be made. This discourages any ventures into crop cultivation, even where there are sufficient resources. In the end analysis of the equation, importation becomes a cheaper option. But how cheap is left to external forces influencing market trends, which the importers have little control of?
Thirdly, high population increase in countries like China and India have been attributed to a high demand for food and increased purchasing by the world’s two largest countries, leading to a higher demand than the supply rate (Larsson, 2008 p. 15). Bourland reports that with their combined population of two and half billion people, which is more than a third of the entire population of the world, they are “directly responsible for the global food prices as they are on other commodities” (Bourland , 163). Previously, their economic growth had been blamed on high oil prices due to their increased purchasing power, which put pressure on global supply. The underscored fact here is that the world’s largest consumers of food products produce none. If half of the world’s food products are claimed by a handful of non-producers, then it is obvious that a shortage and high food prices will follow in that order. What kept the oil-exporting food-importing nations safe in the past was the relative stability in the oil market. However, the recent crisis in the Middle East triggered an unprecedented inflation, which meant that the value of money depreciated very fast in the face of global food shortages and high demand.
The drive-by non-oil producing countries but with higher consumption rates to exploit other sources of energy was also a trigger for high food prices. This was the case with the US, which uses corn and wheat to produce ethanol. Subsidies by the government aimed at encouraging exploration of renewable energy sources spurred an increase in corn production for non-consumption uses, which reduced corn supply for food in the US, leading to shortages in the market and effect, high prices. Besides reduced corn and wheat exports, another angle is that food imports within the US itself could have eaten a big chunk of food products that could have gone into non-producing countries.
And lastly, importation costs for shipping and freight contribute significantly to high food prices (Gerson, 2009 p. 143). Given the fact that most oil-producing countries have got no direct contact to harbors, they incur huge expenses in paying duties and air transport, which is not made any easier by the bulkiness of agricultural produce, and the large quantities that need to be imported. Thus, even if food was cheaply available in the global market, taking it to where it is needed adds to its cost.
In conclusion, the high food prices in Saudi Arabia and other oil-producing countries are not directly related to oil prices, since they heavily rely on importation rather than local production. Poor climatic conditions make farming unfavorable, thereby reducing their potential for self-reliance. Efforts at self-sustenance such as irrigation are costly, making local production expensive. Similarly, major exporters of agricultural products are adversely affected, reducing supply in the world market, eventually leading to high prices. High competition from other big importers like China and India also puts pressure on global suppliers. And finally, transportation costs incurred when importing keep the food prices at a constant high. It seems that until these countries develop self-sufficient means for food production, they will be dictated by global patterns.
Works Cited
Bourland, Brad. Why Food Prices Have Risen in Saudi Arabia.The Saudi-US Relations Information Service. 2007. Web.
Commodity Online. Food Shortage Causes High Inflation. New Delhi, 2010. Web.
Gerson, Lehrman. Biofuels and Food Prices. 2009. Web.
Larsson, James. Food shortages and global oil markets: New York: Bantam Books, 2008.