World Bank: Ukrainian war-induced food and energy price shocks could last for years
Food and fertilizer prices soar
The past two years have seen their biggest jump in energy prices since the 1973 oil crisis. Prices of food commodities (both Russia and Ukraine are major producers) and fertilizers (which use natural gas as a production input) rose the most since 2008.
The report expects energy prices to rise by more than 50% in 2022, before falling back in 2023 and 2024; non-energy prices, including agriculture and metals, are expected to rise nearly 20% in 2022, before falling back in the years thereafter. Still, commodity prices are expected to remain elevated, well above their recent five-year averages. If the Russian-Ukrainian war is protracted or sanctions on Russia increase, the price level may be higher and more volatile than currently forecast.
As the war disrupts trade and production, the report expects Brent to average $100 a barrel in 2022, the highest level since 2013 and more than 40 percent higher than in 2021. It is expected to fall back to $92 in 2023 — still well above the five-year average of $60 a barrel. Natural gas prices in 2022 (Europe) are expected to be twice as high as in 2021, with coal prices rising by 80%, both hitting record highs.
The report expects wheat prices to rise more than 40 percent this year, with nominal prices reaching record highs. This will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine. Metal prices are expected to rise 16% in 2022, before falling back in 2023, but still at elevated levels.
The effects of the war in Ukraine
The report delves into the impact of the Ukraine war on commodity markets and examines how markets have reacted to similar shocks in the past. The analysis found that there are at least two reasons why this war could have a more lasting impact than previous shocks.
First, there is now less room to substitute other fossil fuels for the energy products most affected by the war—because the prices of all fuels have generally risen. Second, increases in the price of some commodities drive up the prices of others—for example, rising natural gas prices push up fertilizer prices, which in turn puts upward pressure on agricultural prices. Furthermore, the policy response in the countries concerned so far has been dominated by tax cuts and subsidies (which tend to exacerbate supply shortages and price pressures) rather than long-term measures that help reduce demand and encourage alternative supply.
The Ukrainian war has also led to a shift in international trade to a more costly model that could trigger more persistent inflation, the report noted. The war is expected to lead to a major shift in energy trade, as some countries, for example, are now seeking coal supplies from further afield; at the same time, some major coal importers may increase their imports from Russia and reduce their imports from other major coal producers. This shift means higher trade costs because of longer transport distances, and coal is a bulky and expensive commodity, the report said. Similar shifts are taking place in the oil and gas trade.
In the short term, rising energy prices could disrupt or delay the transition to clean energy, and some countries have announced plans to expand fossil fuel production. Since renewable energy production relies on metals such as aluminum and battery-grade nickel, rising metal prices have also pushed up the cost of renewable energy production.
preventive solution
The report urges policymakers to act quickly to minimize the damage to national and global economies from rising commodity prices. Instead of subsidizing food and fuel, the report calls on countries to adopt targeted safety net programs - such as cash transfers, school feeding programs and public employment programs. An important priority is to increase investment in energy efficiency, including strengthening the climate protection of buildings to reduce building energy consumption. The report also calls on countries to speed up the development of zero-carbon energy sources such as renewable energy pvt solar hybrid panel.
