The impact of oil on food prices and mitigation strategies

Next Monday, fuel prices will undergo a historic increase. This sudden change could have a major impact on food prices and the budgets of many families, especially the most disadvantaged, potentially affecting access to food and food quality

What is causing this rise in food prices? How does the price of oil influence the food system so much? Will all foods be affected equally? Could lowering the VAT on food solve the problem? 

These are issues we frequently discuss when teaching Nutrition Policy to our students at FCNAUP, but which, in these particular times, deserve a broader debate within our entire community. In this short essay for "Thinking Nutrition," we attempt to provide a concise answer to these questions, for a better understanding of public policies in Portugal and their importance in the thinking of nutrition professionals.

From energy to plate: how rising oil prices influence food prices 

Before the agricultural industrialization of the 20th century, most of the energy used in food production came from human labor, animal power, and solar energy captured by plants. Consequently, the consumption of fossil fuels was practically nonexistent in traditional agricultural production.

Oil dependency began to solidify in the first decades of the 20th century, with the spread of agricultural machinery powered by fossil fuels. The introduction of tractors, implements, and other mechanized equipment allowed for increased productivity and reduced the need for agricultural labor. This process accelerated after the First World War, when many technologies developed for military purposes were adapted to agriculture. Among these were synthetic fertilizers produced from natural gas and pesticides derived from petrochemical processes. 

The production of nitrogen fertilizers is mainly based on the industrial process known as the Haber-Bosch process, which allows the synthesis of ammonia from atmospheric nitrogen and hydrogen. This process consumes large amounts of energy and often uses natural gas as an energy feedstock. As a result, intensive soil fertilization is directly linked to the consumption of fossil fuels. Fritz Haber developed, around 1909, the laboratory method for synthesizing ammonia (NH₃) from atmospheric nitrogen (N₂) and hydrogen (H₂) under conditions of high temperature and high pressure, and Carl Bosch transformed this scientific discovery into a large-scale industrial process from 1920 onwards. Thanks to this industrialization, the process became used worldwide to produce nitrogen fertilizers, and Fritz Haber received the Nobel Prize in Chemistry in 1918.

Currently, the Haber-Bosch process is used virtually worldwide, as approximately 80–90% of global ammonia production is destined for fertilizer manufacturing, with its use being particularly intense in regions with highly intensive agriculture or large agricultural production. It is estimated that around half of current world food production depends on fertilizers produced through the Haber-Bosch process (1). 

After the 1940s, the structural transformation of agricultural systems accelerated. Agriculture adopted an industrial model characterized by the intensive use of fossil fuels, mechanization, and chemical soil amendments. This process was reinforced by public policies, agricultural modernization programs, and the expansion of international agricultural markets.

The Green Revolution, which began in the 1940s and 1950s, encouraged the use of higher-yielding varieties of cereals and other crops, the expansion of irrigation, and the intensive use of chemical fertilizers and pesticides. While it contributed to significant increases in global food production, the Green Revolution also deepened agriculture's dependence on fossil fuels.

Pesticides and herbicides also depend largely on the petrochemical industry. Many of these products are synthesized from petroleum-derived compounds and are widely used to control pests, diseases, and weeds. Their use became particularly common after World War II, when several chemical compounds initially developed for military purposes were adapted for agricultural use.

Furthermore, petroleum is fundamental to other stages of the food chain, such as the production of plastics used in packaging, the manufacture of agricultural equipment, and the transportation of food over long distances. Globally, the contemporary food system is highly dependent on fossil fuels. It is estimated that around 15% of global fossil fuel consumption is associated with the production, processing, transportation, and consumption of food, while the food system as a whole uses around 30% of the world's energy (2). Most of this energy is consumed in post-production stages—industrial processing, packaging, transportation, storage, and distribution—reflecting the increasing complexity and globalization of current food systems.

Howard T. Odum was one of the first researchers in the 1960s and 1970s to analyze agricultural systems, demonstrating that modern agriculture increasingly depended on external energy from fossil fuels. He proved that without the presence of petroleum energy (fertilizers, machinery, transport), the current food system would collapse. In 1973, he published one of his most emblematic texts – “Energy, Ecology and Economics” (3) where he demonstrates how the “green revolution” was, in fact, the replacement of human and solar labor with fossil fuels. He is the author of the famous phrase: “Industrial man no longer eats potatoes made from solar energy; now he eats potatoes partly made of oil” (4). And in fact, on average, in industrialized food systems, approximately 10 calories of fossil energy are used to produce 1 calorie of food. 

