Despite Dips, Fuel and Food Prices Likely to Remain High
Despite recent declines, fuel and food prices are likely to remain high unless there is a sharp economic downturn, according to the International Monetary Fund.
Fuel and food prices have eased from recent peaks, but remain well above their levels at the onset of the recent price surges, the IMF says in an Update.
Key points from the Update:
- Both supply and demand factors have contributed to the recent softening in commodity prices, while global growth prospects are somewhat weaker than expected at the time when the June paper was released.
- In the oil market, easing market conditions have led to a turnaround in prices. OECD consumption has suffered by more than expected (particularly in the U.S.), and the weakening of economic activity has been sharper-than-anticipated, especially in Europe and Japan. The almost 1 million barrel a day increase in OPEC production, mostly from Saudi Arabia, as well as a recovering dollar, have also contributed.
- In food markets, the price impact of recent temporary supply shocks has waned. A bumper wheat crop this year, together with a substantial reduction of rice and wheat export restrictions, has fostered large price declines in these two grains since May. Moreover, some of the unexpected upturn in corn and soybean prices has been reversed, as the damage from the June floods in the U.S. Midwest was smaller than expected.
- Part of the price decline reflects the recovery of the dollar: in Euro terms, oil prices have fallen by about a third less than in dollar terms from their July peak. Nevertheless, many of the fundamental forces behind the price surge are still in effect and are likely to keep prices high in the absence of a sharp global downturn.
- Demand from emerging and developing countries is expected to remain robust. In the oil market, the constraints underpinning the sluggish supply response to high prices should persist amid limited buffers. Moreover, continued strong demand for corn for ethanol use and high fuel and fertilizer costs will also keep up pressure on food prices.
Against this background, the baseline projections for food and fuel prices are broadly similar to the Spring 2008 World Economic Outlook (WEO).
“Oil prices are projected to stay high, although current futures prices suggest a price path below the baseline assumptions underlying the September 2008 WEO exercise. Oil futures options prices, however, imply that there is more uncertainty around those expectations than is usual, consistent with continued high price volatility. Prices of major foods will stabilize or ease slightly, but strong demand and high production costs will prevent a sharp retreat.”
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