Amid rising tensions and fears of full-blown war between Russia and Ukraine, the energy security of all of Europe seems at stake. Oil prices are drawing ever closer to €100 a barrel, and in the event of war are likely to far exceed that number.
At the same time, Europe has over the past decade increased its blend-in mandates of biofuels, as part of its transition away from fossil fuels. In the current situation this creates yet another layer of vulnerability as prices rise further in vegetable oils, including palm oil, sunflower oil and rapeseed oil. These can either be directly used as biofuels or are feedstocks for much of its production. While crude oil has traded above $100 for years at a stretch, vegetable oil prices have now been in uncharted territory for almost a year.
Ukraine, with its agricultural strength deeming it for the centuries as the breadbasket of Europe, supplies 3-5% of the EU’s total consumption of vegetable oils and oilseeds, and over 20% of its imports. Rising tensions could spell trouble for the EU’s supply of such energy commodities, but also for food. Ukraine supplies 88% of the bloc’s sunflower oil, and significant quantities of honey, corn and cereals besides. Vegetable oil and other food supply shortages have already put world food prices at a 10-year high. The IMF and FAO’s 2021 global food price indexes were both up almost 30% from the stable baseline of the past 7 years. On the back of rising energy and food prices, EU and World inflation rates continue to break records. No matter where, and whether for industry, traders or household consumers, potential supply shocks from Ukraine do not bode well.
The challenges to the economy are reflected in more than prices and inflation. European equity indexes like the MSCI Europe and Euronext 100 have been mirroring global indexes in both their steady rise through to December 2021 and their 6-7% fall since the new year. High energy prices tend to dampen growth, and the tensions now could threaten the EU’s chances to meet its growth forecasts for the pandemic recovery. Can Europe’s economy weather this perfect storm?
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