The asymmetric relationship between structural oil shocks and food prices: evidence from Saudi Arabia

Abstract

This paper examines the impacts of structural oil shocks, namely, the index of industrial production, world production of oil, and spot crude oil prices on the food prices in Saudi Arabia between 1986 and 2020 using nonlinear autoregressive distributed lags (NARDL) and Structural Vector Autoregressive (S-VAR) models to capture both short- and long-run asymmetries between these variables. The asymmetry between industrial production and food price in the short- and long-run was revealed and the impact of negative shocks of industrial production on the food prices was dominant. This implies that lower economic activities result in declined industrial production and food shortage which exerts a hike in food prices. With respect to Saudi Arabia, a significant relationship between negative shocks in crude oil prices and food prices was found in short- as well as long-run periods. The estimations also reveal that increases in oil supply result in a decline in food prices decrease in both periods of time. Similarly, a positive association between GDP growth and food prices was found. Finally, the oil supply shocks are found as the main factor, followed by the oil demand shocks and crude oil prices, causing the food price variation in Saudi Arabia.