While European leaders and President Joe Biden announced sanctions against Russia following the country’s recognition of two separatist republics within Ukraine, one thing didn’t change: The gas kept flowing. And Russia’s oil continues to be on sale on the world market.
Biden cited a reason for that: “As we respond, my administration is using every tool at our disposal to protect American businesses and consumers from rising prices at the pump.”
Even before the acute crisis on the Ukraine border, U.S. energy prices had been rising due to restrained domestic production and a sharp increase in demand for energy amid economic activity coming out of the omicron variant surge.
Russia is a major player in the world energy markets, especially in shipping natural gas to Europe, where the hydrocarbons flowing from east to west make up about a third of the continent’s natural gas usage. While these pipelines are still in operation, the status of “energy as a weapon” remains one of the biggest unknowns of the crisis.
The knock-on effects of a disrupted or completely cutoff gas supply would be tremendous. It would likely reduce the supply of natural gas available for world consumption, potentially creating even more of an inflation crunch here at home.
The global energy market is deeply connected to the U.S. economy
Americans may think this is all happening “over there,” but disruptions in world energy prices could quickly be felt at home. Even though the United States is largely self-sufficient when it comes to oil production (and even exports oil), prices for oil are set globally and feed into consumer prices paid for gasoline, food and airfares, as well as natural gas price fluctuations affecting electricity costs.
Past episodes of high inflation, most notably the 1970s “Great Inflation,” have been associated with big run-ups in the price of oil. Also, for any given consumer, gasoline is likely the product they buy that exhibits the most volatility in its pricing, making it a key factor in changes in the overall landscape of consumer prices. And a substantial portion of the change in consumer prices over the past 18 months can be attributed to a rise in oil and gasoline prices.
According to calculations done by Warren Pies, chief strategist at 3Fourteen Research, about 20 percent of the excess inflation experienced in the past year has been due to transportation costs that are largely gasoline. “The big swing factor in inflation going forward is going to be the price of oil,” Pies explained.
How the world can get around Russian gas — and how it can’t
While the United States and other countries like Qatar or Norway could try to fill in the gap, this could lead to price increases elsewhere, including in the United States, where some regions have already experienced spiking electricity and heating bills.
Before the Ukraine crisis reached its more acute phase, a group of senators wrote Energy Secretary Jennifer Granholm requesting she look into restricting natural gas exports. And the price and availability of natural gas does not just affect where natural gas does and doesn’t flow, but oil as well.
If the Russian gas supply were to be cut off, “The volumes you’re talking about are so large that it’s unlikely Europe would get the gas it needs. It’s more than enough to cause the mother of all gas spikes but in the global natural gas market. Not just in Europe, but in Asia as well,” said Pierre Noël, a scholar at Columbia’s Center on Global Energy Policy.
As prices went up all over the world, natural gas users would begin to substitute oil and even coal. “You’re talking about a very major supply disruption, which would translate almost immediately into cross-commodity price spikes,” he said.
For the moment at least, natural gas is still flowing to Europe. One major energy policy announced on Tuesday was the delaying of certification for Nord Stream 2, the planned gas pipeline project that would supply Germany. But this move, Noël said, was “symbolic.”
“It went down very, very well in the U.S.; it placates the hawks in Congress. But this is a symbolic move. By definition, there is no gas flowing in NS2, and there was no gas until this summer.”
While the Russian gas market is the big unknown of this rapidly evolving conflict, the risk of impeding Russia’s ability to sell oil seems even low. Edward Fishman, who worked on sanctions policy for the Obama administration and is now at Columbia University, told Grid that U.S. sanctions are flexible and targeted enough not to “inadvertently” shut down Russia on the world oil market.
Lessons from Crimea in 2014
When the United States imposed sanctions on Russia in response to the annexation of Crimea and intervention in Ukraine in 2014, some were specifically targeted at the energy industry but did not prevent it from selling oil. Instead, the sanctions made it more difficult for Russian energy companies to work with Western counterparts and eventually led to ExxonMobil exiting the country entirely.
Instead, Fishman said, the risk to oil prices is that if the situation in Ukraine escalates, all policy — Russian, European and American — will become more unpredictable, thus attaching a risk premium to world oil prices.
In the run-up to Monday’s sanctions, Fishman said, “I’ve never seen so much telegraphed, they’ve signaled the hell out of this that they’re not touching the oil sector. We should take them at their word.” But if oil prices were to jump up just because of anxious traders or because demand increased in order to substitute for natural gas, it could make an already tight oil market tighter and heat up an inflationary economy even more.
“Crude oil prices feed into gas prices with a high degree of reliability, generally speaking, that this is the main relationship,” Skanda Amarnath, executive director of Employ America, told Grid. While prices haven’t spiked so far, they’ve risen steadily since December. Prices at the pump have been going up for eight consecutive weeks according to GasBuddy, with the per gallon average rising almost 21 cents in the last month and 89 cents in the last year.