Energy Price Spikes Lead Economic Impact Of War
March 7, 2022—By far, the greatest cost of Russia’s war against Ukraine is the humanitarian costs: the lives lost, the forced displacement, and the psychological trauma. As the world faces down Russia’s aggression, we also need to recognize and prepare for the economic effects.
The battle and emerging breakdown of global trade are also having an economic impact, and it is helpful for individuals to brace themselves for that.
“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Federal Reserve Chair Jerome Powell said recently. “We will need to be nimble in responding to incoming data and the evolving outlook.”
-House Financial Services Committee hearing on March 2, 2022
Fed ‘On Track’
Whether or not the war has an impact on the Fed’s actions is one question. In his testimony to a House committee last week, Powell said the U.S. central bank is on track to raise the Federal Funds Rate by a quarter basis point. But this article goes well beyond that.
Economic Effects
The larger issue is how the economic effects of war impact individuals and companies around the world. Understanding that effect can help one to plan for it.
In the United States, the economy is soaring at a rate of 5.5 percent. The labor market is tight, with an unemployment rate of only 4.0 percent. But prices on goods and services are rising too—and that was going on before the Russian president invaded another country. Inflation rose at an annual rate of 7.5 percent by January. Now prices are set to soar even higher.
Global Energy Prices Spike
The price of crude oil rose to its highest level since 2008. The price of WTI crude oil, the U.S.-based benchmark, climbed to over 126 late Sunday before simmering down to 119 today. Brent crude oil, the international benchmark, spiked to 130 on Sunday, settling in at 123 today. Moreover, the OPEC basket price stood at $113 as of Friday. That’s up from $78 from the beginning of the year.
Bans On Oil Imports Possible
In the United States, lawmakers in Congress and the White House started pushing for a ban on Russian oil. Across the pond, some European political leaders pushed back on sanctioning oil and gas. In Germany, for instance, where consumers are dependent on Russian oil and gas, leaders drew a line in the sand in which they are not ready to cross.
“The federal government has been for months working urgently with its partners in the European Union and beyond to develop alternatives to Russian energy,” German Chancellor Olaf Scholz announced today. “This cannot be done overnight.”
Scholz’s statement is an indication that Germany’s pledge to make values part of its foreign policy may be put to a real test.
In Britain, government leaders are considering putting a limit, or “ceiling,” on Russian oil imports. That follows a move by U.K.-based BP to exit its agreement with the Russian-government-owned oil giant Rosneft.
BP Cuts Ties With Rosneft
It was February 27 when BP announced its pullback from its 19.75 percent share of Rosneft.
“Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region,” BP chair Helge Lund said. “BP has operated in Russia for over 30 years, working with brilliant Russian colleagues. However, this military action represents a fundamental change. It has led the bp board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”
Crippling Russia’s Economy
Of course, the greatest impact of the war will be felt in Russia itself as well as Belarus. Russian officials try to downplay the effects of the sanctions, saying they’ve managed to survive with before. That’s only partly true. Russia survived the 2014 sanctions. But those sanctions were minuscule compared to what’s being put in place today by a large coalition of countries. It’s like comparing a pinprick to a missile attack.
De-Globalization
One thing is clear from the outset of the war: the world’s retreat from globalization and economic integration is now accelerated. And it’s not only accelerated, the breakup is now on steroids.
Trade ties in the energy sector may take longer to split apart. But the fragmentation has begun.
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