Originally posted on Bloomberg Opinion

By Javier Blas

Oil crises have occupied plenty of time during my career covering commodities. But today I’m discussing another oil crisis afflicting just about every household in southern Europe: olive oil. Let’s start here: the price of olive oil has surged to an all-time high, double a year ago. A metric ton now costs more than 10 times a metric ton of crude oil. In 2019, before the pandemic, the ratio was less than five times. For me, the price shock is personal. Born and raised in Spain, I love the stuff; I consume too many liters a year. Back home for the summer break, the stratospheric cost of the golden liquid is a constant topic of dinner table conversation, best summarized by my own mother: “It’s out of control.” With myself and my sister visiting for holiday, I fear my father would put the kitchen’s oil dispenser under lock and key. How bad is it? Last week, the benchmark wholesale price of extra virgin olive oil surged to an all-time high of $8,500 per metric ton, about 125% higher than the 2000-2020 average. The previous record was set in 1996 at a little over $6,200 a ton.

In southern Europe and the Levant, olive oil is as much culture as food, a way of life around shared customs on the shores of the Mediterranean Sea. For many families in the region, its price has come to symbolize the struggle against rampant inflation.Unfortunately for me, I’m my family’s in-house commodity expert, required — and that’s the right word — to provide supply, demand and price forecasts over the kitchen table. A lot is a stake, as my father would rush into the supermarket and stockpile on my recommendation. A blown call would certainly be reflected in my next Christmas present. Right now, thankfully, my standing is high: A few months ago, I called the bull market just right. But what comes next is what really worries me. The supply outlook is “critical,” says Oil World, the industry bible that has tracked the ups and downs of the market for the last 65 years. “Demand rationing is inevitable.”At my hometown’s local supermarket, the cashier shakes his head in disbelief. “We’ve to change the prices every week,” he says — “and it’s always higher.” The most popular brand in Spain retails now for 9.99 euros ($11), more than double a year ago and about three times what many would call normal. The 10 euros-per-liter mark is a psychological price barrier for my compatriots, akin to US drivers facing $5 per gallon gasoline prices last year.For Spaniards, this is a real crisis. We generously coat our food in olive oil. And I mean properly coating it; anyone here would roll their eyes at those American-style spray bottles. The average Spaniard consumes about eight liters per year; Italians, Greeks and Portuguese do as much, if not even more. Multiply that for a family of four, and a household in Spain would spend more than 300 euros in a year, at current prices.

For the rest of the world, however, the shock is more of a curiosity. Beloved as it is in southern Europe, olive oil accounts for a tiny fraction of global edible-oil consumption. In 2020, it represented less than 2% of the global market, on par with cottonseed and coconut oil. Palm oil and soybean oil together account for 65% of the market; sunflower and rapeseed oil represent another 24% combined.Spain’s southern region of Andalusia, the Saudi Arabia of olive oil, accounting for about one-third of the global supply, is the epicenter of the crisis. The Phoenicians introduced the olive tree millennia ago there, and then Romans turned the region into a plantation. Today, Spain devotes an area roughly the size of Massachusetts to growing olive trees and produces about half of the world’s output.Spain — Andalusia in particular — has been facing a drought for the last two years, likely exacerbated by climate change. In the current 2022-23 crop year, production plunged to about 663,000 metric tons, down 56% from the 2021-22 level. The collapse, coupled with low production in Italy, where a pathogen is killing olive trees, dragged global output to 2.62 million tons, down nearly a quarter from the previous year. As demand has risen, global inventories have plunged, with the stocks-to-use ratio falling to 12.1%, the second-lowest level in more than 50 years.

With Spanish and Italian facing crop failures, the pressure is elsewhere. Turkey, one of the few countries that enjoyed a good crop in 2022-23, has banned exports in an effort to bring domestic prices down.The dwindling inventories wouldn’t be a huge problem if the 2023-24 harvest looked promising. But production in Spain may reach just 737,000 tons in 2023-24, a tiny recovery from the previous season and about half the normal size, according to the country’s main farming cooperative group. Italian and Greek producers don’t expect much improvement either. The problem remains the weather.Spanish olive trees faced an unusually warm spring, just when they flower and the fruit is set. In Jaen, the capital of the industry in Andalusia, the temperature in April was 4C higher than normal. In nearby Cordoba, another key growing town, the thermometers reached 30C (86F) every day for two weeks in April – the earliest-ever heat wave. Since then, the weather hasn’t given the trees any breathing room. In southern Spain, it has been dry and hot for months, a situation only comparable with the drought in the early 1980s, when olive oil production also tumbled.But the problem is now much worse than 40 years ago because since then global demand has nearly doubled. With the Mediterranean diet gaining popularity around the world, olive oil consumption has increase to an average of nearly 3 million tons over the last five years, up from 1.64 million tons on average from 1980 to 1985.With stocks already at critically low levels, another crop failure in Spain, let alone in Italy and Greece, would require unprecedented demand destruction. That means much higher prices. In the market, the buzz is whether wholesale prices could surge to as high as $10,000 per ton, a level no one thought possible only a few months ago. Hoarding, as my family did a few months ago, would only make the situation worse. But the alternatives look grim: Maybe I’ll have to start buying Greek or Portuguese olive oil, even if that feels like burning my national flag. Perhaps sunflower or rapeseed oil in a true emergency. My only hope is that things don’t get so bad I’ll have to consider butter.