Shift to more costly trade patterns has begun; transition to cleaner energy could be delayed
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.
Indermit Gill, the World Bank’s Vice President for Equitable Growth, Finance, and Institutions explained that Overall, it amounts to the largest commodity shock they have experienced since the 1970s adding that the shock is being aggravated by a surge in restrictions in trade of food, fuel and fertilizers.
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.
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 projected.
Because of war-related trade and production disruptions, the price of Brent crude oil is expected to average $100 a barrel in 2022, its highest level since 2013 and an increase of more than 40 percent compared to 2021. Prices are expected to moderate to $92 in 2023—well above the five-year average of $60 a barrel. Natural-gas prices (European) 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.
Ayhan Kose, Director of the World Bank’s Prospects Group made it known that the Commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine which led to the production of 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.”
Wheat prices are forecast to increase more than 40 percent, reaching an all-time high in nominal terms this year. That will put pressure on developing economies that rely on wheat imports, especially from Russia and Ukraine. Metal prices are projected to increase by 16 percent in 2022 before easing in 2023 but will remain at elevated levels.
John Baffes, Senior Economist in the World Bank’s Prospects Group stated that Commodity markets are under tremendous pressure, with some commodity prices reaching all-time highs in nominal terms adding that this will have lasting knock-on effects and the sharp rise in input prices, such as energy and fertilizers, could lead to a reduction in food production particularly in developing economies.
