Energy Prices Rise 20% Globally Following Ukraine Invasion

by Carolyn Mathas

From February 24, 2022, energy prices rose by up to 20% worldwide for five months. When energy prices rise, consumers primarily buy fewer durable goods, including cars and new houses, and investment spending declines due to uncertainty. Given that fossil fuels are mainly used as intermediate inputs upstream in the supply chain, higher energy prices lead to higher global costs (spillover effects).

Input-output analysis (IOA) examines the spillover effects in the supply chain. In particular, the Leontief quantity model is the de-facto standard for both demand and supply analysis. The model is not theoretically consistent with the supply analysis, and it is likely to overestimate monetary damage because price and quantity are inelastic.

Researchers at Kyushu University found that if the price increases by 20% in Russia’s mining and quarrying sector alone, there will be almost no effects globally, and global prices will rise by only 0.13% across all sectors.

However, if prices increase by 20% globally in every M&Q sector, global prices will rise by 3.15% across all sectors, reducing the social surplus by 6.83% of the pre-invasion monthly GDP ($551,080 million per month). This case is roughly equivalent to Russian M&Q energy prices being 5x higher (+497%), indicating the magnitude of geopolitical risk.

Findings include that with a price change of only 20%, Russia’s energy sector alone has little global impact since the economic scale is relatively small. Second, if energy prices rise globally, the most affected are three energy-related sectors (coke/petroleum, electricity, and gas supply), metal, mineral products, electrical equipment, chemical products (manufacturers), air transport, and construction (service sectors). Finally, if energy prices rise, policymakers should focus on the downstream sectors of buyers or consumers. They will be more damaged than sellers or producers as they must buy fewer quantities at higher prices.

In terms of energy (fossil fuel) prices, the 2022 Russian invasion of Ukraine (was an economic shock that) cost consumers or buyers (in the world) primarily 2.85% of the pre-invasion annual GDP ($2.7 trillion) in five months following the invasion.

The results of this research were published online in the journal Economic Analysis and Policy.

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