Explained: What the US ban on Russian oil means for the world
On Tuesday, US President Joe Biden announced a ban on imports of oil and other Russian energy in a bid to counterattack Russia which has launched a hard-fought war in Ukraine.
“Russia can continue to grind its lead at a horrible cost, but it’s already clear: Ukraine will never be a victory for Putin. Putin might be able to take a city, but he can never hold the country,” Biden told reporters at the White House.
On the ground in Ukraine, the Kiev government has accused Russian forces of bombing a humanitarian corridor that Moscow had promised to open to allow residents to flee the beleaguered port of Mariupol.
Read more: 10 killed in strikes in Severodonestk in eastern Ukraine
The latest sanctions imposed by the United States are a move that economists say could have minor but potentially significant domestic economic consequences, driving up prices at the gas pump at a time when inflation is already rapid.
“We ban all Russian oil, gas and energy imports,” Biden said, speaking at a White House briefing on Tuesday. He said the plan would target “the main artery” of the Russian economy.
Russia is the world’s largest exporter of crude oil and petroleum products combined, with around 7 million barrels per day (BPD) or 7% of global supply. The ban was already unprecedented. Moreover, it fueled already exorbitant prices and risked an inflationary shock.
Here are some of the likely consequences of the ban:
Western governments have shunned Russia’s energy sector, but some customers are already avoiding its oil to avoid getting entangled in legal issues later.
JP Morgan predicts oil could hit a record high of $185 a barrel by the end of 2022 if the Russian export disruption lasts that long, although like most analysts polled by Reuters, the bank expects an annual average price of less than 100 dollars.
The last time oil prices rose above $100 was in 2014 and levels reached on Monday were not far off a peak over $147 reached in July 2008. This is a strong an increase from two years ago, when a barrel of West Texas crude fell below $0 as sellers had to pay to get rid of it.
“A protracted war that causes widespread disruption to commodity supplies could see Brent break through the $150 a barrel mark,” said Giovanni Staunovo, commodities analyst at UBS.
As natural gas prices reach historic highs, soaring energy costs are expected to push inflation above 7% on both sides of the Atlantic in the coming months and deeply eat away at the power of household purchase.
Read also | Oil hovers near 14-year high as US weighs Russian oil embargo
As a general rule, each 10% increase in the price of oil in euros increases inflation in the euro zone by 0.1 to 0.2 percentage point. Since January 1, Brent is up around 80% in euros. In the United States, every $10 a barrel increase in oil prices raises inflation by 0.2 percentage points.
In addition to being a major supplier of oil and gas, Russia is also the world’s largest exporter of grain and fertilizers and a major producer of palladium, nickel, coal and steel. The attempt to exclude its economy from the trading system will affect a wide range of industries and heighten fears over global food security.
Hit to growth
The Russian oil ban would further slow the nascent global recovery from the coronavirus pandemic.
Preliminary calculations by the European Central Bank (ECB) suggest that the war could reduce euro area growth by 0.3 to 0.4 percentage point this year in a baseline scenario and by 1 percentage point in the event of a severe shock.
In the coming months, there is a high risk of stagflation or low to minimal growth associated with high inflation. However, in addition, Eurozone growth is expected to remain robust, even if commodity prices prove to be a drag.
Read also | Russia warns against oil import ban as little progress in talks with Ukraine
In the United States, the Fed estimates that every $10 a barrel increase in oil prices reduces growth by 0.1 percentage points, although private forecasters see a more moderate impact.
In Russia, the damage is likely to be significant and immediate. JPMorgan estimates its economy will contract 12.5% from peak to trough.
Central Bank impact
For the US Federal Reserve, the inflationary impact has already proved too great and its chairman, Jerome Powell, has said interest rates are expected to rise this month, adding pressure on borrowers.
For the ECB, the urgency for policy action is less acute as the labor market still benefits from spare capacity and there is little internal inflation.
“No one can seriously expect the ECB to start normalizing monetary policy at such a time of great uncertainty,” said ING economist Carsten Brzeski.
As demand for fossil fuels rebounds from the pandemic, but global supply remains tight, policymakers will be under pressure to increase supply despite promises to support green energy.
“There will be a wake-up call for near-term green initiatives to try to reverse the contraction we’ve seen in fossil fuel supplies,” said Susannah Streeter, principal investment and market analyst at Hargreaves Lansdown.
Talks to release Iran from international sanctions are at an advanced stage and high oil prices should galvanize investment in US shale, but supply may not come online soon enough to replace Russian production.
“The potential supply impacts are so large that there is no quick way to replace them in the medium term, which means that the only mitigating factor will be inflation in the prices of these inputs and products that depend on it,” said Alex Collins, senior analyst at BlueBay Asset Management.
The long view
The Russian-Western standoff could reinvigorate Moscow’s relationship with Beijing, but energy infrastructure between the two countries is scarce.
“Although Russia’s East Pivot has accelerated gas cooperation with China via gas infrastructure…all of these developments are still in their infancy compared to mature markets in Europe,” Kaho Yu said, senior analyst for Asia at Verisk Maplecroft.
Renewables could be boosted in the medium to long term as countries seek to wean themselves off Russian energy.
“We should take the subsidies we currently spend on natural gas, coal and oil and invest them in renewable energy generation, electric mobility and electric vehicle charging infrastructure, heat pumps, building efficiency,” said Wolfgang Ketter, a professor at the Rotterdam School of Management at Erasmus University in the Netherlands.
“Anything that will lead to long-term energy security by reducing reliance on fossil fuels.”
(With contributions from the agency)
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