Impact of Crude Oil on Vegetable Oil

The relationship between crude oil and vegetable oils is as strong as ever. Vegetable oils price is influenced by crude oil price, volatile prices of crude oil put pressure on agriculture and food industry and low prices of crude oil have an impact on vegetable oils used in biodiesel production. Crude oil and vegetable oil are both natural oils, but share very different properties and uses. As a general rule, crude oil refers to oil extracted from the earth, whereas vegetable oil is classed as a food ingredient, used for cooking. Vegetable oil is an oil derived from vegetables or plants, such as corn, olive, sunflower and rapeseed. Vegetable oil consists of fatty acids, including linoleic, palmitic, oleic, etc.

Edible oil markets have grown substantially over the last two decades with a tripling of production of the nine major vegetable oils: coconut, cottonseed, groundnut, olive, palm, palm kernel, rapeseed, soybean, and sunflower oils. While all have expanded, the dominant growth has been in palm oil production.

The 4 main vegetable oils – soyabean, palm, rapeseed and sunflowerseed oils – are all used in the production of biofuels to some extent. The dominant vegetable oil is palm oil, which is mostly produced in Indonesia and Malaysia. Its recent growth has been an important contributor to those countries’ overall economic performance. This recent growth in palm oil production has made Indonesia and Malaysia the two largest exporters of vegetable oil. Other large vegetable oil producers are China and the U.S. (soybean oil), and the European Union (rapeseed oil). In the long run, soybean oil is the most influential player among edible oil markets.

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Biofuels can be broken down into two types, one in the form of ethanol (bioethanol) from corn and sugar and the other derived from vegetable oils (biodiesel). Bioethanol is mainly produced in the U.S. and Brazil, while biodiesel is mostly produced in European countries. In Europe, biodiesel is dominantly produced from rapeseed oil. Because of the recent soaring petroleum price and growing environmental concerns, biodiesel has become an important alternative fuel.

The increase in oil prices have a two-fold effect on crop prices. On the supply side, with increase incrude oil prices, it pushes up crop production cost with relation to higher fertilizer, chemicals andtransportation costs; thereby resulting in grain price increase. On the demand side, grain commoditiesare competing with the derived demand for bio-fuels. With rising fuel prices, governments are takingsteps to increase plantation of energy crops (eg. maize) by providing generous subsidies, and the farmers are complying with these mandates by diverting agricultural land to producing energy crops. This as a result is not only leading to reduced food productions but also affecting food prices.

The market prices of vegetable oils are presumably interacting with each other and with crude oil prices, since there is a considerable degree of substitutability among selected vegetable oils, and high world crude oil price has prompted the use of vegetable oils as a fuel. In the long run, soybean oil is the most influential player among edible oil markets.