Energy war disruption

Al-Ahram Weekly Editorial
Tuesday 22 Mar 2022

Global commodity prices are hitting record highs as the war in Ukraine has spilled oil over the fire. Everything from oil to wheat and coffee has been affected.

Already, before the war, commodity prices had reached record highs. In February Nikkei Asia reported that the Refinitiv CoreCommodity CRB Index, a composite measure of commodity prices, was up 46 per cent on the year at the end of January. It said that, out of 22 major commodities, nine rose more than 50 per cent. Those included coffee, cotton and aluminium.

The deepening Russian-Ukrainian war has led to increased fears of an energy war between Russia and the West, as the US is pushing its allies in Europe to ban oil imports from Russia, while the latter threatens to cut its gas supply to Europe.

A harsh impact can be felt across the world beyond the conflict zone in Ukraine because of the energy war and sanctions as well as retaliatory decisions, and the global economy is feeling the pinch of a slowing growth.

The EU is already suffering from lower-than-expected gas imports from Russia. Tighter natural gas supply for Europe coincided with higher demand as economies worldwide were emerging from the coronavirus pandemic. Europe receives natural gas from Russia mainly through Nord Stream 1, an offshore natural gas pipeline running from Russia to Germany. Another pipeline, Nord Stream 2, was about to start operating when the war broke out. Germany decided last month to halt the opening of the new Nord Stream 2 pipeline, right after Russia formally recognised the eastern Ukrainian regions of Donetsk and Luhansk as independent states.

Russia, which is currently supplying Europe with about 40 per cent of its natural gas needs, has warned it could cut the gas supply to Europe through the Nord Stream 1 gas pipeline in response to oil and gas bans, which might lead to major blackouts and hit global economies even worse.

Russia’s contribution to the global energy supply is hard to fill in, as it is the world’s second largest gas producer after the US, with 17 per cent of global output in 2020, and is also the third largest oil producer after the US and Saudi Arabia with 12 per cent of output in the same year, or about five million barrels per day.

While Europe relies heavily on Russian oil and gas supplies, Russia too is dependent on revenues from oil and gas exports. More than 40 per cent of Russia’s revenue comes from the oil and gas sectors. About 70 per cent of Russia’s natural gas exports go to Europe, and the latter also receives about 50 per cent of total Russian exports. The US, UK and the EU reportedly spend more than $700 million a day on Russian oil and gas. 

But the EU wants to reduce its reliance on Russian gas. The European Commission announced recently that the EU will reduce its imports of Russian gas by two thirds, from 155 billion cubic metres (BCM) per year to 100 BCM by the year 2023 in response to the war in Ukraine. 

The EU has been in talks with Egypt, Qatar, Algeria, Turkey, Japan, South Korea, Norway, Azerbaijan, and the US to secure alternatives. Russia is also stepping up cooperation with China but cannot simply switch gas exports to the Asian giant due to the lack of sufficient pipeline infrastructure.

This major mutual reliance on energy and sales means a cut-off on both sides would bring a disruption to world economies and the prices of basic commodities that may prove difficult to recover from.

The fallout regarding basic food commodities like wheat is just as serious. Russia is the largest wheat exporter, with Egypt among the top buyers. Together with Ukraine, it accounts for about 30 per cent of global wheat exports.

Wheat prices have risen by about 60 per cent since the beginning of February, and prices are likely to continue rising amid uncertainty about Ukraine’s crop this year.

Wheat, cereals and vegetable oils are reaching levels higher than the global food crisis of 2008, according to the Food and Agricultural Organisation (FAO) which predicts even higher prices in the near future as a result of a disruption in production and trade in Russia and Ukraine.

This could have structural implications for long-term supply, especially that Russia and Ukraine have banned the export of some products including wheat, oats, rye, and other staples. Accordingly, food prices are likely to rise and make some important commodities scarcer, hitting low-income countries hard, especially in the Middle East and Africa, and pushing more people into poverty.

Progress in negotiations between Russia and Ukraine will help stabilise the situation to a certain extent, but the world will take a long time to recover from the current energy and food crisis.

*A version of this article appears in print in the 24 March, 2022 edition of Al-Ahram Weekly.

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