Bethany Blankley, The Center Square
Dallas Federal Reserve warns that Russia’s sanctions will continue to cause a recession.
Fed Warning Report “The Russian Oil Shock of 2022,” was made prior to President Joe Biden on Monday calling for additional sanctions against Russia after reports of mass killings and war crimes committed by Russian troops in Bucha, Ukraine.
Russia refutes the claims of Ukrainian eyewitnesses. Biden asked for the creation of a tribunal to investigate war crimes, and U.N. Human Rights Commissioner for Human Rights demanded an investigation.
If Russian sanctions continue, and international markets don’t have access to Russian exports of oil, natural gas and key agricultural exports for the rest of the year, a global recession is inevitable, Dallas Federal Reserve economists project in the report.
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The economists don’t address whether sanctions should be imposed; they focus on economic factors contributing to a global recession.
In the Fed report, economists Lutz Killian and Michael Plante argue that immediately after Russia invaded Ukraine, “early estimates suggested that perhaps 3 million barrels a day (mb/d) of petroleum production – almost 3 percent of world production – had been effectively removed from the global oil market, constituting one of the largest supply shortfalls since the 1970s.”
Russia is responsible for approximately 10% of the world’s petroleum production.
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The report refers to the “oil shocks” of 1973 and 1979 when the U.S. and other countries suffered economically from OPEC policies and weren’t energy independent.
The U.S. has been the world’s largest exporter of natural gas and crude oil since then. According to industry experts, the United States could be fully independent of energy if Washington prioritizes energy policy over national security.
“Our nation has an opportunity to reshape American energy policy that recognizes oil and natural gas as an asset rather than a liability,” Texas Oil and Gas Association President Todd Staples said.
Trump’s administration has made America a net exporter for energy in 2019 for the first-time since 1953. Texas was leading this nation. In 2018, it surpassed Saudi Arabia to become the world’s largest producer of petroleum. The increases in production in 2018 “was one of the largest absolute petroleum and natural gas production increases from a single country in history,” the EIA reported.
Texas’ and the U.S.’ energy prowess “gave us affordable energy, thousands of new jobs, economic growth, and national security,” Texas Railroad Commissioner Wayne Christian said. “Our country achieved this by simply empowering, instead of attacking, domestic oil and gas producers.”
Texas Gov. Greg Abbott has argued that Texas already leads the U.S. in crude production and can easily generate more if the Biden administration will “get out of the way.”
The Biden administration is now looking to Venezuela and Iran, rather than encouraging more U.S. crude oil and gas production. Even if negotiations with these countries were reached, production won’t be fast enough to thwart a recession, the Fed economists argue.
“The increases would be much smaller than the shortfall that likely must be covered,” thy wrote.
Because of COVID-related shutdowns that led to layoffs, and federal policies restricting domestic production, American producers aren’t in a position to ramp up production fast enough to meet the demand or offset worsening inflation-associated costs.
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“Unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil,” the Fed economists argue.
If the bulk of energy exports from Russia were to be “off the market for the remainder of 2022, a global economic downturn seems unavoidable,” Killian and Plante wrote.
Other consequences of sanctions are also possible. The supply of either Russia or Ukraine will be restricted as nearly 30% is from these countries.
“Wheat and fertilizer supplies could be disrupted in 2022 and beyond and make it more costly to put dinner on the table,” they said. Additionally, “the diminished supply, along with a shortage of fertilizer produced from natural gas, will drive up global food prices and reinforce the growth-retarding and inflationary effects of higher fuel prices.”
Andy Lipow from Houston’s Lipow Oil Associates LLC told The Center Square that while the U.S. could fare better than some other countries.
“The high cost of crude oil and record prices for diesel fuel combined with increases in the price of wheat, corn, soybeans, rising food insecurity and the higher cost of raw materials such as steel and aluminum may first lead to a recession in Latin America and Southeast Asia where per capita income is far less than in the United States or Europe,” he said. “This could result in slowing economic growth in China and India, raising the risk of a recession in the rest of the world.”
The Center Square permission granted this syndicated version.