## sfapril2022

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---

### Commodity Price Developments (Aug 2021–Feb 2022)
- Primary commodity prices rose 24 percent between August 2021 and February 2022.
- Energy commodities, especially natural gas, were the main drivers of the increase, amplified by rising geopolitical tensions and Russia’s invasion of Ukraine; Omicron created short-term volatility in late 2021.
- Base metal prices increased by 2 percent; precious metal prices rose by 3 percent; agricultural commodities increased by 11 percent.
- Precious metal prices increased due to an upward shift in inflation expectations.

### Oil and Gas Prices and Market Dynamics
- Crude oil prices increased by 36 percent between August 2021 and February 2022.
- Brent crude oil temporarily reached $140 in early March as markets began to shun Russia’s Urals oil and several countries banned imports of Russian oil.
- Supply conditions before the war were already tight: OPEC+ members were easing supply curbs at a measured pace and production in major non-OPEC+ countries increased slowly.
- Non-OPEC+ producers focused more on cash generation than investment, partly because of the energy transition.
- Globally coordinated releases of strategic petroleum reserves have buffered supply disruptions; spare capacity has not been tapped.
- Global demand for oil in 2022 is projected at 99.7 million barrels a day (mb/d) in 2022 (up 2.1 mb/d from 2021), per the International Energy Agency—this is a downward revision of 1.1 mb/d compared with demand before the war in Ukraine.
- Futures markets suggest crude oil prices will increase 55 percent in 2022 and fall slightly thereafter; short- and medium-term upside risks to oil prices remain elevated, with long-term downside risks from the energy transition.

### Natural Gas, Coal, and European Gas Inventories
- Natural gas markets were driven by energy security concerns in Europe and low average storage levels going into last winter.
- Greater competition with northeast Asia for spot LNG cargoes raised global natural gas prices except in North America.
- Natural gas prices are expected to remain high until mid-2023 amid supply and energy security concerns, while Europe plans to reduce dependence on Russian natural gas.
- Coal prices rose 55 percent and reached historic highs in early March, reflecting tight supply-demand balances, production disruptions, and the shunning of Russian coal.
- European gas inventory and TTF price dynamics show notably low storage going into winter (last observation Mar. 29, 2022; past decade refers to 2011–20).

### Metals and Agricultural Prices
- Base metal index initially retreated from a 10-year high in July 2021 owing to iron ore prices falling 13.8 percent; the index began to recover in December as steel production curbs were lifted.
- Increased demand for electric vehicle batteries pushed cobalt, nickel, and lithium prices higher.
- Base metal prices are expected to rise by 9.9 percent in 2022 (compared with a decline of 6.5 percent in the October 2021 WEO) and remain unchanged in 2023.
- Precious metal prices are expected to rise 5.8 percent in 2022 and 2.1 percent in 2023.
- Food price composition: beverage prices rose 17.2 percent; cereal prices rose 21.8 percent; sugar prices declined 5.3 percent; vegetable prices fell 4.8 percent.
- Wheat prices rose by 26.4 percent due to severe drought in Canada and across the northern plains of the United States.
- Continued war in Ukraine and falling Russian exports, adverse weather, and higher fertilizer prices are upside risks for world cereal and food prices.

### Pace of Fossil Fuel Divestment — Overview
- Anticipation of lower fossil fuel demand has likely reduced capital expenditures in oil and gas globally over the past three to four years—especially for publicly traded companies—reducing their investment by about 20 percent.
- The clean energy transition requires substantial reduction in fossil fuel investment, but the recent energy crisis has raised concerns that divestment from fossil fuels may be happening too fast relative to renewable adoption.

### Historical Oil and Gas Investment Trends
- About half of total energy investment in 2021 was in fossil fuels—half of which was oil and gas upstream investment.
- Global upstream oil and gas investment peaked at 0.9 (3.6) percent of global GDP (investment) in 2014.
- By 2019 it declined to less than 0.5 (1.5) percent of global GDP (investment), and it fell further during the pandemic.
- The cyclical reversal disproportionately affected publicly traded companies, which cut oil and gas investment more than national oil companies; investment declined more notably in the Americas and Africa, as opposed to the Middle East and Russia.
- Empirical analysis (1970–2019) shows oil and gas prices are main drivers of capital expenditure: a 10 percent increase in oil and gas prices typically raises global oil and gas investment 3 percent in the same year and 5 percent after two years, cumulatively.
- The 40 percent decline in capital expenditure between 2014 and 2019 was deeper than model predictions (which suggest a 20 to 25 percent decline), indicating additional factors beyond prices.

