Russia’s war in Ukraine has resulted in the steepest rise in energy prices in nearly 50 years and the largest increase in food prices in 14 years, causing the biggest shock to commodity markets since 1973, the World Bank said in its latest semi-annual commodities outlook this week.
Soaring prices of energy and food pile further upward pressure on already rampant inflation globally, making central banks’ task to tame inflation more complicated compared to just two months ago. The Fed and other central banks expect to raise key interest rates several times this year alone. And this—alongside high energy and food prices—is set to slow down economic growth in 2022, which in turn could hamper growth in global oil demand, analysts and major international organizations warn.
“Higher For Longer” Energy Prices
The biggest energy shock since the 1970s is expected to keep oil and other energy prices elevated for years as the Russian invasion of Ukraine is changing energy trade flows and consumption and production, the World Bank said in its Commodity Markets Outlook report on Tuesday.
“While prices generally are expected to peak in 2022, they are to remain much higher than previously forecast. The outlook for commodity markets depends heavily on the duration of the war in Ukraine and the severity of disruptions to commodity flows, with a key risk that commodity prices could be higher for longer,” the bank noted.
After the Russian invasion of Ukraine, energy prices in March 2022 were double their level in March 2021, with the largest price increases for natural gas and coal.
The price of Brent Crude oil is expected to average $100 per barrel this year, a 42-percent increase from 2021 and the highest annual level since 2013. Brent prices are expected to moderate to $92 a barrel in 2023, but remain well above the five-year average of $60 a barrel.
Food Prices Soar To All-Time High Moreover, since the war in Ukraine started, price increases for food commodities—of which Russia and Ukraine are large producers—and fertilizers, which rely on natural gas as a production input, have been the largest since 2008, the bank says.
“Overall, this amounts to the largest commodity shock we’ve experienced since the 1970s. As was the case then, the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilizers,” said Indermit Gill, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions.
Related: Turkey Tries To Remain Neutral As Russia’s War Persists
The FAO Food Price Index surged to a record in March, averaging 159.3 points, up 12.6 percent from February, when it had already reached its highest level since its inception in 1990, the UN Food and Agriculture Organization (FAO) said earlier this month.
“Higher commodity prices exacerbate already elevated inflationary pressures around the world,” noted Ayhan Kose, Director of the World Bank’s Prospects Group at the launch of the Commodity Markets Outlook.
Judging from open interest in the six major crop futures contracts, the market expects food prices to continue soaring.
“The risk of a global food crisis caused by weather worries and the risk of a sharp reduction in this year’s Ukraine production, helped underpin the grain and soybean sector” in the latest reporting week to April 19, according to the Commitment of Traders reports published by exchanges, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said this week. The net long position in crop futures hit a ten-year high.
“The bullish belief in higher prices can be seen in the long/short ratio with readings of 43 longs to 1 short in soybeans and 33 to 1 in corn, highlighting a sector with literally no short positions left,” Hansen noted.
Soaring Inflationary Pressure Complicates Response
Spikes in energy and food prices raise upward pressures on consumer prices, and policy makers face increased challenges in taming inflation, which hasn’t been “transitory” – as economists insisted last year – for months now.
“The war is also leading to more costly patterns of trade that could result in longer-lasting inflation. It is expected to cause a major diversion of trade in energy,” the World Bank says.
“Rapidly rising energy and food prices will weigh on growth and materially increase inflation, further complicating policy decisions facing central banks,” the bank warns.
The International Monetary Fund (IMF) also warned last week that the war in Ukraine is setting back the global economic recovery as the “economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation.”
Global growth is now expected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January, the IMF says.
ADVERTISEMENT
According to the IMF, inflation is expected to remain elevated for longer than in the previous forecast, “driven by war-induced commodity price increases and broadening price pressures.”
“Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safeguarding growth,” the fund noted.
In the United States, the Fed will be moving more aggressively to tame inflation, by considering a 50-basis-point hike in interest rates as early as next month, Fed Chairman Jerome Powell said last week at an IMF panel moderated by CNBC’s Sara Eisen.
The Fed will aim to bring supply and demand back into balance in order to reduce inflation without causing a recession, Powell said, and added:
“I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy. It’s going to be very challenging.”
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- Is China Finally Distancing Itself From Russia?
- Moldova Fears Russia Is Looking To Expand Its War Beyond Ukraine
- The UK Could Give Up Russian Gas Sooner Than Thought
The second fact is that food prices were also rising long before the Ukraine conflict erupted but at manageable levels. However, the conflict did disrupt much of Ukraine’s wheat exports thus accelerating its price rise since both Russia and Ukraine account for 25% of global wheat production.
The pre-conflict rise in energy prices was the real decisive factor behind the rise in food prices since it has led to a surge in the price of fertilizers, diesel for tractors and food processing and distribution. Moreover, The continued production of ethanol in the United States from corn and Brazil from sugar cane is also an important factor in the rise of food prices since the Amazon areas used for sugar cane production and the huge areas in the US State of Iowa used for corn production could have been used to add to global food production rather than used to produce ethanol whose contribution to a reduction of CO2 emissions is highly questionable.
To all the above could also be added the fact that agricultural areas of the world aren’t growing fast enough to satisfy the global demand for food whilst the population of the world is growing and standards of living are improving thus adding to higher consumption of food materials.
Yet, there is another factor affecting food prices which is rising inflation. Inflation resulting from higher energy prices also feed into food prices.
And with attempts by central banks to tame inflation, global economic growth is expected to decline from the original forecast of 4.4% in 2022 to 3.6% and from the original forecast of 4% in 2023 to 3.8%.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London