Rampant food and fuel inflation is a disaster for emerging economies

The United States is currently struggling with high commodity prices, including high fuel and food prices. Although gasoline prices have fallen significantly from their highs of $5+, they are still 10.6% higher than a year ago; diesel is 46.5% higher while food costs have increased by 11.4% over the past year, the largest annual increase in 23 years. Experts say inflation in the United States may have peaked this summer and fuel prices will fall another 11% in 2023, but they will continue take years for prices to fall heights they have reached this year. Although this does not sound very encouraging, the problem is much worse in developing economies. According to the latest World Bank report Commodity Markets Outlook Reportthe fall in the value of currencies in most developing countries is driving up food and fuel prices in ways that are likely to continue to aggravate the crises many of them are already facing.

According to the World Bank, almost 60% of emerging and developing oil-importing countries have seen an increase in oil prices in national currency since Russia invaded Ukraine, thanks to currency depreciations.

In addition, almost 90% of these economies saw a larger increase in wheat prices in local currency compared to the increase in US dollars.

On a regional basis, food price inflation in South Asia averaged over 20% in the first three quarters of 2022. Other regions, including Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa and Eastern Europe and In Central Asia, food price inflation averaged between 12% and 15%. East Asia and the Pacific is doing better than most developing countries, thanks in part to generally stable prices for rice, the region’s staple food.

Related: IEA expects demand for all fossil fuels to peak in next decade

“The combination of high commodity prices and persistent currency depreciations is translating into higher inflation in many countries,” the World Bank notes, warning that policymakers in emerging markets and developing economies “have room to maneuver limited to manage the steepest global inflation cycle in decades”.

It’s about to get worse. These emerging economies should “prepare for a period of even higher volatility in global capital and commodity markets,” writes Ayhan Kose, director of the World Bank’s Prospects Group and chief economist at EFI.

Lower fuel prices

In the United States, the World Bank has predicted that energy prices will drop 11% in 2023 after jumping 60% in the current year following Russia’s invasion of Ukraine. The World Bank has forecast Brent crude to average $92 a barrel in 2023 before declining to $80 in 2024, still well above the five-year average of $60.

According to the bank, natural gas and coal prices will decline in 2023 from record highs in 2022, but US natural gas and Australian coal prices are expected to further double their five-year average by 2024. Gasoline prices could be almost four times higher.

The World Bank has further predicted that Russia’s oil exports could drop by up to 2 million barrels a day due to EU sanctions on Russian petroleum products, coupled with restrictions on insurance and transportation. maritime, which are due to come into force on 5 December.

These projections appear to be consistent with a recent Moody’s Research Report.

According to the report, profits for the sector will broadly stabilize in 2023, but will remain below the levels reached by recent peaks. Analysts note that commodity prices have fallen from very high levels at the start of 2022, but predicted that prices are likely to remain cyclically high through 2023. This, combined with modest volume growth, will support a strong cash flow generation for oil and gas producers. .

Moody’s estimates that U.S. energy sector EBITDA for 2022 will reach $623 billion but fall to $585 billion in 2023. Analysts say weak capital spending, growing uncertainty over expansion however, future supplies and the high geopolitical risk premium will continue to support cyclically high oil prices. Meanwhile, strong US LNG export demand will continue to support high natural gas prices.

A particular element of this report is how bullish analysts are about the Oil Field Services (OFS) sector.

Growing demand for oilfield services (OFS) amid growing drilling and completions activity will continue to drive pricing power and support significant earnings growth for OFS companies,” the analysts wrote.

By Alex Kimani for Oilprice.com

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