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War in Ukraine to cause commodity demand destruction

Oil&Gas Materials 29 March 2022 12:45 (UTC +04:00)
War in Ukraine to cause commodity demand destruction
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, March 29. The experience of the 1970s suggests that the ongoing war in Ukraine and its effects on commodity prices will reshape commodity markets for years to come, Trend reports with reference to Capital Economics, UK-based research and consulting company.

“Most immediately, elevated prices are likely to lead to some degree of demand destruction. And further ahead, a renewed focus on energy independence in Europe and elsewhere will have longer-lived consequences for commodity demand and supply,” said the company.

Capital Economics notes that one striking similarity between the 1973/74 oil price shock and the war in Ukraine is the effect on energy policy.

“In 1973/74, the US responded to the sudden loss of OPEC supply by accelerating efforts towards energy independence, and we’re seeing something similar across the West this time around. For example, the European Commission has already announced plans to make Europe independent from Russian fossil fuels before 2030, which is likely to accelerate the shift towards renewable energy in the years ahead,” reads the report released by the company.

Another key parallel is that there doesn’t currently appear to be sufficient supply elsewhere to make up for the shortfall caused by the crisis, according to Capital Economics.

“Back then, the OPEC embargo came at a time when oil producers in the US were already running close to capacity. And despite the shale boom since then, drilling activity in the US is yet to point to a forthcoming surge in output. At the same time, OPEC has continued to reject calls to ramp up output more quickly in response to the loss of Russian supply. Therefore, it seems likely that commodity prices will remain elevated for some time, as was the case following the initial shock in 1973. High prices could start to see an increasingly negative impact on demand, but it is hard to imagine this offsetting the upward pressure on prices stemming from lower supply.”

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