In a report to a European bank

Giving up Russian oil could exacerbate the world's food crisis

The use of grains for biofuel production may increase food supply shortages.

AFP

A central banking institute has warned that attempts to dispense with Russian oil from Western economies may lead to a significant increase in global oil prices, which may thus exacerbate the global food crisis.

International Settlement Bank has warned that plans by major economies to dispense with Russian oil imports may lead to increased use of grain for biofuel production, which could worsen food supply shortages already in a critical situation due to the war in Ukraine.

This summer, the European Union agreed to gradually impose a ban on Russian oil and oil-related products, starting at the end of this year, in order to tighten economic sanctions against Russian President Vladimir Putin.

Britain and the United States imposed an immediate oil embargo when the war broke out, and the Group of Seven nations said they wanted all major economies to impose a price cap on Russian imports to deprive the Kremlin of windfall revenues.

Ramifications

International Settlement Bank, based in Basel, Switzerland, known as the “central bank of central banks,” says excluding Russian oil imports could have unintended “repercussions” on the global economy, by raising the price of crude oil.

He adds that "constantly high oil prices may add upward pressure on the prices of grains and oilseeds by increasing their use in the production of biofuels, such as ethanol and biodiesel," and that "shifts in the prices of these crops, which are a major feed for livestock, may be quickly reflected in the prices of Other foodstuffs.

3rd largest producer

Russian oil exports account for 10% of global demand, which puts the country in the list of the three largest global producers, along with Saudi Arabia and America.

International Settlement Bank says phasing out all Russian oil would constitute a "major negative shock" to the global economy, as there are no readily available alternatives to service global demand.

Crude oil prices fell again from $130 a barrel in March to nearly $90 amid fears of a global recession that could affect energy demand.

However, the International Energy Agency expects that demand for oil will continue to rise in the next year, after the lifting of restrictions imposed on the outbreak of the epidemic in most countries.

Global food supplies have been disrupted by Ukraine's inability to ship vital crops and fertilizers from its ports since the war, although raw material prices have fallen from previous peaks after a grain supply deal was agreed this summer.

International Settlement warns that rising global oil prices would “create incentives for gasoline mixers to increase the ethanol content in their products. Such a shift could mitigate higher oil prices, but it would also increase demand for corn.”

High rates of inflation

Soaring energy and food prices helped push inflation to its highest levels in 40 years in the richer parts of the world this year.

International Settlement urged the authorities to continue raising interest rates aggressively now, to prevent inflationary pressures from becoming entrenched.

"We know that if we wait to allow inflation to take hold, that will raise the cost of the economy in the future," says Claudio Borio, head of monetary department at International Settlement.

"It is important to act in a timely and robust manner," he added.

Russian oil exports account for 10% of global demand, putting the country in the list of the three largest global producers along with Saudi Arabia and America.

Excluding Russian oil imports could have unintended “repercussions” on the global economy, by raising the price of the crude oil market.

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