"Russia’s invasion of Ukraine has set the stage for faster-rising consumer prices, with the mayhem of war driving up manufacturing costs for food, consumer goods and machinery in places far from the battlefield. The conflict is stressing an already strained global supply chain, and its economic impact will likely be felt in households world-wide," - WSJ lead story today, War Pinches Supply Chain, Driving Up Prices Globally
It's no surprise that President Joe Biden has been reluctant to curb Russian oil shipments to the U.S. or slap on energy sanctions in ways that would reduce supply as gas prices at the pump are climbing for Americans. He knows that ultimately - despite the impulse to do something in the face of the Ukrainian horrors - any such choice could rebound badly on U.S. consumers.
This is despite Nancy Pelosi (as well as Lindsey Graham) cheering on such a move. Wide swaths of Republicans and an increasing number of Democrats are also 'all in' for a ban. In Ms. Pelosi's words Friday:
“I’m all for that! Ban it.”
Not to be outdone, Lindsey barked:
"What if we crush the oil and gas sector of the Russian economy? That would be a lethal combination for the Russian economy.”
But be careful what you wish for, or want! Dan Dicker, oil markets expert appearing on MSNBC's ALL In Friday night, didn't mince words when he told Chris Hayes that any such move could well lead to much more inflation and Americans paying "five to six dollars a gallon" perhaps in the next few months. When Chris Hayes' face nearly drained of color, doubtless visualizing the 'Blame Biden' meme explode, Dicker quickly responded:
"Remember we've paid this much before, and besides it's a small price to pay given what's happening in Ukraine."
Maybe, but the way too many Americans are yelping even now - as the national average exceeds $4 / gallon- so I am not so sure I'd be that sanguine. Dicker's take was all in terms of supply and the fact is that incoming Russian oil (it is a "petrostate") amounts to barely four percent of all oil imports. Biden, to ease pain at the pump, plans to open the strategic oil reserves - but that tiny addition will add up to barely 1/25 th of the total Russian imports. In other words, like it or not there will be too much demand on a limit supply - and unless Americans cut back on travel and general energy consumption - that translates to higher gas prices.
The Financial Times columnist Gillian Tett is in agreement - based on her FT Friday op-ed, and from a more general perspective of the interconnectedness of global markets. And effects. As she writes:
"One reason is that the full impact of sanctions has not really rippled through the system yet; the formal exclusion of seven Russian banks from the Swift messaging system only comes into effect on March 12. Another is that we simply do not know how a freeze of Russian assets will ricochet around interlinked contracts.
The main point that investors need to understand, notes Adam Tooze, a professor at Columbia University, is that “Russia’s reserve accumulation, like reserve accumulation by other oil and gas producers such as Norway or Saudi Arabia, is a source of funding in western markets — [and] part of complex chains of transactions that may now be put in jeopardy by the sanctions.”
This ought to make the angry politicos impatient to punish Putin to take a step back. Think about what Ms. Tett is saying, and let it sink in. If Prof. Tooze is correct, and I've no reason to doubt him, then inflation could spike radically - and not merely with gas prices. Indeed, in worst case scenarios some inflation estimates reach 10 %. (Cf. Weekend Financial Times: 'IMF Warns Conflict Will Have Very Serious Effect On Global Economy;')
Are Americans really prepared for those price increases including possibly $9/ gallon gas by the end of next month? Groceries spiking too given meat and agro supplies have to be delivered, by trucks, to supermarkets. Will 'Muricans suck it up and factor the hits into a "small personal sacrifice" for Ukrainians, as Dan Dicker hopes? Or will they do more moaning, crying and negative polling - blaming Biden for everything but their kid failing to notch a Harvard entry, or toenail fungus?
Gillian Tett - in response to those who might argue 'let's just track the supply chains and tweak where we can' - answers:
"It
is hard to track the nature of these chains with precision, since cross-border
data on financial flows and counter parties is patchy."
She then cites the case of U.S. Treasurys sold in Russia at the end of 2018. Data showed "the Russian central bank had sold $81bn of its $96bn pile of treasuries holdings, apparently to avoid future sanctions." However, two economists at the American Council of Foreign Relations later did a forensic analysis of different national data bases and decided that "$38 billion of those holdings had simply gone missing from the U.S. data."
The war and accompanying sanctions are already threatening another major supply shock that slows growth and raises inflation in Europe and the U.S.. And that’s without an embargo on Russian oil and natural gas. Refiners and banks are avoiding Russian crude nonetheless, pushing prices sharply higher from last Tuesday. Just yesterday, indeed, The Financial Times reported the price of Brent crude hit $139 a barrel for the first time since July, 2008. And that 17.8 % increase came merely after a U.S. announcement it was "in very active talks with EU partners" about banning Russian oil imports.
This is a warning shot that as the dire and costly effects filter down to the public, the remarkable unity of Western governments against Russia will be tested. Also the unity of the American people - tentative and fragile as it already is - will be tested to the limit. Think the trucker protests were nutso, wait until you see the oil prices backlash.
One guy (Jesus Lopez) quoted in a NY Times' piece, "empathized" with the travails of the Ukrainians, including kids, but "lamented the conflict was also affecting working class people in the U.S." Well, that's the dynamic in a complex, interlinked world, buddy. Just be thankful you didn't live through the severe rationing and other sacrifices during World War II.
The takeaway here: IF Americans are truly on the side of the beleaguered Ukrainians - fleeing for their lives- then they will be prepared to sacrifice like my parents did during WWII. If not, then I can only conclude they are too selfish and spoiled to see beyond their own interests. Yeah, paying such high gas prices is brutal, no question. But not as much as mortars and missiles reducing your apartment to rubble as the occupants are reduced to corpses. Get a perspective, already!
See Also:
Calls for U.S. to ban Russian oil gain momentum
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