Food, Energy, and Political Instability: A Disastrous Trio

???????????????2022 started on the heels of a shaky recovery following the COVID-19 pandemic, and as nations around the world began to reopen borders, free up travel, and trade, and begin to rollback emergency fiscal and monetary policies, a series of events around the world strained already stressed supply and logistics lines. On February 24, Russia invaded Ukraine, causing oil futures to rise to all-time highs for fear of supply disruptions. This also had the tandem effect of preventing Ukraine from exporting its grain and sunflower oil. Additional sanctions on Russian goods have prevented Russian food products from being exported as well. Historical data shows that prolonged periods of high oil prices coincide with most recessions, and prolonged periods of high food prices are often triggers for instability and political violence.

???????????According to the Observatory of Economic Complexity (OEC) Russia and Ukraine make up more than 25% of the worlds grain exports, the conflict in this region is preventing the bulk of this grain from being exported, this is happening after 2021 saw world food prices rise more than 30% (FAO). While inconvenient for developed countries, this can pose potentially disastrous consequences for developing nations, where more than 1.5 billion people live on less than two dollars a day, and more than 3 billion people live on less than five dollars a day. In addition to rising food prices, energy prices have risen in tandem, putting a double squeeze on billions of people already living on the margins.

According to studies, 64% of food price variance is dependent on the movement of oil prices, with United States corn futures tracking oil prices closely.

Damage to global oil production capacity caused by low oil prices from 2015-2020 have been severely exacerbated by the disruption to energy markets caused by invasion of Ukraine. For example, oil and gas rig count in the United States is currently at 727, 25% less than the high point of 1080 rigs that were online in November 2018. This decrease in extraction has reduced total oil production by 1.1 million barrels fewer barrels per day than what was produced during February 2020. At the current rate, production should reach 2019 levels in the next 12-18 months, but in the meantime analysts such as Goldman Sachs believes oil will average as much as $135 a barrel during 2022.

?The unique risk posed by the current grain shortage, is that due to the low cost, ease of transport, and proximity to the Middle East and North Africa (MENA), more than thirty-six countries count on Russia and Ukraine to supply more than half of their wheat imports. Egypt, for example, imported $5.2 billion worth of grain in 2020. Most of these counties are currently some of the worlds most fragile and unstable, with Yemen, Somalia, Lebanon, and the Democratic Republic of the Congo already experiencing political unrest and armed conflict.

Developing nations that are not currently experiencing unrest can often be thrown into sudden chaos by rising food prices. The previous two instances that the FAO food index reached all time highs in 2008 and 2011, there were food riots and antigovernment protests in numerous countries, with the 2011 riots culminating in the Arab spring. This also is supported by IMF data showing food price deviations correlating with anti-government demonstrations.

With no end to the Ukraine conflict in sight and Russian recommitting to its offensive, new supply for both food and energy will have to be developed and brought online from around the world. This is a multiyear process, meaning elevated food and energy prices for the foreseeable future. The longer these factors drag on the greater the likelihood for unrest becomes. Even relatively stable countries such as Brazil, Argentina, and Mexico could, overtime feel the squeeze on its economy, and subsequently be consumed by unexpected political upheaval. Travelers of all types should take extra precaution when visiting developing nations, especially in the Middle East and North Africa (MENA) regions. Nations with high levels of imports, such as Egypt, should be monitored closely in the lead up to and during travel. Protests and demonstrations can be triggered unexpectedly, and the governments of these regions are known to clamp down with severe force when threatened.