Thursday June 30, 2022

Ukraine impact

May 01, 2022

LAHORE: As war in Ukraine deepens, Pakistan may get embroiled into another uncalled crisis after Covid-19. The last three years of the pandemic had been a roller coaster period for the global economy, before the world heat up on recovery, the Ukraine war is ready to deepen the turmoil.

The demand for petroleum product saw a significant decline during the lockdown days, providing a little relief to the production. However, to maintain the existing production, the government needs to invest in exploration as the existing wells get depleted with each barrel of crude pumped out.

Without new investment the supply would get reduced naturally, nurturing a challenge to manage as oil flows cannot be stopped immediately with having taps turned off.

Not only has the demand come back on too quickly, but the already available resources have also depleted. New exploration and investment in oil tankers and other infrastructure needed to ship the increased oil supply will take time. Therefore, the world must bear the high cost of oil for next three to four years.

Since oil fuels the world economy, it is but natural that inflation will affect every sphere of life and every industry.

The war in Ukraine has added another dimension to this story. Russia and Ukraine together export 29 percent of the world’s wheat, and the demand of the commodity is quite inelastic. This indicates huge price escalation for the staple food for a major portion of the world population.

Since the region affected by war and sanctions is also a major producer of urea and potash, the future production of commodities, especially of wheat is simply under threat.

The problem seems for medium to long term depending how the events in the region pan out. Russia is the highest supplier of gas to the European Union (EU). Its export of natural gas to the world is around 18 percent, and around 15 percent of the world's crude comes from Russia alone.

The microchip supply chain and auto industry production challenges are another good example of how demand and supply got affected and have played out to create unprecedented challenges for the world economy. The work-from-home phenomenon had created new demand for the computing industry.

The war in the region has and would exasperate the already complicated demand and supply situation. The region is a major source of aluminium and copper; two major raw materials for the industry. Engine blocks of automobiles are critically dependent on the supply of aluminium. Some aluminium smelters have already closed in Europe.

Russia supplies 43 percent palladium needed a core material in catalytic convertors. The supply chain for the commodity has also been disrupted.

Advanced countries with financial muscle can survive this crisis. For countries like Pakistan, it will be very difficult to avoid the effects of inflation.

No artificial measures can keep the price down as costs have increased. In a situation like this the government cannot order industry and markets to keep prices down. The little resources that we have should not be spent on gaining political mileage at this time of crises. The meagre resources the country has needed to be targeted to help and assist the really marginalised segments of the society. Only targeted subsidies need to be administered.

The government lacks resources to subsidise petrol and electricity. Price escalations cannot be controlled by controlling the markets, rather will only create supply side crises. Better sense needs to prevail!