The effects of the US ban on all imports of Russian oil, natural gas, and coal are already rippling through the global economy.
Brent oil prices spiked above $130 a barrel on the news, closing around $129, a tad higher than the day before. Though markets had priced in an embargo ahead of ban announcement, JPMorgan analysts expect oil prices to hit $185 by the end of the year if Russia’s invasion of Ukraine lasts that long.
Unlike other sanctions on Russia, which have been applied by a coalition of countries, the oil ban is only backed by the US and the UK. That limits its effects. The US only buys 1% of Russia’s crude production, and the UK even less than that.
Still, oil makes up about 3% of the global economy and its widespread use means that any price increase will spread to all kinds of other goods, from gasoline to fertilizer to clothes. Here’s a rundown of some of the short and long-term effects of the ban:
Higher prices will likely push inflation above 7% in the US and the EU. The European Central Bank (ECB) has suggested the war could dent growth in the euro zone by 0.3 or 0.4 percentage points of GDP. Meanwhile, JPM analysts estimate the US would see a 0.27% drop in GDP for every 1% drop in the global oil supply.
Regardless of how much gasoline costs, US workers still have to go to work. Given the higher price of gas, those workers will slow down purchases of durable goods like cars, computers, refrigerators, furniture, and electronics, eventually lowering prices for those items.
“The surge to $120 WTI is incredibly disinflationary for durable goods,” said George Pearkes, an investment analyst at Bespoke Investment Group, referring to West Texas Intermediate crude oil benchmark.
Employees who can work from home are going to do that, or buy a more fuel-efficient car, Pearkes said. Though the poorest Americans spend three times less on gas than their richer counterparts, they will feel gas price increases more because they don’t have as much flexibility to work from home when prices move up at the pump.
During the last run-up in oil prices, the US turned to fracking to produce more oil years after the increase, Pearkes added. The same is likely to happen this time around. Higher oil prices will also make it financially viable for producers in places like Canada to ramp up production. Oil importers like the Philippines, meanwhile, will feel the crunch of higher prices, Pearkes said.
Russia may be able to find other buyers for its oil than the US and the UK, said Brian Prest, an economist with Resources for the Future, a non-profit that does energy research. The oil sanctions, then, won’t have as much impact on Russia unless the EU and other countries and follow suit.