### Channels through Which the Energy Transition Affects Investment
- Three main channels:
  - Demand-side channel: existing demand-side climate policies (for example, carbon taxes on fossil fuel consumption).
  - Expectation channel: public awareness and expectations about future fossil fuel demand (for example, subsidies to solar and wind, announced future bans on internal combustion engines).
  - Supply-side channel: top-down supply restrictions on fossil fuel production and bottom-up shifts such as sustainable investment portfolio reallocations that increase cost of capital for fossil fuel projects.
- Indicators assembled include: energy transition awareness (text-based proxy), CO2 prices, GHG emission coverage by emissions trading systems, sustainable investing awareness, and portfolio inflows into sustainable funds.
- Energy transition public awareness increased sharply after 2018; increases in CO2 prices and GHG coverage slowed in 2019; sustainable investing awareness and inflows have both increased sharply since 2018.

### Firm-Level Estimation and Results
- Estimation framework: firm-level regression (2012–2020, excluding pandemic) comparing oil and gas firms (treatment) to non-energy firms (control) with controls for firm characteristics and oil and gas price.
- After the Paris Agreement (2016), capital expenditure of a typical oil and gas company was 35 percent lower than that of the control group, controlling for firm-level variables.
- Decomposition of the decline:
  - About half of the investment decline between 2014 and 2017 is explained by lower oil prices (shale boom-bust cycle).
  - Between 2018 and 2020, the expectation channel (public awareness of the energy transition) mattered: if energy transition awareness had remained at 2014 levels, “brown” investment would have been 38 percent higher in 2020.
  - Inflows into sustainable funds (supply-side channel) show a slightly smaller effect on investment, though their coefficient is not statistically significant.
  - The demand channel (CO2 prices and GHG coverage) is not significant in the regression, either because its effect is small or subsumed by oil prices.
  - The pandemic likely further penalized brown investment; 18 percent of the 2020 decline is not fully explained by the model and is attributed to unprecedented uncertainty.

### Scenarios: Supply-Side vs Demand-Side Driven Net Zero Pathways and Price Implications
- International Energy Agency Net Zero Emissions Scenario (crude oil production declines from 85 mb/d in 2020 to 66 mb/d in 2030) is used to illustrate contrasting price outcomes under different drivers:
  - Demand-side policies only: crude oil prices could decline to the $20s in 2030, with dire consequences for oil exporters; rents would diminish and production in high-cost regions would be under pressure.
  - Supply-side policies only (restrictions on production and/or capital access): prices could rise sharply—to roughly $190 a barrel in 2030—benefiting producing countries but harming consuming countries.
- The distribution of production and rents under supply-side-driven decline would depend on country restrictions, environmental regulations, and access to capital; production outcomes would be profitable for all producers in that scenario, generating uncertainty in production patterns across regions.

### Data notes
- Production costs refer to country averages.
- Data labels in the figure use International Organization for Standardization (ISO) country codes.

### Key findings on fossil fuel prices and the energy transition
- It is incorrect to assume that fossil fuel prices will necessarily decline because of the energy transition; outcomes depend on the balance of supply-side and demand-side policies.
- Supply-side policies could exert upward price pressure, while demand-side policies would exert downward pressure.
- The reality is a mix of supply-side and demand-side effects; if country policies are unpredictable and uncoordinated, the price effects of the energy transition are ultimately hard to determine, increasing uncertainty.

### Conclusions on investment and price risks
- Anticipation of lower fossil fuel demand and—possibly, but to a lesser extent—supply-side climate policies (including shifting public preferences for sustainable investing) have sapped capital expenditures in oil and gas globally over the past three to four years—especially for publicly traded companies, whose investment may have shrunk 20 percent during that time.
- Reduced capital expenditures can:
  - Put persistent upward pressure on oil and other fossil fuel prices.
  - Move production to less regulated producers.
  - Add substantial uncertainty to the outlook for oil and gas prices.

### Policy implications and recommendations
- A coordinated climate effort among fossil fuel consumer and producer countries would help reduce the risk of high and volatile energy prices.
- Divestment from fossil fuels at a pace commensurate with the speed of adoption of renewable energy would help reduce the risk of high and volatile energy prices.
- Reducing policy uncertainty would help countries make necessary adjustments.

