There is no way to avoid a global economic slump now
According to research conducted by analysts at the Federal Reserve Bank of Dallas, there is no way a global economic slump can be avoided if Russian energy exports is barred globally.
They say the world economy is likely to enter a recession if that were to happen and Russian energy is barred for the rest of this year.
“If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable,” economists Lutz Kilian and Michael Plante wrote in an article posted by the Dallas Fed Tuesday.
Russian exports account for around 8% of total world petroleum output.
Despite the fact that oil was initially exempt from US and allied sanctions, Russian oil was largely kept off global markets and out of the hands of refiners.
The unwillingness of financial institutions to guarantee such transactions has been the primary reason Russian crude oil and processed product shipments have been jeopardised since Russia’s invasion.
Furthermore, oil tanker prices for Russian destinations reached all-time highs, reflecting public pressure on oil corporations to avoid buying Russian oil, the threat of government restrictions on Russian energy exports at a later date, and assaults on Black Sea vessels.
This conclusion was generally unexpected, given sanctions imposed by the United States and the European Union first targeted Russian energy exports.
That is because financial institutions refused to finance Russian purchases, shipping rates skyrocketed, and many private sector buyers decided to boycott. As a result, there has been an unexpected supply shock.
“With early reports pointing to a significant disruption in Russia’s petroleum exports, along with the prospect for even greater disruptions in the near future, it is not surprising that the price of West Texas Intermediate crude oil surged to about $120 a barrel in a matter of days following the invasion,” the analysts wrote.
They say recent data from Energy Intelligence indicate that the fall in Russian petroleum exports to date has been somewhat smaller than the initial estimate of 3 mb/d and coincided with oil price weakening after March 8.
“What changed is that much of the Russian oil that continues to be exported from Baltic and Black Sea ports at steep discounts is not delivered to refiners, as is customary. Instead, trading houses are purchasing the oil and keeping it in commercial storage in Europe, from where it may be potentially resold, bypassing financial sanctions. Buying oil for storage is not prohibited under current sanctions,” they say.
How to avoid a global economic slump
The U.S. has made many enemies across the globe. They shunned Iran for its nuclear programme and banned its oil export for decades. Iraq faced oil bans too, so did Libya and now Venezuela.
The Americans cannot go back to these countries to ask for help. Perhaps the price will be too high to pay?
One solution to the present oil supply gap would be for China to replace low-cost Russian oil for higher-priced imports from global markets. Large increases in Chinese oil imports from Russia, on the other hand, seem unlikely to occur anytime soon. There is relatively little spare capacity in the oil pipelines that connect China to Russia, and it is unclear where China would obtain the oil tankers needed to bring extra oil to China and at what cost.
Increased oil output abroad is another possible possibility. One reason the 1990 oil supply shock was connected with just a temporary recession in the United States was Saudi Arabia’s determination to balance the loss in oil output to the best of its abilities, resulting in a net deficit that was less than the total.
To conclude
There are three major consequences for the global economy. First, Russia’s invasion of Ukraine will have far-reaching consequences for the renewable energy transition.
The scope of the energy supply disruption is significant enough that European countries must stop their efforts to transition away from fossil fuels in order to maintain economic activity. Similarly, measures to limit oil and gas output in nations such as the United States may need to be reviewed in light of chronic worldwide shortages.
Second, the rise in global gasoline, power, residential natural gas, and food prices, as well as supply-chain disruptions induced directly by the invasion of Ukraine and indirectly by Russian sanctions, will keep inflationary pressures high in 2022.
Third, they say third, if the majority of Russian energy exports are taken off the market for the rest of 2022, a worldwide economic slowdown becomes unavoidable. This downturn might last longer than the one in 1991.