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Energy prices to stay high

Shawn Cumberbatch

Energy prices to stay high

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Businesses and other consumers may have to contend with high energy prices at least until next year.

It is unlikely, however, that Barbados and other countries will have to contend with an energy price shock reminiscent of the one experienced in the 1970s.

An International Monetary Fund (IMF) team of Andrea Pescatori, chief of the Commodities Unit, economist Martin Stuermer, and senior economist Nico Valckx, expected that “prices will revert to more normal levels early next year when heating demand ebbs and supplies adjust”.

However, they cautioned that “if prices stay high as they have been, this could begin to be a drag on global growth”.

“While supply disruptions and price pressures pose unprecedented challenges for a world already grappling with an uneven pandemic recovery, the silver lining for policymakers is that the situation doesn’t compare to the early 1970s energy shock,” they said.

“Back then, oil prices quadrupled, directly hitting household and business purchasing power and, eventually, causing a global recession. Nearly a half century later, given the less dominant role that coal and natural gas plays in the world’s economy, energy prices would need to rise much more significantly to cause such a dramatic shock.

“Moreover, we expect natural gas prices to normalise by the second quarter as the end of winter in Europe and Asia eases seasonal pressures, as futures markets also indicate. Coal and crude oil prices are also likely to decline. However, uncertainty remains high and small demand shocks could trigger fresh price spikes,” they added.

The uncertainty meant that policymakers had tough choices, said the trio.

Pescatori, Stuermer, and Valckx said central banks “should look through price pressures from transitory energy supply shocks, but also be ready to act sooner – especially those with weaker monetary frameworks – if concrete risks of inflation expectations de-anchoring do materialise”.

“Governments should act to prevent power outages in the face of utilities curtailing generation if it becomes unprofitable. Blackouts, particularly in China, could dent chemical, steel, and manufacturing activity, adding to global supply-chain disruptions during a peak season for sales of consumer goods,” they predicted.

“As higher utility bills are regressive, support to low-income households can help mitigate the impact of the energy shock to the most vulnerable populations.”

The IMF team said the high cost of energy was illustrated by the fact that Brent crude oil prices, the global benchmark, recently reached a seven-year high above S$85 per barrel, as more buyers sought alternatives for heating and power generation amid already tight supplies.

This prompted power plants to turn to coal, the nearest substitute, which pushed coal prices “to the highest level since 2001, driving a rise in European carbon emission permit costs”.

“Should energy prices remain at current levels, the value of global fossil fuel production as a share of gross domestic product this year would rise from 4.1 per cent (estimated in our July projection) to 4.7 per cent. Next year, the share could be as high as 4.8 per cent, up from a projected 3.75 per cent in July,” the IMF economists said.

“Assuming half of this increase in costs for oil, gas, and coal is due to reduced supply, this would represent a 0.3 percentage point reduction in global economic growth this year and about 0.5 percentage point next year.” (SC)