Surging global energy prices are among the consequences of Russia’s military invasion into eastern Ukraine. U.S. crude oil crossed above $130 per barrel (West Texas Intermediate) for the first time since mid-2008, up more than $35, or 25%, in the past week. U.S. natural gas prices (Henry Hub) have increased nearly 10% over the same span.
Much of the rise has been related to sanctions against Russia by Western leaders — primarily the U.S., Europe, and the U.K. Russia is among the largest crude oil exporters at over 7.5 million barrels per day.
While the sanctions largely exclude energy exports, which would cripple European economies, most of the largest global maritime companies (62% of global shipping capacity) have already halted all shipments into or out of Russia due to insurance and liability concerns during a military conflict.
Our take – While it hurts U.S. growth, we still don’t see a recession on the horizon
As we have said in recent commentaries, the direct impact of rising energy costs is significantly higher on Europe than on the U.S. and could push some European nations into recession. Nonetheless, that would cool U.S. exports marginally and complicate European-based supply chains due to factors such as hampered production. Ultimately, the difficulty is that this is a geopolitical problem on top of already high inflation.
Our key takeaway points for the U.S. economy for crude oil:
- The biggest impact to the U.S. economy is it aggravates inflationary pressures. Importantly, less than 5% of consumer spending is on energy, though it will disproportionately impact low-income Americans (see slide 2).
- We see a minimal impact if the U.S. cuts off Russian oil imports, or about 1.4% of total U.S. crude oil imports (see slide 3).
- We expect crude oil prices to remain elevated given declining U.S. drilling investment and the brief lifecycle of shale wells (see slide 4). We also anticipate the recent price volatility as well as turbulence in the broader markets will persist for months, pushed around by headlines and developments.
- While the Federal Reserve (Fed) will debate crude oil’s impact, we still expect a quarter point rate hike at its March 16 meeting. The market will remain very focused on the Fed outlook and approach.
- Given strong economic momentum recently, the risk of a U.S. recession remains low, as evidenced by U.S. payroll growth in February, which jumped 678,000, the largest increase in seven months. Additionally, Americans have a substantial cash hoard to buffer higher energy prices, with nearly a quarter from wage & income growth rather than simply pandemic assistance (see slide 5).
- Our view is the U.S. economy remains on solid footing. While higher oil prices will likely reduce growth somewhat, we expect economic growth above 3% year over year in 2022, which remains faster than the pre-pandemic 10-year trend of 2.3%.
- Lastly, we reiterate we could see an unusually-wide range of outcomes from a cease-fire or a roll-back of hostilities to an escalation of the conflict.
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