In general, cereal and oilseed crops produced on a large scale in industrial agricultural systems are those that show the greatest dependence on fossil fuels and petroleum derivatives. On the other hand, a large part of the cereals produced is not consumed directly by humans, but rather used as animal feed. Agricultural products such as corn, soybeans, and wheat are fundamental for feeding cattle, poultry, and pigs in intensive livestock systems. It is estimated that about one-third of the world's cereal production is destined for animal feed. In the case of soybeans, the proportion is even higher: approximately 70–80% of global soybean production is transformed into animal feed (5). With the growing demand for meat and other animal proteins, this dependence will tend to increase.

Finally, high oil prices make the production of biofuels (such as corn ethanol or soybean biodiesel) more profitable. This diverts crops that would be destined for human consumption to the energy sector, reducing the food supply and raising its price. If we add to this the stock market speculation during oil price increases—interpreted by investors as an indicator of future inflation, attracting speculative capital to futures markets where contracts for the purchase and sale of agricultural raw materials (such as corn or wheat) for delivery at later dates are traded—a snowball effect could be generated.

These are some of the reasons that explain why there is a very strong historical correlation between the price of oil and the FAO Food Price Index (FFPI). It is estimated that, in certain periods, up to 93% of the variation in global food prices can be explained by changes in the price of oil.

On the other hand, different food groups react with different intensities and speeds to the rise in oil prices. According to the most recent FAO Food Price Index data for February/March 2026 (6), vegetable oils were the ones that rose most rapidly (+3.3% in February) because when oil prices rise, the demand for biodiesel increases, diverting oils (such as soybean and rapeseed) from the food sector to the energy sector. Cereal production is also highly dependent on nitrogen fertilizers (derived from gas/oil) and fuel for harvesting and international transport and will therefore be greatly affected, as will meat, since the rise in oil prices increases the cost of feed (corn and soybeans) and refrigerated transport in the cold chain.

Portugal is one of the countries with the most road-dependent distribution chains in Europe. Because it operates with low margins and is highly sensitive to diesel prices, the impact on food prices will be visible. On the other hand, we import the vast majority of the fertilizers we use. The increased cost of these production factors will certainly influence food prices, disproportionately impacting lower-income families. If we add to this the fact that in January 2026, Carbon Border Adjustment Mechanism (CBAM) (7) will come into effect, which will begin taxing carbon emissions from imported fertilizers, the cost of production will certainly increase.

Returning to Howard T. Odum and his last major book, "A Prosperous Way Down" (2001), written with his wife, Elisabeth C. Odum, before his death, the researcher insists that food systems must be redesigned for the scenario of oil scarcity, focusing his attention on the transition to models that are more integrated with nature and less dependent on oil.

This warning was given 25 years ago. Have we, however, prepared ourselves sufficiently for what is to come?

Public policies in response to rising food prices: evidence on their effectiveness 

Measures aimed at mitigating the impact of rising food prices can, according to the Food and Agriculture Organization of the United Nations (FAO) (8), be organized into three main groups. Firstly, there are consumer-oriented policies, which seek to reduce the impact of rising prices on food consumption, especially among the most vulnerable groups. These may include measures such as food tax reductions, price subsidies, price control measures, direct food distribution, or food support programs. Secondly, there are trade and market policies, whose objective is to reduce domestic prices and increase the food supply. Among these measures are the reduction of import tariffs, the imposition of export limits, as well as price monitoring mechanisms or other forms of market intervention. Finally, there are producer-oriented policies, which seek to increase agricultural production and strengthen the food supply. This group includes measures such as subsidies for fertilizers and other production factors, support for agricultural credit, and support mechanisms for producers.

