Rising Fuel Prices Bring More Expensive Food

With the rising price of fuel, consumers will pay higher prices not only to fill up their cars’ tanks, but also to go shopping for groceries and other products, said Eric Jessup, assistant research professor at the Washington State University School of Economics Sciences.

Jessup explained that there will be two main causes for the rising prices of commodities. The costs of transportation will go up for all products that have to be shipped and increased demand for alternative bio-based fuels, such as ethanol and bio-diesel, will cause some products such as beef, poultry and anything requiring corn as an input to be more expensive.

Truck transportation will not decrease despite higher fuel prices. Although rail transportation is more cost-effective than trucks for long-distance shipments, many processed agricultural products have to be shipped by truck, Jessup said, because of the better service attributes associated with truck shipment such as speed, reliability or less handling, and the greater geographic coverage of the highway network compared to that of the railroads. This is especially true for perishables and products that are very time sensitive.

“If transportation prices increase, grocery stores will increase the final prices and food budgets will suffer. Consumers will be the ones paying for the higher fuel prices,” said Jessup.

Some products, however, will have an additional increase in price because demand for ethanol increases when fuel prices go up.

Jessup said that when more farmers who grow corn or soy beans sell their crops to ethanol-producing companies there is a shortage of corn for animal feed and human consumption, which increases the price of corn, and has a negative impact on producers of meat products such as beef, poultry or anything which requires corn as an input. 

“This second cause is more of a long-term supply response as producers of meat products switch to alternative enterprises or eliminate production,” he said.

“In the near term, I don’t see any change in the trend of rising fuel prices. This is basically a market-driven phenomenon where the demand for fuel exceeds the available supply, driven in large part by the emerging economies of China and India.

“While we often complain about higher fuel prices, in real terms the impact on the average U.S. consumer has been quite small historically due to the fact that average incomes in the U.S. have grown at a faster rate than fuel prices. As a result, the proportion of income spent on fuel for the average U.S. citizen has stayed about the same or declined slightly. This isn’t the case in other countries where income growth hasn’t been as strong and is one of the reasons why adoption of more fuel-efficient automobiles in the U.S. hasn’t occurred faster.”    

Jessup can be reached at 509-335-5558 or eric_jessup@wsu.edu.