The war in Ukraine will likely pour more gasoline on the already raging inflationary fire, threatening to send the global economy into stagflation. Stagflation is a slowdown of economic activity caused by inflation.
Let’s review what is going on in the US and global economies.
Oil
First, higher commodity prices. Even before the pandemic, the supply of oil and gas was getting constrained by a decline in investment caused by low oil and natural gas prices and petrocarbons falling out of favor with the ESG cult. The pandemic caused a further falloff of investment in the sector. Russia’s invasion of Ukraine forced the world to excommunicate the third largest producer of petrochemicals from modernity.
The oil market has slightly different dynamics from the natural gas market. Oil is a fungible commodity and is easily transported by tankers, and thus it can be (relatively) easily redirected from one customer to another. For instance, if China used to buy oil from Saudi Arabia and now buys oil from Russia, the oil that China stopped buying from Saudi Arabia can now be bought by Germany. That said, Russia produces heavy crude and the Saudis light crude, so refineries need to be reconfigured, and that takes months.
Sanctions on oil will only have an impact on the Russian economy if everyone stops buying Russian oil. If all countries embrace sanctions, then about 8 million barrels of daily oil exports will be removed from the market. That is a lot of oil, considering that world consumes about 88 million barrels a day.
It is unclear if China and India, the largest and third largest importers of oil, will go on buying significant amounts of oil from Russia, as doing so risks damaging their relationships with the West. Neither country wants to be told what to do by the West. They have their own economic interests to consider, but their trade with US and Europe is significantly greater than it is with Russia.
It seems that both countries have been slowly distancing themselves from Russia. For example, the Chinese credit card network UnionPay has quietly cut off its relationship with Russia. Though Russia has an internal credit card network called Mir, since Russia was cut off from the Visa and Mastercard networks and now from UnionPay, Russians have no easy way to spend money when they travel outside of Russia.
This war was a horrible infomercial for Russian weapons, and there is a good chance India may decide to switch to Western weapons, which would bring it closer to the West.
In the short term, the supply of oil from Russia to the world market will likely shrink; it is just hard to tell by how much. The demand for Russian oil has clearly declined, as the (Urals) price is down 30% while global oil prices are making new highs.
Long-term, the oil-supply picture from Russia looks even worse. There was a good reason why Western companies participated in Russian oil projects. A great love for the West was not the motivator that drove Russia to share oil revenues with BP and Exxon. Western companies brought much-needed technical expertise to very challenging Russian oil and natural gas fields. With the West leaving Russia, long-term production of oil and gas is likely to decline, even if China and India continue buying Russian oil and gas.
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