22/01/2008 (Blogging Stocks.com) - The decade's dramatic rise in crude oil prices to roughly $90 per barrel levels has had a lesser-known, but equally consequential impact on life in the developing world -- a rise in price of cooking oils from palm, soybean and many other types of vegetable oils, The New York Times reported.

The United Nations Food and Agriculture Organization said that exports of 60 internationally-traded foodstuffs increased 37% in 2007, following a 14% rise in 2006. Further, price increases in cooking oils hit the developing world particularly hard, as the bulk of poor families in these countries grow their own food, but buy the oil to cook it with.

In the case of palm oil, The Times reported that rising consumption in China and other emerging markets, along with use of the oil in developed markets as a substitute for chemically-altered trans fats, are two major factors behind its price rise.

Biofuel nexus
However, for other oils the rise in crude oil is playing a considerable role, according to London-based economist Mark Chandler. Chandler, whose economic specialization includes developing world economies, said crude oil's rise has led to a dramatic rise in the use of cooking oils as biofuels.

"The biofuel factor is a two-punch phenomenon," Chandler told BloggingStocks. "First you have actual use of the cooking oil as a fuel. For example, biodiesel use has increased markedly. Second, there's the displacement of some crops for crops that are more conducive to energy crops, such as corn."

Chandler said that despite a agricultural production revolution driven by seeds, fertilizer, and technology, the world is witnessing "that classic economic theory involving displacement."

"If a farmer can realize a 30, 40 or 50% increase in profits from switching to a biofuel crop from another crop of foodstuff, many will make this change, and it's kind of unrealistic to expect the farmer to do otherwise," Chandler said, adding that he doesn't not expect the trend to change "as long as crude oil prices remain at high levels, with a small safety cushion between global crude oil supply and demand."

Global oil supply averaged 87 million barrels per day and global oil demand totaled 85.8 million barrels per day in 2007, according to International Energy Agency. Oil's price has increased more than 90% in the past three years on strong demand for oil in emerging markets in Asia, including China and India; in developed nations in North America and Europe, and due to geopolitical concerns in several key oil producing nations (Iraq, Iran, Nigeria, Venezuela).

U.S. food prices
Chandler said the biofuel / cooking oil / food equation is also affecting U.S. food prices. He estimated that "more than 30% of the U.S.'s 4.7% rise in 2007 food prices was due to biofuel production" -- the use of corn and crops for fuel instead of food. Chandler said he expects U.S. food prices to rise by about the same amount, 4.0-4.5%, in 2008.

"Most people don't realize the impact of the use of corn for ethanol. Corn is not only used in cereal, but it's a feed for cattle, so the price of many other foods, including meat and milk, will rise as well," Chandler said, adding that economists are still evaluating the net positive energy gain from the use of corn as a fuel.

Public policy adjustments
In general, Chandler projects continued, strong price increases for cooking oils and corn in 2008 and 2009, barring a global recession. A U.S. economic recession would only slow that price rise, not eliminate it, he said. Given the price trend, and cooking oil's importance in the developing world in particular, Chandler said selected developing world governments will probably have to expand existing subsidies.

"It's a tough spot for many of these governments that are also facing other pressures costs, including rising infrastructure costs," Chandler said. "But there's only so much the developing world can shift away from traditional cooking oil. It's a vital commodity in much of the developing world."