Against the backdrop of an existing cost-of-living crisis, the conflict in Ukraine risks exacerbating food and energy poverty, adding to human insecurity and contributing to social unrest.
The world faces a possible ‘perfect storm’ of risks, in which rising food and energy insecurity adds to the current cost-of-living crisis, potentially leading to labour disputes, recession, social and civil unrest, and sovereign debt crises – all of which have the potential to spark further conflict. The implications of these risks go far beyond food and energy markets.
A worsening cost-of-living crisis
The COVID-19 pandemic threw into sharp relief the levels of inequality that exist both within and between countries. Across high-, middle- and low-income countries, the poorest were the most vulnerable to the effects of the pandemic. During the initial lockdowns in 2020, low-income households had the lowest capacity to withstand income losses, which also fell disproportionately on these groups.
As lockdowns were lifted and economies began to recover in 2021, global demand for goods rebounded but supply chains in many sectors – including food – struggled to keep up. This contributed to global inflationary pressure, which was further exacerbated by rapidly rising energy prices during the Northern Hemisphere winter (see Chapter 2). The emerging cost-of-living squeeze was given extra impetus by governments reducing general economic and social support as pandemic risks receded.
Against this existing backdrop, as explained in Chapter 3, the conflict in Ukraine risks amplifying the cost-of-living crisis as price pressures hit consumers from multiple directions. Unprecedented price rises for food, fuel and other essential goods spell trouble for populations around the world, particularly at a time when governments are looking to reduce spending on social safety nets, and when governments within Europe are moving to increase spending on defence and national security. Individuals and families unable to absorb rising costs will be faced with extremely hard decisions.
Rising food prices and food insecurity
FAO has predicted price rises for food and animal feed of between 8 and 22 per cent above the already high levels seen at the start of 2022, with other major global suppliers filling only part of the shortfall in supply from Russia and Ukraine. Since staple crops and oilseeds are substitutable in many global markets (wheat may be readily replaced by maize in many food value chains, for example), price rises for one food type can prompt similar price movements for other types. This is currently evident in most staple grain and oilseed prices, though, unlike in previous crises, prices for rice have remained relatively stable.
Price rises like this are of concern around the world, but particularly for low-income households, who spend large proportions of their incomes on food, much of which goes on staples. Low-income farmers are also vulnerable: their incomes are highly dependent on food sales, with little scope for timing those sales, for sharing risks or for making longer-term investments. Prices could also be driven up further if existing export restrictions (see Chapter 3) spark a wave of additional protectionist measures or a scramble among countries to stockpile, for fear of future supply being curtailed.
FAO predicts that the number of undernourished people globally will increase by between 7.6 million and 13.1 million as a result of the situation in Ukraine and of the ripple effects on food prices and availability. In addition to the immediate challenge of high food prices, high fertilizer prices will also likely contribute to lower yields, as farmers choose either not to plant this season or to plant without the requisite fertilizers. Low yields in this harvest year may curtail supply next year through the depletion of strategic reserves – at both household and national levels.
Household food security could face long-lasting impacts, as price transmission from international markets is often ‘sticky’ – meaning that domestic prices remain elevated even when international prices ease. Countries that are dependent on food imports are at particular risk from continued international price volatility, since transmission of volatility from international markets is more common when imports fulfil a large part of domestic requirements. Even before the Russia–Ukraine conflict, high prices were already constraining budgets in developing countries: the aggregate food import bill in those countries was expected to be nearly 20 per cent higher in 2021 than in 2020, with the majority of this increase, especially in low-income, food-deficit countries, being due to price increases rather than larger import volumes. The overall pressure on countries and households worldwide could increase further if the sharp price rises for wheat and maize spill over to rice markets, as occurred in previous food price crises.
The capacity of humanitarian agencies to mitigate severe food insecurity will be constrained both by logistical disruptions following the conflict and by increasing costs. The World Food Programme (WFP) anticipates significant disruption to its shipments from Odesa destined for West Africa – including to Nigeria, where 8.7 million people are food insecure – for distribution from May. Sourcing supplies from alternative destinations will bring both time delays and cost increases: the agency’s procurement bill is expected to increase by $23 million per month as a result of the conflict’s impact on supply and prices, while transportation costs are expected to rise by $6 million per month owing to high energy prices. For those in besieged cities within Ukraine, continued attacks on humanitarian corridors pose a direct threat to life. Aid agencies have struggled to reach people facing acute shortages of food, water and fuel trapped in Kharkiv, Mariupol and Sumy.
Rising energy prices and energy insecurity
As previously noted, global energy markets tightened prior to the invasion of Ukraine as activity returned to pre-pandemic levels. While this would have been difficult for many consumers and companies, higher prices were expected to quickly recede as output increased and as the global market balanced supply and demand. The conflict in Ukraine has drastically altered these predictions: for example, Goldman Sachs has stated that the world could now be facing one of the ‘largest energy supply shocks ever’, while other financial institutions and energy analysts, including Barclays and Rystad Energy, suggest worst-case scenarios leading to prices of $200 per barrel.
