Soaring Energy Prices Pose Inflation Risks as Supply Constraints Persist

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Thursday, October 21, 2021 / 05:51 PM / by World Bank / Header Image Credit: World Bank

 

Energy prices soared in the third quarter of 2021 and are expected to remain elevated in 2022, adding to global inflationary pressures and potentially shifting economic growth to energy-exporting countries from energy-importing ones.


The World Bank's latest Commodity Markets Outlook forecasts that energy prices-expected to average more than 80 percent higher in 2021 compared to last year-will remain at high levels in 2022 but will start to decline in the second half of the year as supply constraints ease. Non-energy prices, including agriculture and metals, are projected to decrease in 2022, following strong gains this year.


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"The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries", said Ayhan Kose, Chief Economist and Director of the World Bank's Prospects Group, which produces the Outlook report. "The sharp rebound in commodity prices is turning out to be more pronounced than previously projected. Recent volatility in prices may complicate policy choices as countries recover from last year's global recession".


In 2021, some commodity prices rose to or exceeded levels not seen since the spike of 2011. For example, natural gas and coal prices reached record highs amid supply constraints and rebounding demand for electricity, although they are expected to decline in 2022 as demand eases and supply improves. However, additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks.


Crude oil prices (an average of Brent, WTI, and Dubai) are expected to average $70 in 2021, an increase of 70 percent. They are projected to be $74 a barrel in 2022 as oil demand strengthens and reaches pre-pandemic levels. The use of crude oil as a substitute for natural gas presents a major upside risk to the demand outlook, although higher energy prices may start to weigh on global growth.


As global growth softens and supply disruptions are resolved, metal prices are forecast to fall 5 percent in 2022, after rising by an estimated 48 percent in 2021. Following a projected 22 percent increase in 2021, agricultural prices are expected to decline modestly next year as supply conditions improve and energy prices stabilize.


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"High natural gas and coal prices are impacting the production of other commodities and pose an upside risk to price forecasts", said John Baffes, Senior Economist in the World Bank's Prospects Group. "Fertilizer production has been curtailed by higher natural gas and coal prices, and higher fertilizer prices have been pushing up input costs for key food crops. The production of some metals such as aluminum and zinc has been reduced due to high energy costs as well".


More broadly, the events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply. From an energy transition perspective, concerns about the intermittent nature of renewable energy highlight the need for reliable baseload and backup electricity generation. These will increasingly need to be from low-carbon sources, however, such as hydropower or nuclear power, or from new methods of storing renewable power. At the same time, the surge in natural gas and coal prices this year has made solar and wind power even more competitive as an alternative energy source. Countries can benefit from accelerating the installation of renewable energy and reducing their dependency on fossil fuels.


The report notes that forecasts are subject to substantial risks-including adverse weather, the uneven COVID-19 recovery, the threat of more outbreaks, supply-chain disruptions, and environmental policies. Furthermore, higher food prices, along with the recent spike in energy costs, are pushing food-price inflation up and raising food-security concerns in several developing economies.


Special Focus: Urbanization and Commodity Demand

As the global shift from rural to urban living continues, the report's Special Focus section explores the impact of urbanization on commodity demand. Although cities are often associated with increased demand for energy commodities (and hence greenhouse gas emissions) the report finds that high-density cities, particularly in advanced economies, can have lower per capita energy demand than low-density cities. As the share of people living in urban areas is expected to continue to rise, these results highlight the need for urban planning to maximize the beneficial elements of cities and mitigate their negative impacts. Cities are at the forefront of climate change, and strategic planning particularly for transport links, can help reduce their resource consumption and, crucially, their greenhouse gas emissions.


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World Bank Group Response to COVID-19

Since the start of the COVID-19 pandemic, the World Bank Group has deployed over $157 billion to fight the health, economic, and social impacts of the pandemic, the fastest and largest crisis response in its history. The financing is helping more than 100 countries strengthen pandemic preparedness, protect the poor and jobs, and jump start a climate-friendly recovery. The Bank is also supporting over 50 low- and middle-income countries, more than half of which are in Africa, with the purchase and deployment of COVID-19 vaccines, and is making available $20 billion in financing for this purpose until the end of 2022.


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Download Full PDF Report Here


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