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The Effect of Oil Prices on the Cost of Your Holiday Meals

The price of oil plummeted 6 percent on Monday, after the Organization of Petroleum Exporting Countries (OPEC) — a group of the largest oil-producing nations — made a policy decision last week to maintain its current oil production rates. OPEC now produces about 31.5 barrels of oil per day, which is above the organization's 30-million-barrel ceiling for oil output.

Current oil prices stand at $39.97 for crude oil, $2.19 for natural gas, $1.27 for gasoline, and $1.34 for heating oil at the time of this writing. These prices represent a low not seen since 2009. So what does this mean for the cost of your holiday meals?

holiday meal on festive table
Photo by Kaboompics.

Lower Oil Prices Mean Slashes in Food Costs

Since the agriculture industry uses oil in its farm machinery, its agricultural chemicals, and its transportation of farm output, oil prices remain a fundamental driver of consumer food costs.

According to the U.S. Department of Agriculture, energy and transportation costs represent about 8 percent of the total cost of domestically produced food. Fertilizers, chemicals, lubricants and fuel make up about 50 percent of production costs for corn and wheat crops in developed countries. Thus, the year's decline in oil prices will trickle down to food costs, said a January report from Rabobank.

Rabobank, a multinational banking company based in the Netherlands, predicted that lower oil prices in 2015 would lead to a direct drop in food production costs — creating lower prices for consumers. And it looks like that's exactly what has happened.

UN Food Index Reports 2015 Price Declines

According to the United Nations Food and Agricultural Organization (FAO) Food Price Index — a measure of the international monthly change in costs of major food categories — the cost of major food commodities dropped significantly since last year.

Overall, the FAO Price Index averaged 156.7 points in November, 18 percent lower than its value in 2014. This number also represents a 1.6 percent decline since the Price Index's October average.

The cost reductions were driven by a 3.1 percent drop for vegetable oils, 2.9 percent drop for dairy products, and 2.3 percent drop for cereals and grains. Of the major food categories, only sugar saw a price increase since October.

The cost decline for most food commodities since 2014 is charted below.

oil price chart
Figure 1. FAO Food Price Index trends in 2014-2015; Source: FAO.

Robabank predicts that the prices of both oil and food commodities will remain low for the remainder of 2015, leading to a "reasonably comfortable" season.

"For many...people who spend a lot of their budget on food, this is good news," says Shenggen Fan, director general of the International Food Policy Research Institute. "There is a high correlation between oil and food prices."

Benefit to Consumers Not Universal

Still, for the world's poorest, such as rural farmers who are not integrated in the global commodity market, this year's declining oil costs will have only a slim effect on the costs of food. Globally, reports the FAO, around 805 million people suffer from chronic hunger due to poverty.

But there's some good news, U.N. officials report that lower oil prices make it easier for humanitarian groups to provide aid to the world's hungry. The decline in costs has enabled groups like the World Food Programme (WFP) to fuel ships to bring food to conflict-ridden areas like Syria, Somalia and the Sudan.

The WFP says that, since the third quarter of 2014, the organization has saved about $30,000 per month for the three ships it has been chartering.

Lower Oil Prices May Not Last

But low oil prices and the resulting drop in food costs may not last, warned The Economist Intelligence Unit (EIU) in an October report.

Despite continued growth in crude oil supply, "supply increases [will be more than offset by] an anticipated decline in U.S. output in 2016," the EIU predicts.

The EIU expects that the price of crude oil will rise to $60 a barrel in 2016 and $73 in 2017. These price increases are expected to have a direct impact on retail food costs in the next few years.

The bottom line: Enjoy your cheaply priced holiday ham, turkey or vegetarian dishes while you still have time.

Kayla Matthews is a health and wellness blogger who loves jogging, yoga and hiking. Follow Kayla on Google+ and Twitter to read all of her latest posts.