*International Monetary Fund | April 2022 — SPECIAL FEATURE: Market Developments and the Pace of Fossil Fuel Divestment*

### Section 1

### sfapril2022 - Section 1

### Commodity Price Developments (Aug 2021–Feb 2022)
- Primary commodity prices rose 24 percent between August 2021 and February 2022.
- Energy commodities, especially natural gas, were the main drivers of the increase, amplified by rising geopolitical tensions and Russia’s invasion of Ukraine; Omicron created short-term volatility in late 2021.
- Base metal prices increased by 2 percent; precious metal prices rose by 3 percent; agricultural commodities increased by 11 percent.
- Precious metal prices increased due to an upward shift in inflation expectations.

### Oil and Gas Prices and Market Dynamics
- Crude oil prices increased by 36 percent between August 2021 and February 2022.
- Brent crude oil temporarily reached $140 in early March as markets began to shun Russia’s Urals oil and several countries banned imports of Russian oil.
- Supply conditions before the war were already tight: OPEC+ members were easing supply curbs at a measured pace and production in major non-OPEC+ countries increased slowly.
- Non-OPEC+ producers focused more on cash generation than investment, partly because of the energy transition.
- Globally coordinated releases of strategic petroleum reserves have buffered supply disruptions; spare capacity has not been tapped.
- Global demand for oil in 2022 is projected at 99.7 million barrels a day (mb/d) in 2022 (up 2.1 mb/d from 2021), per the International Energy Agency—this is a downward revision of 1.1 mb/d compared with demand before the war in Ukraine.
- Futures markets suggest crude oil prices will increase 55 percent in 2022 and fall slightly thereafter; short- and medium-term upside risks to oil prices remain elevated, with long-term downside risks from the energy transition.

### Natural Gas, Coal, and European Gas Inventories
- Natural gas markets were driven by energy security concerns in Europe and low average storage levels going into last winter.
- Greater competition with northeast Asia for spot LNG cargoes raised global natural gas prices except in North America.
- Natural gas prices are expected to remain high until mid-2023 amid supply and energy security concerns, while Europe plans to reduce dependence on Russian natural gas.
- Coal prices rose 55 percent and reached historic highs in early March, reflecting tight supply-demand balances, production disruptions, and the shunning of Russian coal.
- European gas inventory and TTF price dynamics show notably low storage going into winter (last observation Mar. 29, 2022; past decade refers to 2011–20).

### Metals and Agricultural Prices
- Base metal index initially retreated from a 10-year high in July 2021 owing to iron ore prices falling 13.8 percent; the index began to recover in December as steel production curbs were lifted.
- Increased demand for electric vehicle batteries pushed cobalt, nickel, and lithium prices higher.
- Base metal prices are expected to rise by 9.9 percent in 2022 (compared with a decline of 6.5 percent in the October 2021 WEO) and remain unchanged in 2023.
- Precious metal prices are expected to rise 5.8 percent in 2022 and 2.1 percent in 2023.
- Food price composition: beverage prices rose 17.2 percent; cereal prices rose 21.8 percent; sugar prices declined 5.3 percent; vegetable prices fell 4.8 percent.
- Wheat prices rose by 26.4 percent due to severe drought in Canada and across the northern plains of the United States.
- Continued war in Ukraine and falling Russian exports, adverse weather, and higher fertilizer prices are upside risks for world cereal and food prices.

### Pace of Fossil Fuel Divestment — Overview
- Anticipation of lower fossil fuel demand has likely reduced capital expenditures in oil and gas globally over the past three to four years—especially for publicly traded companies—reducing their investment by about 20 percent.
- The clean energy transition requires substantial reduction in fossil fuel investment, but the recent energy crisis has raised concerns that divestment from fossil fuels may be happening too fast relative to renewable adoption.

### Historical Oil and Gas Investment Trends
- About half of total energy investment in 2021 was in fossil fuels—half of which was oil and gas upstream investment.
- Global upstream oil and gas investment peaked at 0.9 (3.6) percent of global GDP (investment) in 2014.
- By 2019 it declined to less than 0.5 (1.5) percent of global GDP (investment), and it fell further during the pandemic.
- The cyclical reversal disproportionately affected publicly traded companies, which cut oil and gas investment more than national oil companies; investment declined more notably in the Americas and Africa, as opposed to the Middle East and Russia.
- Empirical analysis (1970–2019) shows oil and gas prices are main drivers of capital expenditure: a 10 percent increase in oil and gas prices typically raises global oil and gas investment 3 percent in the same year and 5 percent after two years, cumulatively.
- The 40 percent decline in capital expenditure between 2014 and 2019 was deeper than model predictions (which suggest a 20 to 25 percent decline), indicating additional factors beyond prices.

