Visualization of US interest rates since 2020

How rising food and energy prices are impacting the economy

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Since Russia’s invasion of Ukraine, the effects of energy supply disruptions have rippled through everything from food prices to electricity to consumer confidence.

Faced with soaring prices, many OECD countries are drawing on their strategic oil reserves. In fact, since March the United States has sold a record 1 million barrels of oil per day from these reserves. This, among other factors, has led gasoline prices to decline more recently, but shortfalls could follow through 2023, driving prices higher.

With data from the World Bank, the infographic above showcases energy shocks over the past half-century and what this means for the global economy in the future.

Energy price shocks since 1979

How does today’s energy price shock compare to previous spikes in real terms?

USD/bbl equivalent Crude oil Natural gas Coal
2022* $93 $170 $61
2008 $127 $100 $46
1979 $119 $72 $33

*Forecast 2022

As shown in the table above, the annual crude oil price is expected to average $93 per barrel equivalent in 2022⁠. For comparison, during the price shocks of 2008 and 1979, crude oil averaged $127 and $119 per barrel, respectively.

What sets the energy peak of 2022 apart is that prices have skyrocketed for all fuels. Where price shocks were more or less isolated in the past, many countries like Germany and the Netherlands are turning to coal to offset oil supply disruptions. Meanwhile, natural gas prices in Europe have reached record highs.

Food prices have also soared. Due to rising input costs for fuel, chemicals and fertilizers, agricultural commodity prices are expected to increase 18% in 2022. Only fertilizer prices could increase 70% partly because of Russia’s dominance in the global fertilizer market, which exports more than any other country in the world.

What are the 3 knock-on effects of rising energy prices?

Oil powers almost everything, from food to smartphones. In fact, the price of oil influences up to 64% of food price movements.

How could energy and food shocks affect the global economy in the near future, and why does it depend so much on the price of oil?

1. Rise in global inflation

In 2022, inflation has become a global phenomenon, affecting 100% of advanced countries and 87% of emerging markets and developing economies analyzed by the World Bank.

Countries with above-target inflation 2019 2020 2021 April 2022
Emerging markets and developing economies 20% 20% 55% 87%
Advanced economies 9% 8% 67% 100%

The sample includes 31 emerging market and developing economies and 12 advanced economies

In contrast, around two-thirds of advanced economies and just over half of emerging markets experienced above-target inflation in 2021.

This helped to tighten monetary conditions. The chart below shows how rising inflation in the United States has corresponded to increases in interest rates since the 1980s:

Date Core CPI at start of cycle Magnitude of rate hikes
During the tightening cycle
1979-81 9.3% 9.0 dpi
1983-84 4.6% 3.0 dpi
1986-89 3.6% 4.0 dpi
1994-95 2.8% 3.0 dpi
1999-00 2.0% 1.75 dpi
2004-06 1.9% 4.25 dpi
2015-19 2.1% 2.25 pages
2022-23 6.4% 2.75 dpi

2023 is an estimate based on market expectations for the level of the Fed Funds rate in mid-2023. US Core CPI for 2023 based on latest available data.

In many cases, when the United States quickly tightened monetary policy in response to price pressures, emerging markets and developing economies experienced financial crises amid higher borrowing costs.

2. Slowing global growth

Energy price shocks could worsen global growth prospects:

Global Growth Scenarios 2021 2022 2023
Baseline 5.7% 2.9% 3.0%
Including Fed tightening 2.6% 2.4%
Including soaring energy prices 2.2% 1.6%
Including China COVID-19 2.1% 1.5%

Together, price spikes, hawkish monetary policy and COVID-19 lockdowns in China could negatively impact global growth.

3. Growing food insecurity and social unrest

Even before the energy price shock of 2022, global food insecurity was increasing due to COVID-19 and growing inflationary pressures.

Number of acutely food insecure people 2020 2021
Sub-Saharan Africa 97M 119M
Middle East and North Africa 30M 32M
South Asia 16M 29M
Latin America and the Caribbean 12M 13M

Long-lasting food shortages and high food prices could send millions of people into acute food insecurity.

In addition, high fuel and food prices are often correlated with mass protests, political violence and riots. While Sri Lanka and Peru have already started to see an upsurge in riots, Turkey and Egypt are also likely to experience social unrest as the cost of living rises and food insecurity worsens. worsen.

World challenges

Since World War II, oil shocks have been a major constraint to economic growth. As the war in Ukraine continues, the outlook for today’s energy market is far from clear as a number of geopolitical factors could influence oil price movements and their corresponding effects.

Leslie M. Gill