In Portugal, some of these measures have been used in different contexts of economic and social crisis. During the austerity period, new food support models were created, such as soup kitchens. Subsequently, during the COVID-19 pandemic, food support responses were reinforced, notably through increasing the number of eligible beneficiaries for the Operational Programme for Support to the Most Deprived Persons (POAPMC) and maintaining school meals for children from the most vulnerable families, even during school closures. More recently, in the context of inflation associated with the conflict between Russia and Ukraine, measures were implemented such as the temporary application of zero VAT to a basket of essential and healthy foods, the expansion of school food support programs, including the provision of breakfast for the most disadvantaged children, as well as the allocation of extraordinary support, particularly to the most disadvantaged families, to compensate for the increased cost of living. In parallel, measures to support the agricultural sector were also adopted to mitigate the increase in production costs. Also during this period, the Agri-food Price Observatory  (9) was created, promoted by the Planning, Policies and General Administration Office (GPP), with the aim of strengthening the monitoring of price evolution.

Given the diversity of instruments available, it is fundamental that the measures adopted are carefully planned and based on existing evidence, in order to guarantee their effectiveness. In a complex economic context, such as the one we are currently experiencing, it becomes particularly important to ensure that public resources are applied to interventions that produce real gains for the population. Otherwise, there is a risk of implementing measures with an unfavorable cost-benefit ratio, which imply significant increases in public spending or substantial reductions in tax revenue and which, for that reason, may compromise the financing of other public policies, without generating proportional effects in reducing prices or improving access to food. Furthermore, poorly designed policies can generate counterproductive effects and, in some cases, contribute to exacerbating the problems they seek to solve. 

For this reason, it becomes essential to collect and analyze evidence on the effectiveness and costs of different policies used to mitigate rising food prices.

The most recent data available relates primarily to the 2008 global food crisis, which showed that, even with intervention policies, food prices continued to rise in many countries, highlighting the difficulty in implementing truly effective measures in these contexts. Nevertheless, analysis of policy responses adopted internationally indicates that some measures have greater potential for effectiveness.

stands out reduction or elimination of import tariffs on food, contributing to increased supply in the domestic market and easing pressure on prices, as well as the use of public food reserves to stabilize markets. Social protection programs targeting the most vulnerable populations, such as cash transfers or food distribution, have also proven important in mitigating the effects of price increases among lower-income groups. In parallel, some policies supporting agricultural production, such as subsidies for production factors or support for agricultural credit, can contribute to increasing production and strengthening food security in the medium term.

On the other hand, certain measures reveal important limitations. In particular, widespread food subsidies and generalized tax reductions can be very costly for the public budget and tend to benefit higher-income groups, not being sufficiently targeted at the most vulnerable segments of the population. Furthermore, administrative price control measures can generate market distortions and supply problems.

Another aspect that also needs to be considered is the use of national protectionist measures or measures to protect the domestic market, such as export restrictions, import controls, or other interventions aimed at preserving domestic supply. Although these measures may, at first glance, seem effective in protecting domestic consumers, evidence suggests that their effects may be contrary to the intended results, especially in a context of highly interconnected global food markets. In open economies, policies that restrict trade can reduce market efficiency, generate price distortions, and limit access to more competitive products from abroad. Furthermore, when several countries simultaneously adopt protectionist measures, these can amplify the volatility of international prices and contribute to a global escalation of food prices. During the 2007–2008 food crisis, for example, several export restrictions adopted by producing countries reduced the supply available in international markets and contributed to exacerbating the increase in global prices (10-12).

There is also evidence regarding the Portuguese context. A study analyzed the impacts of international shocks on energy and food prices in the Portuguese economy and evaluated different public policy responses aimed at mitigating their effects. The study analyzed four measures implemented in Portugal during the period of 2022 and 2023: wage increases, cash transfers to families, reductions in consumption taxes, and reductions in production taxes. The results indicate that these measures have distinct effects. Wage increases can improve household income, but tend to increase production costs and exacerbate inflationary pressures. Cash transfers and reductions in consumption taxes (e.g., reduction of VAT on food) can help sustain household consumption, but present high costs for public finances and do not directly reduce price pressures. In turn, reductions in production taxes emerge as the most effective policy among the alternatives analyzed. By reducing companies' production costs, this measure improves the competitiveness of economic sectors, stimulates production and employment and helps to mitigate the negative effects of price shocks on the economy, while having a relatively smaller impact on public finances (13).

