A 1-2 page writing assignment that must be turned in as a Gordon Rule Paper. You will need to submit one document that includes both your article and paper. The article must be at the end of your reference page and must be the full article. No links are allowed for your work or you will lose 50 points. If you do not turn the paper in you will receive a 0/200 as there are no exceptions or extensions. You must also use APA format in your paper to receive credit. What you will be doing is to find an article on any economic topic. You are required to find an article that is relevant to economics and make an argument in your analysis using appropriate economic terminology.
Effects of oil prices on food prices
The article “Do oil price increases cause higher food prices?” by Christiane Baumeister and Lutz Kilian relates to the effects that the increase of oil price has on food prices. The researchers investigated whether there was any relationship between high prices of food in the US as observed in the previous years before the study and oil prices. Their findings indicate that the high prices of agricultural products were not directly linked to oil prices adjustments. The prices appeared to be influenced by common macroeconomic determinants relating to both oil prices and those of agricultural commodities. The study observes that its findings mimic those made by other researchers in studies conducted in other industrialized countries. It concluded that prices of oil have a negligible effect on prices of food in industrialized countries and are only tightly linked to the prices of agricultural commodities in developing countries.
Modern agriculture utilizes oil products in various ways such as in fueling machinery, transportation of farm inputs and products and sometimes in processing the products into final goods and services. From this observation that agricultural production system is oil-dependent, there has been the suspicion that oil prices directly influence the price of food commodities. However, Baumeister and Kilian (2014) caution against using the suspicion in explaining situations when there is inflation associated with agricultural products. Price hikes and frequent price volatility regarding food commodities cannot necessarily be caused by oil price increases (Bakhat & Würzburg, 2013). On the contrary, factors such as overproduction of the agricultural commodities could be the cause of such a situation.
Food prices in industrialized countries appear to be unaltered by an increase in oil prices because their economies can absorb the high prices of food prices. They also spend less on food compared to developing countries. Americans, for instance, spend less than 10 percent of the salaries on food while the populations in developing countries spend more than 50 to 60 percent (Carbon, 2011). In reference to the findings in this research, the researchers may have made a wrong conclusion as they did not factor in how the cost of food prices differ in both developing and industrialized countries.
Considering the fact that production of agricultural products is fuel-dependent, one of the recommendations from the analysis of the article is to find alternative ways. Governments from developing countries where oil prices tend to affect the population more should develop ways to produce agricultural products without the use of oil. Dillon and Barrett (2015) observe that there has been insufficient research on this topic. The research that has been conducted is also faulty such as in this article due to the failure to incorporate how prices of food differ in developing and industrialized countries in its analysis. Extensive research should hence be undertaken to establish the actual relationship between food and oil prices.
In conclusion, it is imperative to observe that increase in oil prices tend to affect food prices. Agriculture is dependent on oil such as in operating machinery. However, the effect of the increase in prices of food due to oil prices differs from one country to another. Developing countries are more affected compared to industrialized countries where the effect is negligible. Developing countries should hence come up with ways to curb the situation where oil prices affect food prices by avoiding oil-dependent agriculture. Extensive and better research should also be conducted to avoid the contradiction that exists on how oil prices affect food prices globally.
References
Bakhat, M., & Würzburg, K. (2013). Price relationships of crude oil and food commodities. Economics for energy.
Baumeister, C., & Kilian, L. (2014). Do oil price increases cause higher food prices?. Economic Policy, 29(80), 691-747. doi:10.1111/1468-0327.12039
Carbon, P., (2011, December 21). How Oil Prices affect the price of food. Oil Price.
Dillon, B. M., & Barrett, C. B. (2015). Global oil prices and local food prices: Evidence from east africa. American Journal of Agricultural Economics, 98(1), 154-171.
