Oil prices are hitting all-time highs worldwide, creating long lines and panic buying. If that reads like an old story, consider this: we're not talking about fuel oil here. We're talking about food oil, and sunflower oil and palm oil in particular.
The cost of edible oils has been marching higher for years. Crop harvests in certain parts of the world have been erratic, which has caused periodic shortfalls. For example, crops in Canada and Argentina were decimated by drought last year. Meanwhile a surge of investment into biofuel operations — like renewable diesel projects in China, and biodiesel plants in Southeast Asia — has boosted demand for oils. So the price of sunflower oil and palm oil was already rising. But we have recently seen these two commodities become prohibitively expensive for two unique reasons.
In the case of sunflower oil, it's because of a sharp decrease in supply due to the war in Ukraine. Russia and Ukraine together accounted for 75 percent of sunflower oil production before the war began, with Ukraine the world's largest exporter. With harvests in Ukraine stalled , and sanctions in place against Russian firms, production and exports have slumped: exports from Ukraine are down 95 percent since the invasion, and if the war grinds on, Ukrainian farmers risk missing their harvesting and planting windows.
The sunflower oil shortage has hit some Western countries particularly hard. Sunflower oil is one of the most popular cooking oils in Germany and the UK, both of which love their deep-fried foods and value (or valued) sunflower oil for its relatively low price point and comparatively high smoke point. The shortage has created runs on sunflower oil in both countries, with grocery stores rationing sales after shelves were cleared of all supplies, and some restaurants in Germany taking fries off the menu.
Palm's up
The factors behind palm oil's recent price surge are not quite so clear-cut. Indonesia is by far the world's biggest palm oil producer, generating roughly 60 percent and exporting about 53 percent of the world's supply. The country is not experiencing chronic shortages: palm oil production has been steady, and is expected to rise 2.6 percent next year. Still, the price of palm oil mysteriously surged in Indonesia in the last quarter of last year, from about $1 per liter in October to roughly $1.50 per liter in March. And that inflation has recently begun to spill over into the global market.
That spillover is happening because palm oil prices are a powerful factor in Indonesian domestic politics. Palm oil is a staple there, and used by every household to cook. A fifty percent increase in the price is a politically poisonous situation, of course, and President Joko Widodo recently leapt into action to stabilize prices. First, he released a kind of strategic reserve of 11 million liters of oil. When prices continued to rise, he deployed subsidies. Next came export limits, and then quotas and finally price ceilings for the domestic market.
Nothing worked. Palm oil disappeared from store shelves as citizens began hoarding. The government ratcheted up the pressure on producers and raised taxes on exports. Palm oil reappeared in the markets, but at nearly double the price it had been in November. So two weeks ago, Widodo deployed the nuclear option: he banned all exports of a range of palm oil products.
Oil shock
The global market freaked out. Palm oil is the most used edible oil in the world, and the prospect of fifty percent of the global supply disappearing overnight spooked commodity markets. Prices jumped six percent, and the prices of other edible oils followed suit. Soybean oil, the second most used oil, leapt 4.5 percent. The next day, Widodo backed off, saying the ban was limited to only a few products. And then he reversed himself a second time, saying the ban would indeed be almost total, and include raw palm oil and even used cooking oil.
You can see why Widodo would want to hold prices down in Indonesia: he has a duty to protect his people, and if the price of palm oil keeps rising, the voters will almost certainly kick him out. What's more of a mystery is why prices are going up so sharply in the first place. If Indonesia does not have a palm oil production issue, what's going on with the supply?
Widodo is apparently keen to understand this himself, and has launched an investigation into the palm oil production business. The probe has already found evidence of cartel activity, with producers, distributors, business associations, government officials, and retailers colluding to restrict supply to the retail market and to fix prices.
One of the biggest problems, however, is the government itself. In 2005, when the world began to lean into the idea of biofuels in earnest, Indonesia saw an opportunity. It built numerous biodiesel plants, cultivated strong relationships with buyers, and stimulated the market with subsidies. That encouraged palm oil producers to direct an increasing amount of oil away from the domestic consumption market, thereby increasing prices for Indonesians. To reverse the direction of that flow, Widodo would need to cancel or at least freeze the subsidies. But the handful of families that control the Indonesian palm oil business are both wealthy and politically powerful, and would have a lot to lose if Widodo decided to take that step.
The slippery slope
But it's not just Indonesians that are worried about the rising cost of palm oil. The commodity is used in a wide variety of goods, from cosmetics and soaps to chocolate and packaged bread. Perhaps most importantly, though, it's used all over the world as a cooking oil, especially in poorer nations. As edible oil shortages persist, the price of palm oil will rise. Wealthier nations will be able to compensate: Brits might switch to canola oil to fry their fish and chips, for example. But the poorest nations won't have that luxury. Palm oil is already the cheapest cooking oil out there, which means that the poorest people will be trapped in a cycle of food inflation that has already seen food prices rise more than 30 percent in 2021.
The World Bank expects prices to keep rising; more than 20 percent in the coming year. The result could be catastrophic. Many poorer countries are already feeling the squeeze, financially and politically, as governments rack up debts, and unhappy citizens take to the streets to protest the effects of inflation. It might be tempting for Western nations to dismiss the problem: it's just cooking oil, after all. But rising food costs and the consequent political discord can lead to collapse, coups, and even war. And then we'll all be paying the price.
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