A global recession “seems unavoidable” if sanctions on Russia keep most of its oil and natural gas off international markets for the rest of 2022.
That’s what a pair of researchers at the Dallas Federal Reserve contend in a new report called “The Russian Oil Shock of 2022.”
Authors Lutz Killian and Michael D. Plante say the Western-led sanctions on Russia could remove about 3 million barrels of oil a day — or 3% of world production — and “constitute one of the largest supply shortfalls since the 1970s.”
In 1973, an OPEC oil embargo against the U.S. for its support of Israel during the Yom Kippur War drove energy prices to record highs, forced Americans to wait in long lines at gas stations and triggered a two-year recession.
So far, the sanctions on Russia haven’t led to a similar spike in oil prices. The cost of West Texas intermediate crude shot up from about $90 a barrel to as high as $130 before settling to under $115.
Prices could resume an upward March, the Dallas Fed economists say, the longer the sanctions persist and the noose tightens around Russian energy exports.
Some analysts argue the Russian oil will likely find a home elsewhere since not all countries are supporting the sanctions. The Dallas Fed authors acknowledge Russia could find alternative buyers, but say the market is limited.
Take China. Killian and Plante say China lacks enough pipeline capacity with Russia to buy more oil and it probably won’t be able to procure enough oil tankers to sharply increases petroleum imports.
One country they did not mention is India. News reports suggest India is prepared to buy more Russian oil at discounted prices, giving Russia another potential market.
The Dallas Fed report also casts doubt on the willingness of major Arab oil exporters to boost exports given their increasingly close ties with Russia. Nor can American producers quickly ramp up production to fill in the gap, they say.
“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 report says.
A global shortfall of oil is not the only problem.
The Dallas Fed report points out that Russia and Ukraine account for almost 30% of wheat exports and a large global share of fertilizer production. Wheat and fertilizer supplies could be disrupted in 2022 and beyond and make it more costly to put dinner on the table.
“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,” the report said.
“Likewise, the war is driving up the price of raw materials and metals produced in Russia. “
The potential result: A global and U.S. recession.
“if the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable,” Killian and Plante wrote. “This slowdown could be more protracted than that in 1991.”