Gasoline prices could soar if Russia invades Ukraine

If Russia invades Ukraine, inflation-weary Americans will likely pay the price at the bomb.

Oil prices have hit seven-year highs in recent days. A conflict between Russia and Ukraine, which the White House warned could be imminent, would have the potential to take them much further.

This is because Russia is the second largest oil producer on the planet, after the United States. And Ukraine is an important energy transit hub, through which a large amount of Russian natural gas exports to Europe flow.

An invasion of Ukraine would raise immediate fears of Washington sanctions on Russia’s vast energy resources, damage to the region’s energy infrastructure and raise the specter of Vladimir Putin arming exports of natural gas and crude oil.

Investors would buy first and ask questions later.

“There’s a very good chance we’ll get to $100. That’s going to be inflationary with an exclamation point,” said Robert Yawger, director of energy futures at Mizuho Securities. “We don’t need it. And we couldn’t pay for it.”

‘All bets are off’

It’s impossible to say how high prices would rise — and how long they would remain high. But oil at $100 would certainly drive prices up at the pump. And that means that a Russia-Ukraine conflict has the potential to impact the majority of Americans.

Gasoline prices, which move lagging behind oil, have already started to rise in recent days. The national average hit $3.32 a gallon on Wednesday, up from a recent low of $3.28, according to the AAA.

“If there is a war with Russia, then all bets are off,” said Claudio Galimberti, senior vice president of analytics at Rystad Energy.

Oil prices have risen sharply this week and analysts say concerns over a Russia-Ukraine conflict have contributed to those gains.

“The market has been too slow to assess the risks of a break-in,” said Helima Croft, head of global commodities strategy at RBC Capital Markets. “Putin is not really a bluff. He is known for backing words with action.”

The White House is talking to energy companies and countries

All of this underscores the difficult situation the White House finds itself in, economically, politically and, of course, from a national security standpoint.

Inflation is already a major political and economic problem for President Joe Biden. The recent rebound in gasoline prices threatens to further exacerbate inflation. And $100 oil in a Russia-Ukraine conflict would make it even worse.

“Whatever we decide is the right path for our collective interest and security,” a spokesperson for the National Security Council told CNN In a statement, “we are prepared to deliver severe costs to the Russian economy, including its financial system and sectors deemed critical to the ambitions of the Kremlin and President Putin – while minimizing unwanted spillover.”

That last part — mitigating the impact — can be tricky.

A senior government official told the CNN that authorities are taking contingency planning very seriously “to ensure we are prepared to mitigate any impact and assess potential repercussions”.

That contingency planning, the official said, includes conversations with energy companies and countries.

The administration official added that the White House was “very clear” about how it would respond to an invasion and “this should already start being priced in the markets.”
Natural gas prices could soar

Europeans would pay the greatest price in a conflict. That’s because Europe depends on Russia for natural gas. Heating costs in Europe soared last fall as natural gas futures soared.

Germany has warned that it would consider stopping the Nord Stream 2 pipeline, a pipeline project from Moscow to Germany, if Russia attacks Ukraine. This would further limit the supply of natural gas to Europe.

The impact for American consumers is less direct.

Russia sends relatively modest amounts of oil to the United States, totaling just 200,000 barrels a day in October. This represents just 3% of total US oil imports of 6 million barrels.

However, crude oil is a globally traded commodity and prices at the pump are based on world oil prices. An oil shock anywhere is felt everywhere.

Not only that, but an increase in natural gas prices abroad would have significant ripple effects.

That’s because very high prices for natural gas would force some power plants and factories in Europe and Asia to switch from gas to oil. In other words, the demand for oil would increase.

‘Energy as a weapon’

At the same time, the offer would be in doubt.

First, a military conflict would threaten the region’s energy infrastructure.

But even if pipelines and refineries are spared, Russia may decide to reduce its supply of natural gas — or even crude oil.

“Russia can weaponize energy exports — to make everyone feel the pain,” said Croft, a strategist at RBC. “Many people believe that Russia will respond by withholding supply, to make us pay the price.”

And there is a risk that the White House will respond to an invasion by sanctioning Russian oil and natural gas.

President Biden warned Wednesday of imposing “severe costs and significant damage” on the Russian economy if Putin invades Ukraine.
“It’s going to be heavy, it’s going to be real and it’s going to have consequences,” Biden said.

Biden noted that Russia depends on its oil and gas exports for its economy. However, he did not go so far as to threaten to impose energy sanctions.

Croft, a former CIA analyst, suggested that US officials’ reluctance to threaten Russia with energy sanctions is showing a vulnerability for Putin.

“If you sculpt energy, you’re signaling that you’re concerned about energy,” she said.

Sanctions can worsen inflation

Leveling the sanctions would be a difficult decision for Biden.

On the one hand, energy is vital to Russia’s economy, making it an obvious target for sanctions and a way to make Putin face real consequences.

Crude oil and natural gas accounted for about 43%, on average, of the Russian government’s annual revenue between 2011 and 2020, according to the US Energy Information Administration.

Oil and gas revenue increased by 60% during the first nine months of last year, making them the biggest driver of government revenue growth, according to the World Bank.

“Russia is a one-pony city. Energy is the only thing they have. It’s the glaring weakness of its economy,” said Mizuho’s Yawger.

And yet, taking advantage of that weakness by limiting Russia’s supplies of natural gas and oil would drive prices up at a time when they are already high.

“This war situation would be bad enough. But if you start imposing sanctions on energy, it just oversizes the whole inflation story and takes it to the next level,” Yawger said. “You would be committing economic and political suicide by doing that.”

Will OPEC and the big oil companies come to the rescue?

Croft, an analyst at RBC, said the Biden administration would likely respond to a price increase by releasing more barrels from the Strategic Petroleum Reserve, likely in coordination with other nations. This could help cushion the blow.

Biden may also try to convince Saudi-led OPEC to turn on the faucets, arguing that too high prices are not good for producers if they destroy demand.

Analysts say US oil companies, which until recently were reluctant to significantly increase production, would respond to more than $100 oil by increasing production.

But that wouldn’t translate to more gasoline overnight. And in the meantime, prices at the pump would remain high.