What Will The US Ban On Russian Oil Mean For The World?

LONDON, March 8 – The possibility that the United States could ban Russian oil imports has sent Brent oil prices up to nearly $140 a barrel, the highest level since 2008. read more

Russia is the world’s largest exporter of crude oil and petroleum products, with a volume of about 7 million barrels per day (bpd), or 7% of world supplies. Such a ban would be unprecedented, spurring already exorbitant prices and risking an inflationary shock.

Here are some of the possible consequences of a ban:

RECORD PRICES

Western governments have not imposed direct sanctions on the Russian energy sector, but some consumers are already avoiding its oil to avoid legal problems later.

JP Morgan predicts oil could hit a record $185 a barrel by the end of 2022 if the disruption to Russian exports lasts that long, although like most analysts polled by Reuters, the bank expects the annual average price to be below $100. More

The last time oil prices were above $100 was in 2014, and the levels reached on Monday were not far from the $147 peak reached in July 2008. a barrel of West Texas crude is below $0 as sellers had to pay to get rid of it.

“A prolonged war that is causing massive disruptions to commodity supplies could see Brent hit $150 a barrel,” said Giovanni Staunovo, commodity analyst at UBS.

INFLATION SHOCK

With natural gas prices at record highs, rising energy prices are expected to push inflation above 7% on both sides of the Atlantic in the coming months and severely erode household purchasing power.

As a general rule, every 10% increase in the price of oil in euros increases inflation in the eurozone by 0.1-0.2 percentage points. Since January 1, Brent crude has risen by about 80% in euro terms. In the US, every $10/barrel rise in oil prices increases 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 grains and fertilizers and a leading producer of palladium, nickel, coal and steel. An attempt to exclude its economy from the trading system will hit a range of industries and exacerbate concerns about global food security.

DEVELOPMENT

A ban on Russian oil would further slow the nascent global recovery from the coronavirus pandemic.

Preliminary calculations by the European Central Bank (ECB) suggest that the war could cut eurozone growth this year by 0.3-0.4 percentage points in the base case and by 1 percentage point in the event of a major shock.

In the coming months, there is a high risk of stagflation or little or no growth combined with high inflation. Going forward, however, eurozone growth is likely to remain robust, even if commodity prices prove to be dragging down.

In the US, the Fed estimates that each $10 a barrel increase in oil prices reduces growth by 0.1 percentage point, though private forecasters see a weaker impact.

In Russia, the damage is likely to be large and immediate. JPMorgan estimates that its economy will shrink by 12.5% from peak to trough.

IMPACT ON THE CENTRAL BANK

The inflationary impact is already too strong for the US Federal Reserve, and its chairman, Jerome Powell, has said it needs to raise interest rates this month, which will increase pressure on borrowers. More

For the ECB, the urgency for policy action is less urgent as the labor market still has spare capacity and local inflation is low.

“No one can seriously expect the ECB to start normalizing monetary policy at such a moment of high uncertainty,” said ING economist Carsten Brzeski.

REPLACEMENT?

As fossil fuel demand recovers from the pandemic but global supply remains tight, policy makers will be forced to boost supply despite pledges to support green energy.

“In the short term, environmental initiatives will be phased out in an attempt to reverse the decline we have seen in fossil fuel supplies,” said Suzanne Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Negotiations to lift international sanctions on Iran are at an advanced stage, and high oil prices should encourage investment in the US shale industry, but supplies may not start fast enough to replace Russian production.

“The potential impact on supply is so large that there is no quick way to replace it over the medium term, meaning that the only mitigating factor will be price inflation for these resources and the products that depend on them,” said Alex Collins, senior corporate analyst. at BlueBay Asset Management.

FAR LOOK

A Russian-Western stalemate could revive Moscow’s relationship with Beijing, but energy infrastructure between the two countries is sparse.

“While Russia’s turn to the East has accelerated gas cooperation with China through gas infrastructure… all of these developments are still in their infancy compared to mature markets in Europe,” said Kaho Yu, chief Asia analyst at consultancy Verisk Maplecroft.

Renewables could gain momentum in the medium to long term as countries look to phase out Russian energy.

“We need to take the subsidies that we currently allocate for natural gas, coal and oil and channel them into renewable energy production, electric mobility and electric vehicle charging infrastructure, heat pumps, building efficiency,” said Wolfgang Kötter, a professor at the Rotterdam School of Economics. . Management at the Erasmus University in the Netherlands.

“Anything that will lead to long-term energy security by reducing dependence on fossil fuels.”

Additional report by Bozorgmer Sharafedin; Editing by Alexander Smith

Our Standards: Trust Principles.