Costlier market channels are starting to take hold and the transition to cleaner energy is likely to be delayed
The war in Ukraine has caused a major shock to commodity markets and changed the pattern of world trade, production and consumption. According to the latest edition of the report Commodity Markets Outlook published by the world Bankprices will remain at historically high levels until the end of 2024.
The increase in energy prices over the past two years has been the largest since the oil crisis of 1973. The rise in food raw materials – of which Russia and Ukraine are major producers – and in fertilizers, the production depends on natural gas, has never been so strong since 2008.
“Globally, this is the biggest commodity shock we have seen since the 1970s. As was the case then, this shock is compounded by an upsurge in food trade restrictions. , fuel and fertilizerExplain Indermit Gillvice-president of the world Bank for the Equitable Growth, Finance and Institutions division. These phenomena have begun to raise the specter of stagflation. Policy makers should seize every opportunity to boost economic growth at the national level and avoid any action that is harmful to the global economy. »
Energy prices are likely to rise more than 50% in 2022 before falling in 2023 and 2024. As for non-energy goods, including agricultural products and metals, they are expected to increase by nearly 20% in 2022 , then also decrease in subsequent years. However, commodity prices are expected to remain well above the average of the past five years, and in the event of a prolonged war or new sanctions once morest Russia, they might become even higher and more volatile than currently expected.
Due to trade and production disruptions following the war, the price of crude oil (Brent) is expected to average $100 per barrel in 2022, its highest level since 2013 and an increase of more than 40% from 2021. It is expected to fall to $92 in 2023, which will be well above the five-year average of $60 a barrel. (European) natural gas prices are expected to be twice as high in 2022 as in 2021, while coal prices are expected to be 80% higher, both historic highs.
“Commodity markets are suffering one of the biggest supply shocks in decades due to the war in Ukraine, highlighted Ayhan Kose, Director of the Perspectives Division of the world Bank, who produces the report. The resulting rise in food and energy prices has a huge human and economic cost and risks undermining progress in poverty reduction. In addition, this increase in commodity prices is exacerbating already high inflationary pressures around the world. »
Wheat prices are forecast to increase by more than 40% and reach a record high in nominal terms this year, which will hurt developing economies that depend on wheat imports, especially from Russia and Ukraine. Metal prices should rise by 16% in 2022 before moderating in 2023, but remaining at high levels.
“Commodity markets are under enormous pressure, with some prices reaching unprecedented levels in nominal termsnoted John Baffes, Senior Economist in the Outlook Division of the world Bank. This will have lasting repercussions. The sharp rise in the prices of inputs such as energy and fertilizers might cause a decline in food production, especially in developing economies. Reduced input use will weigh on food production and quality, affecting food availability, rural incomes and the livelihoods of the poor. »
In its special feature, the report analyzes in depth the impact of war on commodity markets and how these markets have responded to similar shocks in the past. This analysis suggests that the effects of war may be more lasting than those of previous shocks, for at least two reasons.
First, it is less easy today to replace the most affected energy products with other fossil sources, because price increases have been generalized to all fuels. Second, by a snowball effect, the rise in the prices of certain commodities leads to other increases: the high prices of natural gas have thus pushed up those of fertilizers, which has exerted upward pressure on prices agricultural. In addition, policy responses so far have favored tax cuts and subsidies—which often exacerbate supply shortfalls and price pressures—over long-term measures to reduce demand. and to favor other sources of supply.
The war also induces more expensive commercial circuits which are likely to lead to more lasting inflation and a major reorientation of trade in the energy market. For example, some countries are now looking to source coal from more remote areas. At the same time, some major coal consumers might increase their imports from Russia while reducing demand from other major exporters. The report points out that such a shift is likely to be more expensive, as it involves longer transport distances, and coal is bulky and expensive to transport. Finally, developments of the same order are occurring for natural gas and oil.
In the short term, rising prices threaten to disrupt or delay the transition to cleaner forms of energy. Several countries have indeed announced their intention to increase the production of fossil fuels. High metal prices are also driving up the cost of renewable energy that relies on, for example, aluminum and nickel for batteries.
The report urges policy makers to act quickly to minimize the damage to both their fellow citizens and the global economy. It advocates using targeted social safety nets, such as cash transfers, school meals programs and public works camps, rather than food and fuel subsidies. A key priority should be to invest in energy efficiency, including the modernization of buildings. Finally, the report also calls on countries to accelerate the development of carbon-neutral energy sources, such as renewable energies.
Source: World Bank
