Question 1(b)
A global olive oil shortage
Almost every kitchen in the United States (US) will pay the price for the intense heat and drought in Europe in the summer of 2023. Olive harvests in key countries were so poor that some analysts were concerned that there would be a shortage of olives to produce enough olive oil to meet the demand around the world. The dramatic reduction in output of this typical household cooking oil has resulted in the consumer price of olive oil rising between 30% and 50% across the US. At the same time, the US dollar has fallen in value against Europe's main currency (the euro), further adding to the price increase of olive oil.
Fig. 1.1 World price of olive oil, May 2022 to January 2023 (US\$/tonne)
In Spain, olive production was forecast to be down by about 50% in 2023, which would make it the lowest since 2008. The wide-scale drought conditions across Southern European and other Mediterranean countries significantly impacted on the global supply of olives, since about 80% of global output comes from these regions.
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Restaurants and commercial kitchens are desperately trying to find a solution to the olive oil shortage, but alternatives are scarce too. Sunflower oil is a top choice for an olive oil replacement, but the conflict in Ukraine, which is the biggest producer of sunflower oil, has made this substitute increasingly difficult to access.
Previously, the US would look to other countries for olive oil, but supply chains have been severely disrupted. Olive oil does not store very well as its quality deteriorates over time, so increasing stocks does not solve the problem. It is perhaps unsurprising that analysts are recommending investment into new methods of storage that will preserve the quality of the olive oil. This would allow stocks to increase after good harvests to help stabilise prices during future periods of poor harvests.
Some restaurants and commercial kitchens are using sunflower oil as an alternative to olive oil.
Explain how economists could measure the impact of rising olive oil prices on the demand for sunflower oil.
