For the entity, the energy crisis can not only become an obstacle for the whole of economic activity, especially for industrial production, but also raise the international prices of crops.
Many economies will struggle to offset extensive restrictions or withdrawal of Russian oil-related exports, says the Bank for International Settlements (BIS) in its latest report titled ‘Commodity Markets: Shocks and Secondary Effects’.
The current energy crisis could lead to permanently high oil prices, with side effects that would also add upward pressure on the price of corn and oilseeds by increasing their use in the production of biofuels, such as ethanol and biodiesel.
Russian oil products have a huge presence on international markets. Half of its total crude oil production is exported directly, which represents 10% of world sales. The other half is used to obtain distillates. Russia provides the fifteen% of global exports of diesel and heating oil. According to the report, its withdrawal from the market would mean a “major negative shock to the world economy”.
Therefore, a substantial part of the derivatives of Russian oil would have to be compensated and this substitution would require a large investment in crude oil and gas production. However, no signs of these investments are currently detected. “Weak confidence in energy companies, perhaps driven in part by climate policiesmay be putting a dent in incentives [de las grandes empresas] to invest,” says BPI.
The impact of the energy crisis
The organization also claims that the conflict in Ukraine “pushed up the price of some agricultural products.” This occurred both because of supply constraints, as Moscow and kyiv are major crop exporters, and because of rising fuel costs, as food has to be shipped.
In addition, large and persistent increases in the price of oil can boost crop value that are used as an input for the production of biofuels, such as ethanol and biodiesel.
However, the value of natural gas, which plays a key role in electricity production, has also increased, especially in Europe. “The shocks in gas prices are going to have a material effect on the price of electricity“, states the BPI. In general, the manufacturing sector is the main user of this type of energy, using more than 40% of the total consumption at the planetary level.
“The impact of gas supply disruptions on electricity prices is likely will affect global economic activityespecially to the manufacturing industry,” says the report. The effects of this influence will accumulate over time and may only be fully visible until 50 months later of the increase in the price of electricity.
“The delay likely reflects cost coverage for large consumers or long-term contracts with power generators or distributors. The impact of the shock grows as those coverages expire and contract indexing kicks in,” explains the Bank.
However, the BIS expects that the current crisis accelerate the ecological transition and reduce the dependence of the world economy on fossil fuels, which will eventually reduce their price.
The Bank for International Settlements (BIS) is an international financial organization, owned by numerous central banking entities headquartered in Switzerland. Called the “bank of central banks”, the BIS encourages international financial and monetary cooperation between these institutions. It is also known as an economic research center.