ASSESSING THE IMPACT OF OIL PRICE VOLATILITY ON FOOD PRICES IN SAUDI ARABIA: INSIGHTS FROM NONLINEAR AUTOREGRESSIVE DISTRIBUTED LAGS (NARDL) ANALYSIS

Abstract

This research investigates the impact of oil price fluctuations on food
prices in Saudi Arabia between 1979 and 2020 using Nonlinear Au-
toregressive Distributed Lags (NARDL) methodology. The study em-
ploys Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests
to determine the integration order of the variables and Bounds testing
to confirm the existence of long run cointegration relationships between
each variable. The results indicate that oil shocks influence food prices
through several mechanisms. Firstly, the cost of energy increases due
to the rise in oil prices, affecting the agricultural commodity market,
including farm equipment, food processing, packaging, and distribution
costs. Secondly, the demand for agricultural commodities to produce
biofuels affects food availability and thus food prices. Thirdly, as an
oil-based economy, the oil price shock affects food prices through its
impact on government spending, which affects aggregate demand and
liquidity. Therefore, Saudi Arabia should adopt appropriate policies to
mitigate the impact of oil price shocks on food prices, including invest-
ing in renewable energy sources, diversifying its economy, and improv-
ing food production and supply chain efficiency. Additionally, imple-
menting appropriate fiscal policies to ensure sufficient budget allocation
for food support programs is crucial. However, Investing in groundwa-
ter exploration can contribute significantly to the development of Saudi
agriculture and to gradually achieving food self-sufficiency.