European Commission

European CommissionDirectorate-General for Economic and Financial Affairs

Global Economic Prospects 2009:

Commodity Markets at the Crossroads

Nathalie DarnautHead of Unit

“Reforms under the Sustainable Development Strategy”

World Bank’s Panel Discussion Brussels, 9 December 2008

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The commodity boom: Key messages

• The recent commodity boom is unprecedented in its magnitude, duration and the number of commodity groups whose prices have increased.

• In the oil and metals sectors, the price boom is the consequence of a mismatch between the trend growth of demand and supply capacity.

• The agricultural commodity boom mainly reflects the rising demand for biofuels and higher energy prices. Financial-market speculation may have exacerbated the price increases.

• Prices in all commodity markets have fallen sharply since July 2008, reflecting slower demand growth and expectations of further demand reductions, together with increased supply.

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Long-term prospects: Key messages

• In the short term, commodity prices are projected to ease further, while remaining higher than in the past decade.

• In the longer term, the scenario of permanently higher (and rising) commodity prices appears unlikely, as the main factors driving commodity demand are expected to fade.

• Over the next 20 years, supplies of oil and metals are likely to remain ample. Higher prices than in the past will be required to ensure that firms invest in new capacity.

• In agricultural markets, the supply prospects are good, but biofuels could expand demand for food crops very rapidly.

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The agricultural commodity boom: the Commission’s view

• The price surge resulted from a combination of structural and temporary factors.

• Role of biofuels:

The EU biofuel production has had a limited impact on prices so far, as biofuels currently use less than 2% of EU cereal production .

To minimise the impact of biofuels on agricultural prices, the Commission’s proposal encourages the production of 2nd generation biofuels, which are not in direct competition with food production.

• Role of speculation:

The coincidence of rising commodity prices and of a surge of investment flows into related financial derivatives is striking.

However, there is no convincing evidence that speculation has played a significant role in the price formation process.

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Global energy trends: are they sustainable?

• Securing the supply of reliable and affordable energy will require massive investments in energy infrastructure.

The IEA estimates that under its reference scenario, investments of over $26 trillion (over $1 trillion per year) will be needed between now and 2030.

The oil price is estimated to average $100 per barrel in real terms over the period 2008-2015, before rising to over $120 in 2030.

• Current energy trends will lead to a sharp increase in GHG emissions.

Current trends could increase average global temperature by 6°C in the long term.

The energy sector has a central role to play in curbing emissions, through energy efficiency improvements and a rapid switching to renewables and other low-carbon technologies.

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The policy response (1)

• Maintaining the incentives to adjust

Measures to mitigate the impact of high prices should be temporary, targeted at the most vulnerable and should maintain the incentives to adjust

• Promoting open trade policies and economic reform

Agreeing an ambitious deal in the Doha trade talks

Removing trade-distorting policies on food and fuel

Improving the performance of agricultural and energy markets through economic reform and increased competition

• Encouraging cooperation and increasing market transparency

Enhancing dialogue and cooperation between major oil-consuming and oil-producing countries

Increasing transparency in the oil market

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The policy response (2)

• Supporting innovation and investment

Promoting investment in the energy sector

Supporting research and development in low-carbon technologies

Promoting research and innovation in agriculture

• Accelerating the transition towards a low-carbon economy

Reaching agreement on the climate and energy package in the EU by the end of the year

Pursuing an active policy to increase energy efficiency both at the EU and Member State level

Agreeing an ambitious international deal on climate change by the end of 2009