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An unexplained reaction to diminishing oil prices

With rising school fees, rent increases, medical expenses and extra tariffs on civil services, today’s consumer is feeling the pinch

Gulf News

When global oil prices began their downward spiral last year, many market analysts and traders in food commodities confidently predicted that if the trend of lower oil prices at the time continued, then food prices would definitely decline by 10 to 15 per cent across the board across all Gulf Cooperation Council (GCC) countries. This news item was carried as a full-page report in one of the local Saudi newspapers.

At the time, no one could have predicted that the decline in oil prices in the global market would be a long-drawn affair and that the fall in prices would only materialise in three to four months after the existing inventory purchased at higher prices would have been exhausted. They also cautioned that this decline would not greatly impact locally-produced items as compared to imported goods since the price of oil in the Kingdom was fairly stable and not governed by international market forces. The same formula could have also applied to the rest of the oil producers in the GCC.

A member of the Committee of Food Products at the Jeddah Chamber of Commerce expected that prices of food products would decline by about 10 to 15 per cent, especially as shipping costs determine at least 15 per cent of the final price of a product and the price varies depending on the country of import. He stated that the decline “would take time to be evident due to the large amounts of food purchased at higher rates and because food contracts are signed for a period of six months”.

He added that with respect to the demand for imported consumables, there were local products that did compete with imported items, but customer preference and brand loyalty were towards items from abroad, which they perceived to be of better quality and were willing to pay a premium for those. He felt that local food manufacturers should take a note and raise the bar to improve the quality of their products to match the imported ones, particularly those coming from the West.

The report also carried an analysis from another member of the Chamber of Commerce, who said that “there are no indications that the declining price of oil will impact the price of food within the next two months, but if oil prices continue at their current price of $58 per barrel or less, the price of imported foodstuffs will decline within six months.” He also believed that the impact on locally-manufactured goods would be minimal, “especially as the price of raw materials remains fairly steady”.

In defining locally-produced products versus imported products, Dr Hamza Aoun, a member of the Trading Committee at the Jeddah Chamber of Commerce, reiterated that competition was the key element that set market prices and that consumers did not change their shopping patterns very easily. Once hooked to a product, they would continue purchasing it until a better alternative at a cheaper price came along. He did agree though that the forecast for lower prices of goods on the supermarket shelves would be felt within three to four months if oil prices stayed at current levels.

Slight rebound

Now let’s roll forward. It’s been more than 18 months since the report was published and prices on the supermarket shelves are yet to show a decline. It’s no secret that oil prices had been steadily declining and had been at their lowest levels in the last few years. And yet the decline had failed to materialise in the form of a downward slide in prices and a fall in our grocery bills. It is only recently that oil prices have made a slight rebound, but I wonder where are the savings that many had predicted consumers would be able to enjoy with lower prices?

Is there a reason? It would be reasonable to assume that shipping costs would decline to reflect the falls in the price of fuel and thus would reflect on the price of goods being transported. That in turn would carry over to a decrease in costs in other related transportation issues.

“Consumers continue to pay more for their food bills and even more for gasoline.””
-Tariq A. Al Maeena
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But such is not the case when the consumer is confronted with his or her final grocery bill. It will definitely not have shown any savings from before. Consumers instead pay more for their food bills and even more for gasoline to get to the market to acquire their purchases. Coupled with increasing school fees, rent increases, medical expenses and extra tariffs on civil services, today’s consumer is feeling the pinch. Many have resorted to spending only on essential commodities to make ends meet.

But what could a consumer do other than complain to the Ministry of Commerce about the greed and price gouging by food importers, distributors or merchants? Eat less, I suppose.

Tariq A. Al Maeena is a Saudi socio-political commentator. He lives in Jeddah, Saudi Arabia. You can follow him on Twitter at www.twitter.com/@talmaeena

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