Thus, this study presents results that are not very favorable to reducing VAT on food, partly because it is a measure with a relatively high implementation cost compared to the benefits it allows. Even so, it is a measure that deserves further analysis, as it continues to be one of the proposals frequently presented to respond to the successive periods of inflation that Portugal has faced. The less positive results identified in this study may be related to the fact that the impact of reducing taxes on food depends on the existing level of taxation. That is, when taxes are already relatively low, their reduction tends to have limited effects on the final prices paid by consumers. This is precisely the case in Portugal, where applying a zero VAT rate to foods considered essential or healthy corresponds only to a reduction in the rate from 6% to 0%.

Moreover, the measure of applying zero VAT to a basket of essential foods, implemented in Portugal in 2023, was received with some caution by the Bank of Portugal, which expressed reservations about the structural effectiveness of this type of policy, emphasizing that the reduction of indirect taxes does not always translate entirely into lower prices for consumers, that these are measures that are not directed at the structural causes of inflation and therefore tend to have temporary and uncertain effects on the purchasing power of families.

Regarding the implementation of the zero VAT transitional measure implemented in Portugal in 2023, there are already studies that have sought to evaluate its effective implementation, since previous studies (14-17) relating to the experience of other countries showed that tax reductions did not always fully translate into final consumer prices. A study by Bernardino et al. (2025) (18) analyzes the impact of the temporary reduction of VAT to 0% applied to a set of 46 essential food products in Portugal between April 2023 and January 2024. Using data relating to food prices in supermarkets collected by the Bank of Portugal, the authors conclude that the tax reduction was fully passed on to the prices paid by consumers, resulting in an immediate decrease in prices of around 5.66%, equivalent to the reduction in the VAT rate. The study also shows that this effect persisted throughout the entire period the measure was in effect and that, after the policy ended, prices rose symmetrically again when VAT returned to its previous level. These results suggest that, in certain contexts, tax reductions can be effectively reflected in final prices. These results contrast with many previous studies (14-17), which frequently find partial transmission of tax reductions to prices. However, the authors emphasize that the success of this measure may have been facilitated by specific factors, such as the high public visibility of the policy, media monitoring of prices and the creation of the food price observatory, and the existence of a downward trend in producer prices at the time of its implementation.

In line with the results of this study and despite these reservations, the Bank of Portugal acknowledged that the measure had some impact in the short term. The Economic Bulletin of June 2023  (19-20) indicated that the introduction of zero VAT for certain foods contributed to temporarily moderating food inflation, helping to explain part of the downward revision of inflation forecasts for that year. In any case, the Bank of Portugal (21) also warns that these effects should be interpreted cautiously, since inflationary pressures were already decreasing in the period under analysis, reinforcing that price evolution depends more strongly on external and structural factors, such as the prices of energy raw materials, food raw materials and conditions in supply chains.

Therefore, the data we have are not conclusive regarding the potential impact of reducing VAT on food, and no study has assessed its real impact on families' purchasing power and on improving access to food.

Regarding the existing evidence on the effectiveness of these measures, it is important to note that most studies focus primarily on economic indicators, such as inflation, competitiveness, employment, or consumption. Consequently, the evaluation of their effectiveness has been mainly carried out in light of these indicators. On the other hand, studies analyzing the impact of these measures on dimensions more directly related to access to food and food quality are still limited.

In general, evidence suggests that the most effective policies are those that increase the food supply or directly support the most vulnerable groups, rather than generalized market interventions. Therefore, the design of public policies in this area should prioritize well-targeted and fiscally sustainable measures, based on evidence of their real effects. Political decision-making involves choosing the best option among the various available alternatives, a process that is both necessary and difficult. This is a particularly demanding task in contexts of high uncertainty, such as the one we are currently experiencing, and in situations where decisions need to be made in a short period of time. This exercise also implies seeking to reconcile the different objectives of the measures under analysis, namely controlling inflationary pressures, improving the purchasing power of families, and ensuring their economic efficiency. At the same time, it is important to minimize their economic and budgetary impacts, considering that these measures may affect public spending or tax revenue and, consequently, the funding available for other public policies, which is already limited. In this sense, this text aims to contribute to the discussion and political decision-making process that will take place in the coming days.

