Business Food and Energy Price Shocks from Ukraine War Could Last for Years www.worldbank.org
The war in Ukraine has dealt a major shock to commodity markets, altering global patterns of trade, production, and consumption in ways that will keep prices at historically high levels through the end of 2024, according to the World Bank’s latest Commodity Markets Outlook report. The increase in energy prices over the past two years has been the largest since the 1973 oil crisis. 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. “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. “These developments have started to raise the specter of stagflation. Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy.
are expected to be twice as high in 2022 as they were in 2021, while coal prices are expected to be 80 percent higher, with both prices at all-time highs.
First, there is less room now to substitute the most affected energy commodities for other fossil fuels—because price increases have been broad-based across all fuels. Second, the increase in prices of some commodities is also driving up prices of other commodities—high natural-gas prices have raised fertilizer prices, putting upward pressure on agricultural prices. In addition, policy responses so far have focused more on tax cuts and subsidies—which often exacerbate supply shortfalls and price pressures—than on long-term measures to reduce demand and encourage alternative sources of supply.
“Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine,” said Ayhan Kose, Director of the World Bank’s Prospects Group, which produces the Outlook report. “The resulting increase in food and energy prices is taking a significant human and economic toll—and it will likely stall progress in reducing poverty. Higher commodity prices exacerbate already elevated inflationary pressures around the world.” The war is also leading to more costly patterns of trade that could result in longer-lastWheat prices are forecast to increase more ing inflation. It is expected to cause a major than 40 percent, reaching an all-time high in diversion of trade in energy. For example, nominal terms this year. That will put pres- some countries are now seeking coal supsure on developing economies that rely on plies from more remote locations. At the wheat imports, especially from Russia and same time, some major coal importers could Ukraine. Metal prices are projected to in- step up imports from Russia while reducing crease by 16 percent in 2022 before easing in demand from other large exporters. This di2023 but will remain at elevated levels. version will likely be more costly, the report notes, because it involves greater transpor“Commodity markets are under tremen- tation distances—and coal is bulky and exdous pressure, with some commodity prices pensive to transport. Similar diversions are reaching all-time highs in nominal terms,” occurring with natural gas and oil. said John Baffes, Senior Economist in the World Bank’s Prospects Group. “This will In the near-term, higher prices threaten to have lasting knock-on effects. The sharp rise disrupt or delay the transition to cleaner in input prices, such as energy and fertilizers, forms of energy. Several countries have ancould lead to a reduction in food production nounced plans to increase production of fosparticularly in developing economies. Lower sil fuels. High metal prices are also driving input use will weigh on food production and up the cost of renewable energy, which dequality, affecting food availability, rural in- pends on metals such as aluminum and batcomes, and the livelihoods of the poor.” tery-grade nickel.
Energy prices are expected to rise more than 50 percent in 2022 before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and will also moderate in the following years. Nevertheless, commodity prices are expected to remain well above the most recent five-year average. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently pro- Special Focus: The Impact of the War The report urges policymakers to act promptjected. in Ukraine on Commodity Markets ly to minimize harm to their citizens—and to the global economy. It calls for targeted Because of war-related trade and production The report’s Special Focus section offers an safety-net programs such as cash transfers, disruptions, the price of Brent crude oil is in-depth exploration of the war’s impact on school feeding programs, and public work expected to average $100 a barrel in 2022, commodity markets. It also examines how programs—rather than food and fuel subsiits highest level since 2013 and an increase commodity markets responded to similar dies. A key priority should be to invest in enof more than 40 percent compared to 2021. shocks in the past. The analysis finds that the ergy efficiency, including weatherization of Prices are expected to moderate to $92 in war’s impact could be longer-lasting than buildings. It also calls on countries to accel2023—well above the five-year average of previous shocks for at least two reasons. erate the development of zero-carbon sourc$60 a barrel. Natural-gas prices (European) es of energy such as renewables.
TT 151 | May 10th - May 16th| 2022
