Oil, Biofuels and Food: The Political Economy of Oil and its Impact on Global Food prices

The recent food crisis of 2007/08 drove millions of the world’s poor deeper into poverty and hunger. Understanding the underlying factors that caused the crisis is fundamental to avoid future catastrophes. In particular, it is important to identify the factors that triggered the event. This paper analyses the existing literature and identifies two triggers. First, rising oil prices increased input costs for the production of food and, with it, food prices. Second, increased demand from biofuels has driven up prices as biofuel crops compete with food crops. The focus of this paper lies on the second trigger, as strong biofuel demand is a new variable in the food equation. Descriptive data analysis is examining world and US data sets of prices and harvested areas, revealing a stronger correlation between oil and maize prices in the most recent period. The correlation serves as a proxy for food prices. In addition, cropping patterns, particularly in the US have changed drastically towards an increase in maize production. This development is suggesting an increased demand for biofuels, a fact that would explain rising output of maize in combination with rising maize prices. Biofuels add a new dimension to food markets, transforming a long term declining price trend and threatening the existence of millions. Policies supporting biofuel production through subsidies, tariffs and mandates need to be urgently rethought.