Higher energy prices in developing countries are particularly damaging, as much of the population already has to spend a higher percentage of their income on fuel.
Rising world market prices increase the revenues of all upstream oil and gas producers, whether for companies or for countries. At the start of 2022, Russia was receiving $350 million per day from oil sales and $200 million per day from the sale of gas worldwide. But at the beginning of March, it was receiving $720 million a day for gas from Europe alone.
Higher energy prices in developing countries are particularly damaging, as much of the population already has to spend a higher percentage of their income on fuel (often primarily needed for cooking or transport). The prospect of higher prices may lead to further supply shortages, as those who can afford to do so increase hoarding.
Higher prices are also beginning to affect developed countries. The UK government defines ‘fuel poor’ households as those that would fall below the poverty line if they were to spend the amount required to cover their fuel costs. In 2020, an estimated 13.2 per cent of households (3.16 million) were in fuel poverty in England, 25 per cent in Scotland, 12 per cent in Wales and 18 per cent in Northern Ireland. However, as a consequence of the recent 54 per cent increase in the energy price cap for households – and a resulting rise in domestic energy bills, for a typical household, of about £700 to £2,000 per year – the number of households in fuel poverty in England may now reach 26.7 per cent (6.3 million) from 1 April 2022. If further anticipated rises in energy bills – amid predictions of bills reaching £3,000 per year – are introduced later in 2022, nearly one in every three UK households (8.5 million) could be classified as fuel-poor.
So far, the UK government has refused to impose windfall taxes on record profits received by oil and gas companies, opting instead to deliver social protections in the form of cuts to fuel duty and through support for household energy bills. This response has been described as negative for energy transition, as it promotes fossil fuel ‘demand construction’ rather than ‘demand destruction’, and as regressive in socio-economic terms for supporting relatively affluent car owners over the most vulnerable in society. In the EU, there is more openness to introducing a windfall tax. However, there is still hesitation among EU leaders: for example, the conclusions of the European Council summit meeting held in late March made no mention of such a policy.
Natural gas is widely used in domestic heating in Europe. In the UK, home heating is the largest single use of gas, while domestic use of gas accounts for 40 per cent of total consumption in the EU. Consequently, demand is largely seasonal and gas consumption in Europe drops rapidly as summer approaches, thus relieving pressure on prices. Lower demand for gas enables storage facilities to be filled, and the EU has stated that replenishment of gas storage across the bloc should start as soon as possible, as storage can provide more than one-quarter of winter consumption needs. The European Commission has proposed a requirement that gas storage capacity for each member state be filled to a minimum of 80 per cent by November 2022, increasing to 90 per cent in subsequent years.
Risk cascades across societies
When households have very low incomes, they are forced into making hard choices, including whether to prioritize heating or food. Going without heating poses significant risks to health, particularly for the elderly, while energy poverty can drive people into risky behaviours such as using ovens to heat their homes. When food becomes unaffordable, families are forced to buy less of it: household food insecurity rose significantly in the UK following the introduction of COVID-19 restrictions and the subsequent loss of income for many families. In January 2022, one in 10 adults in the UK experienced food insecurity (meaning that they skipped meals or went a whole day without eating). About 30 per cent of the global population lacked access to adequate food in 2020.
The reality of a cost-of-living crisis can be both immediate and prolonged. People unable to access enough food, energy or water can quickly become more militant in their efforts to reach a level of household security. Perceptions of unjust policymaking, of weak governance or political instability can foment social unrest; the food price spikes of 2007–08 and 2010–11, and energy price spikes in 2007–08 and 2011–13 all resulted in riots. These in turn can further undermine governance and have the potential to lead to state failure.
Systemic impacts of a cost-of-living crisis can be self-perpetuating. Some of these impacts are already happening. As more people struggle to fulfil basic needs, more require the help of social safety nets; worsening physical and mental health contributes to lower productivity; and workers unable to afford the basics may well engage in labour disputes to secure higher pay. Lack of access to an adequate diet, if prolonged, risks leading to an increase in the incidence of chronic malnutrition, which in turn increases morbidity and mortality, constrains cognitive and physical development and reduces both productivity and lifelong earning potential among affected individuals and their children. Supply-chain disruptions create economic challenges for industry, as input prices rise and sales decline. This can lead to business failures and job losses.
All these impacts heighten the economic burden of the growing crisis on governments. The additional economic costs of responding to a conflict on the scale of that being waged in Ukraine, on top of the huge disruption caused by COVID-19 – as governments reinvest in defence, bolster national security, tackle the consequences of economy-wide inflation and re-evaluate their dependencies on global energy markets – could push economies into recession or create a sovereign debt crisis, further deepening existing household insecurity. For some EU countries, inflows of displaced people are likely to add pressure on available resources (see Box 3). In fragile economies in particular, these ripple effects have the potential to spread and escalate rapidly (see Box 4).