### Channels through Which the Energy Transition Affects Investment
- Three main channels:
  - Demand-side channel: existing demand-side climate policies (for example, carbon taxes on fossil fuel consumption).
  - Expectation channel: public awareness and expectations about future fossil fuel demand (for example, subsidies to solar and wind, announced future bans on internal combustion engines).
  - Supply-side channel: top-down supply restrictions on fossil fuel production and bottom-up shifts such as sustainable investment portfolio reallocations that increase cost of capital for fossil fuel projects.
- Indicators assembled include: energy transition awareness (text-based proxy), CO2 prices, GHG emission coverage by emissions trading systems, sustainable investing awareness, and portfolio inflows into sustainable funds.
- Energy transition public awareness increased sharply after 2018; increases in CO2 prices and GHG coverage slowed in 2019; sustainable investing awareness and inflows have both increased sharply since 2018.

### Firm-Level Estimation and Results
- Estimation framework: firm-level regression (2012–2020, excluding pandemic) comparing oil and gas firms (treatment) to non-energy firms (control) with controls for firm characteristics and oil and gas price.
- After the Paris Agreement (2016), capital expenditure of a typical oil and gas company was 35 percent lower than that of the control group, controlling for firm-level variables.
- Decomposition of the decline:
  - About half of the investment decline between 2014 and 2017 is explained by lower oil prices (shale boom-bust cycle).
  - Between 2018 and 2020, the expectation channel (public awareness of the energy transition) mattered: if energy transition awareness had remained at 2014 levels, “brown” investment would have been 38 percent higher in 2020.
  - Inflows into sustainable funds (supply-side channel) show a slightly smaller effect on investment, though their coefficient is not statistically significant.
  - The demand channel (CO2 prices and GHG coverage) is not significant in the regression, either because its effect is small or subsumed by oil prices.
  - The pandemic likely further penalized brown investment; 18 percent of the 2020 decline is not fully explained by the model and is attributed to unprecedented uncertainty.

### Scenarios: Supply-Side vs Demand-Side Driven Net Zero Pathways and Price Implications
- International Energy Agency Net Zero Emissions Scenario (crude oil production declines from 85 mb/d in 2020 to 66 mb/d in 2030) is used to illustrate contrasting price outcomes under different drivers:
  - Demand-side policies only: crude oil prices could decline to the $20s in 2030, with dire consequences for oil exporters; rents would diminish and production in high-cost regions would be under pressure.
  - Supply-side policies only (restrictions on production and/or capital access): prices could rise sharply—to roughly $190 a barrel in 2030—benefiting producing countries but harming consuming countries.
- The distribution of production and rents under supply-side-driven decline would depend on country restrictions, environmental regulations, and access to capital; production outcomes would be profitable for all producers in that scenario, generating uncertainty in production patterns across regions.

*International Monetary Fund | April 2022 — SPECIAL FEATURE: Market Developments and the Pace of Fossil Fuel Divestment (Section 1)*

### Section 2

### sfapril2022 - Section 2

### Data notes
- Production costs refer to country averages.
- Data labels in the figure use International Organization for Standardization (ISO) country codes.

### Key findings on fossil fuel prices and the energy transition
- It is incorrect to assume that fossil fuel prices will necessarily decline because of the energy transition; outcomes depend on the balance of supply-side and demand-side policies.
- Supply-side policies could exert upward price pressure, while demand-side policies would exert downward pressure.
- The reality is a mix of supply-side and demand-side effects; if country policies are unpredictable and uncoordinated, the price effects of the energy transition are ultimately hard to determine, increasing uncertainty.

### Conclusions on investment and price risks
- Anticipation of lower fossil fuel demand and—possibly, but to a lesser extent—supply-side climate policies (including shifting public preferences for sustainable investing) have sapped capital expenditures in oil and gas globally over the past three to four years—especially for publicly traded companies, whose investment may have shrunk 20 percent during that time.
- Reduced capital expenditures can:
  - Put persistent upward pressure on oil and other fossil fuel prices.
  - Move production to less regulated producers.
  - Add substantial uncertainty to the outlook for oil and gas prices.

### Policy implications and recommendations
- A coordinated climate effort among fossil fuel consumer and producer countries would help reduce the risk of high and volatile energy prices.
- Divestment from fossil fuels at a pace commensurate with the speed of adoption of renewable energy would help reduce the risk of high and volatile energy prices.
- Reducing policy uncertainty would help countries make necessary adjustments.

*International Monetary Fund | April 2022 — Section 2*

---


_Source: https://www.imf.org/-/media/files/research/commodityprices/weospecialfeature/sfapril2022.pdf_