Impact of Russian-Ukraine war on agriculture, energy sectors

GEOLOGICAL SOCIETY

At the time of writing this article, the Russian-Ukrainian conflict is entering its seventh week.

It is a major humanitarian crisis, with over 40,000 Ukrainian deaths thus far, and the invasion triggering Europe's largest refugee crisis since World War II.

More than 4.7 million Ukrainians have left the country and a quarter of the population have been displaced.

The conflict is also having far reaching global economic consequences across many sectors, as both Ukraine and Russia are globally significant producers of several commodities.

We will review some of these sectors in relation to the Trinidad and Tobago economy.

Agricultural sector

Ukraine is a world leader in terms of agricultural exports. It produces 18 per cent of the world’s sunflower seed, safflower or cottonseed oil exports; 13 per cent of corn production; 12 per cent of global barley exports; and eight per cent of wheat and meslin.

It is such an important contributor to food security across Europe that it is commonly called its “bread basket”.

The only European country to rival Ukraine in the production of crops like wheat, corn and sunflower is Russia. As such the ongoing invasion of Ukraine poses a serious threat to the vital supply of stable foods which much of the world relies on.

The shortages created by the sudden and significant removal of these agricultural products from the supply chain have led and will continue to lead to inflationary pressures on the prices of these products. As countries scramble to restore their food security with an already limited supply of global agricultural products, supplies will be routed to the countries willing and able to pay premium prices.

We here in Trinidad and Tobago will undoubtedly feel the effects of these shortages and price increases as we visit the grocery stores and food establishments. Flour products and cooking oil are an integral basic input of our culinary offerings, so with any prolonged conflict we can expect limited supplies on our grocery shelves and paying more at food stalls and restaurants for our beloved food items.

Energy sector

In addition to being both Russia and Ukraine being major agricultural commodities producers, Russia and to a lesser extent Ukraine are both significant oil and gas producers.

Russia is the third-largest oil producer after the United States (US) and Saudi Arabia at 10 million barrels a day, but it is the world’s largest exporter of oil and petroleum products, according to data from the International Energy Agency (IEA).Russia is the world’s second-largest producer of natural gas, behind the US, and has the world’s largest gas reserves. Russia is the world’s largest gas exporter. In 2021 the country produced 762 bcm of natural gas, and exported approximately 210 bcm via pipeline.

Europe is especially dependent on Russian gas, supplying 40 per cent of its natural gas imports. Germany and Italy are especially vulnerable to supplies from Russia, as they obtain most of their natural gas via pipeline networks supplied by Russian gas.

Ukraine has a century-long history of oil and gas production and possesses substantial conventional and unconventional hydrocarbon reserves, estimated at nine billion tonnes of oil equivalent (Btoe). Natural gas reserves are estimated at 5.4 trillion cubic metres (tcm), with proven reserves of 1.1 tcm of natural gas, more than 400 million tonnes (Mt) of gas condensate and 850 Mt of oil reserves.

In response to the invasion, the US and other European countries imposed various levels of sanctions on different sectors of the Russian economy.

The US placed an outright ban on Russian exports, as well as cooperating with European countries to place various financial sanctions as well. As we have seen in the last few weeks, any conflict in this region will undoubtedly place upward pressure on oil and gas prices.

The invasion has not yet resulted in a loss of oil supply to the market. Prices nevertheless surged by US$8/bbl to US$105/bbl following the news on expectations that sanctions against Russia would cripple energy exports.

It is currently unclear what the impact of sanctions will be on energy flows and how long any potential supply losses will last.

Any analysis of the oil and gas industry should not be taken in isolation, as the world is still normalising after two years of various level of global shutdowns resulting from the covid19 pandemic.

A sudden loss in demand with a resulting oversupply would have resulted in destabilising industry production levels and maintenance schedules. We cannot forget when there was a flash crash of oil prices on April 20, 2020, and prices entered into negative territory.

However, as the effects of the pandemic lessened and countries began to reopen their economy demand for energy surged and placed upward pressure on prices. Thankfully the energy industry was already responding to this stimulus in demand by looking at ways to increase supplies months prior to the conflict.

This would have resulted in some stability in the industry and prices not surging permanently in the weeks following the start of the conflict as there was spare capacity to absorb its effects.

A high-price energy environment would stimulate capital investment inflows into both the hydrocarbon and renewable energy sectors. Many oil and gas reserves that were previously uneconomic to produce in a low-price environment could now be brought on stream, especially if there is an estimation of a future increase in demand.

High energy prices also encourage a move towards renewable energy research and development. While oil and gas will remain the dominant energy source for the foreseeable future, global episodes like the covid19 pandemic and this conflict strengthens the case for alternative sources of energy and increasing energy security.

In TT, we have seen an increase in the prices paid for transportation fuels at the pump. Gasoline (premium and super rated) have been increased by 18 per cent and 20 per cent respectively. Diesel has been increased by 15 per cent. However, kerosene has been increased by 133 per cent.

With the steady rise in oil prices over the last few months, it has become difficult to maintain prices at the pump at the current levels as we import our fuels. These increases, as argued by the Finance Minister, became necessary because at the previous pricing structure, the government would have been subsidising transportation fuels in the tune of $2 billion for 2022, with this expense coming from tax revenues.

These increases in prices at the pump would lessen the subsidy to $840 million in 2022.

While it could be debated that we here in TT paid a relatively low price for our transportation fuels and there was room for an increase relative to our Caribbean neighbours, we cannot look at the sector in isolation.

Transportation plays an important role in the production of every good and in the implementation of every service. Wage levels and the level of inflation and employment need to be considered as well.

In an environment with relatively static wages and increasing levels of inflation and unemployment, any increase in transportation fuels will lead to some level of economic hardship. We can expect increases in price levels, as well as some level of economic stagnation from the reduction in disposable income amongst citizens.

As the Russian-Ukraine conflict drags on, the loss of life and humanitarian crisis it creates is very concerning. However, we here in TT will feel the effects whenever we visit the grocery stores or the local restaurants or fill up our vehicles’ gasoline tanks.

There are other sectors as well which will be affected globally such precious metals and finance. It is everyone’s best interest for this conflict to be bought to a peaceful resolution in the near future.

This article was originally published in the GSTT Hammer (https://thegstt.org/publications/hammer) in May 2022. Steve Seetahal is a senior instructor at UTT in mathematics and entrepreneurship. He has an MSc in energy economics from UT Austin, an MBA from Harvard Business School, is a former Fulbright Scholar in economics and a former director on the board of the Central Bank of TT.