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Current energy shock gives less opportunity to substitute for cheaper fuel

Oil&Gas Materials 8 June 2022 11:32
Current energy shock gives less opportunity to substitute for cheaper fuel
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, June 8. The current energy shock differs from previous oil price spikes to the extent that the current episode has had a broader impact on energy commodities, implying less opportunity for substitution toward cheaper fuels, Trend reports with reference to the World Bank’s Global Economic Prospects.

“At the same time, however, the energy intensity of GDP now is much lower than in the 1970s, so consumers may be less sensitive to relative price changes, at least in the short term. And in the current episode, policy responses have tended to focus on adjustments to fuel subsidies and taxes to mitigate the effects on consumer prices, rather than on measures to address underlying supply/demand imbalances implying less opportunity for substitution toward cheaper fuels,” reads the report.

WB analysts note that energy intensity of GDP now is much lower than in the 1970s, so consumers may be less sensitive to relative price changes, at least in the short term.

“And in the current episode, policy responses have tended to focus on adjustments to fuel subsidies and taxes to mitigate the effects on consumer prices, rather than on measures to address underlying supply/demand imbalances. Crude oil prices have increased by 350 percent (in nominal terms) from their pandemic low in April 2020 to April 2022, making it the largest increase for any equivalent two-year period since the 1970s. Also, all energy prices rose sharply in 2022, in contrast to earlier episodes where oil prices rose much more sharply than those for coal and gas. In nominal terms, coal and gas prices have all reached historic highs. However, in real terms, only the European natural gas price has reached an all-time high (and it is substantially above its previous peak in 2008). Coal prices are close to their 2008 peak, while oil prices remain some way below,” reads the report.

WB notes that with all energy prices elevated, there is less opportunity to substitute for cheaper fuel in the current energy shock.

“In addition, the increase in prices of some energy commodities is also driving up prices of other commodities. For example, higher natural gas prices have already pushed fertilizer prices to their highest level since 2010.”

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