---

Bibliographic references

1. Erisman, J. W., Sutton, M. A., Galloway, J., Klimont, Z., & Winiwarter, W. How a century of ammonia synthesis changed the world. Nature Geoscience, 1(10), 636-639. 2008. Available at: https://www.nature.com/articles/ngeo325
2. Global Alliance for the Future of Food. Power Shi: Why We Need to Wean Industrial Food Systems Fossil Fuels. np: Global Alliance for the Future of Food. Available at: https://futureoffood.org/wp-content/uploads/2023/11/ga_food-energy-nexus_report.pdf
3. Odum, HT Energy, ecology, and economics. Ambio, 2(6), 220–227. 1973.
4. Mohr, H. Environment, Power, and Society. 1974. Odum, HT Wiley-Interscience, New York 1971. Biologie in unserer Zeit, 4: 94-95. https://doi.org/10.1002/biuz.19740040308
5. United Nations. Annex A to E/C.18/2024/CRP.1: Agricultural Products. United Nations Committee of Experts on International Cooperation in Tax Matters. 2024. Available at: https://docs.un.org/en/e/2024/45/Add.1
6. Food and Agriculture Organization of the United Nations. FAO Food Price Index. Available at: https://www.fao.org/worldfoodsituation/foodpricesindex/en/
7. Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a border carbon adjustment mechanism. Available at: https://eur-lex.europa.eu/legal-content/PT/LSU/?uri=CELEX:32023R0956
8. Food and Agriculture Organization of the United Nations. Committee on Commodity Problems. Sixty-seventh Session. Policy Responses to Higher Food Prices. Rome, 20-22 April 2009. Available at: https://openknowledge.fao.org/server/api/core/bitstreams/92134cb2-6075-4ce0-a25a-be37ada83504/content
9. Office for Planning, Policy and General Administration. Agro-food Price Observatory. Available at: https://observatorioagroalimentar.gov.pt
10. FAO. The State of Food Insecurity in the World 2011: How does international price volatility affect domestic economies and food security? Rome: Food and Agriculture Organization of the United Nations. 2011.
11. World Bank. Rising Food Prices: Policy Options and World Bank Response. Washington, DC: World Bank. 2008.
12. von Braun, J. Food Price Crisis of 2007–08: Lessons for Policy. Washington, DC: International Food Policy Research Institute (IFPRI). 2009.
13. Escalante L, Mamboundou P. Adapting fiscal strategies to energy and food price shocks in Portugal. Economic Analysis and Policy. 82: 651-665. 2024. https://doi.org/10.1016/j.eap.2024.04.005.
14. Fuest C, Neumeier F, Stöhlker D. The pass-through of temporary VAT rate cuts: evidence from German supermarket retail. Int Tax Public Finance 32, 51–97. 2025. https://doi.org/10.1007/s10797-023-09824-7
15. Kosonen T. More and cheaper haircuts after VAT cut? On the efficiency and incidence of service sector consumption taxes. Journal of Public Economics,131, 87-100. 2015.
16. Benzarti Y, Carloni D. Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France. American Economic Journal: Economic Policy. 11:1, 38-63. 2019.
17. Fortaleza N, Prades E, Roca M. Analyzing the VAT Cut Pass-Through in Spain using Web-Scraped Supermarket Data and Machine Learning. Banco de España. WP 17. 2024. Available at: https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/24/Files/dt2417e.pdf
18. Bernardino T, Gabriel RD, Quelhas J, Silva-Pereira M.The full, persistent, and symmetric pass-through of a temporary VAT cut. Journal of Public Economics. 248: 105416. 2025. https://doi.org/10.1016/j.jpubeco.2025.105416.
19. Banco de Portugal. Economic Bulletin June 2023. ISSN: 2182-0368. 2023. Available at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/be_jun2023_p.pdf
20. Bank of Portugal. Economic Bulletin October 2023. ISSN: 2182-0368. 2023. Available at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/be_out2023_p.pdf?utm_source=chatgpt.com
21. Bank of Portugal (Gouveia C, Manteu C, Serra S, Cabral S). Impact of Zero VAT on prices. November 2023. Available at: https://www.gpeari.gov.pt/documents/35086/381108/2-Apresentacao_20231122_IVAzero.pdf/d9d0af4f-936f-faee-deb5-f611137a20e3?t=1700744704010&utm_source=chatgpt.com