The Russia- Ukraine war has already devastated the world, leading to unpleasant economic tsunamis across nations. At this level, when will the price hike end? Already dealing a major shock to commodity markets, the World Bank says that the altering global patterns of trade, production, and consumption will keep the prices at historically high levels through the end of 2024.
In its latest Commodity Markets Outlook report, the World Bank said that the increase in energy prices over the past two years was the largest since the 1973 oil crisis. Apart from this, the Price hike for food commodities also was the largest since 2008.
LARGEST COMMODITY SHOCK
World Bank’s Vice President for Equitable Growth, Finance, and Institutions Indermit Gill pointed out that the world witnessed the largest commodity shock 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,” he said.
“These developments have started to raise the spectre of stagflation. Policymakers should take every opportunity to increase economic growth at home and avoid actions that will bring harm to the global economy,” he added.
The World Bank report warned of rising energy prices more than 50 percent in 2022 before easing in 2023 and 2024. It also said that non-energy prices, including agriculture and metals, are projected to increase almost 20 percent in 2022 and moderate in the following years. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected, the World Bank report said.
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. It also mentioned that prices would moderate to $92 in 2023. Moreover, natural gas prices (European) would rise twice as high in 2022 as they were in 2021. Coal prices are expected to be 80 percent higher, with both prices at all-time highs, the report said.
World Bank’s Prospects Group Director Ayhan Kose stated in the report that commodity markets are experiencing one of the largest supply shocks in decades because of the war in Ukraine. “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 World bank forecast that wheat prices would increase more than 40 percent, reaching an all-time high in nominal terms this year. This could pressurise developing economies that rely on wheat imports, especially from Russia and Ukraine.
Apart from this, metal prices are projected to increase by 16 percent in 2022 before easing in 2023 but will remain at elevated levels.
The World Bank reports special focus on the “Impact of the War in Ukraine on Commodity Markets” finds that the war’s impact could be longer-lasting than previous shocks for at least two reasons.
IT says that there is less room to substitute the most affected energy commodities for other fossil fuels as price hike have been broad-based across all fuels. Moreover, the increase in prices of certain commodities is also driving up prices of other commodities. For example, high natural-gas prices have raised fertilizer prices, putting upward pressure on agricultural prices.
The World Bank also said that policy responses focused more on tax cuts and subsidies that exacerbate supply shortfalls and price pressures.
Moreover, the war as the World Bank says is also leading to more costly patterns of trade. This could result in longer-lasting inflation. This is expected to cause a major diversion of trade in energy. As example, the report mentions that some countries are now seeking coal supplies from more remote locations and some major coal importers could step up imports from Russia while reducing demand from other large exporters. This diversion could be more costly as it involves greater transportation distances.
In the report, the World Bank cautioned that higher prices threaten to disrupt or delay the transition to cleaner forms of energy. Several countries have already announced plans to increase production of fossil fuels.
CALL FOR ACTION
The World Bank report urges policymakers to act promptly to minimise harm to their citizens and to the global economy. It has called for targeted safety-net programs such as cash transfers, school feeding programs, and public work programs rather than food and fuel subsidies. It also asked to invest in energy efficiency, including weatherization of buildings. It also calls on countries to accelerate the development of zero-carbon sources of energy such as renewables.