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Thursday, December 08, 2022

Gas prices could rise if Russia attacks Ukraine

Gas prices could rise if Russia attacks Ukraine

Investors will buy first and ask questions later.

“There is a very good chance that we will reach $100. It will be inflationary with an exclamation point,” said Robert Yeager, director of energy futures at Mizuho Securities. “We don’t need it at all. We can’t stand it at all.”

The head of the International Energy Agency said on Thursday that the conflict between Russia and Ukraine would boost gas prices.

“Such a major geopolitical event will be [have] Major impacts on gas prices, if not leading to turmoil,” IEA Executive Director Fateh Birol told CNN’s Julia Chatterley on First Move.

‘all bets are off’

It’s impossible to say how high prices will move – and how long they will remain high. But $100 worth of oil will certainly drive up prices at the pump. And that means the Russia-Ukraine conflict has the potential to affect most Americans.

Petrol prices, which move with a lag relative to oil, have already started rising higher in recent times. According to AAA, the national average hit $3.32 a gallon on Wednesday, up from a recent low of $3.28.

“If there is a war with Russia, all bets are off,” said Claudio Gallimberti, senior vice president of analysis for Rystad Energy.

Gas prices are in the danger zone.  There's Not Much Biden Can Do About It

Oil prices rose sharply this week and analysts say concerns about the Russia-Ukraine conflict may have contributed to those gains.

“The market has been really slow to appreciate the risks of an attack,” said Helima Croft, Head of Global Commodity Strategy at RBC Capital Markets. “Putin isn’t really a hoax. He’s known for endorsing words with action.”

The White House is talking to energy companies and countries

All this underscores the difficult situation in which the White House finds itself from an economic, political and, of course, national security standpoint.

Inflation is already a major political and economic problem for President Joe Biden. The recent rebound in petrol prices threatens to escalate inflation. And $100 worth of oil in the Russia-Ukraine conflict will make it worse.

“Whatever we decide is the right course for our collective interest and security,” a spokesman for the National Security Council told CNN, adding, “We are prepared to incur serious costs to the Russian economy, including its financial system and critical sectors.” The ambitions of the Kremlin and President Putin – while minimizing unwanted spillovers.”

That last part – nailing down the impact – can be tricky.

A senior administration official told CNN that officials are taking contingency planning very seriously “to make sure we are prepared to minimize any impact and assess potential spillovers.” The official said the contingency plan includes talks with energy companies and countries.

The administration official said the White House is “very clear” about how it will respond to an invasion and “the price of this should already be starting to hit the markets.”

Natural gas prices may rise

The Europeans will pay the biggest price in the conflict. This is because Europe is dependent on Russia for natural gas. Heating costs in Europe skyrocketed last fall as natural gas futures rose.

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

The impact on US consumers is less direct.

Goldman Sachs warns that oil prices will rise to $100 this year

Russia sends a relatively modest amount of oil to the United States, which as of October is only 200,000 barrels per day. 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. The oil slick is felt everywhere.

Not only that, but the hike in natural gas prices abroad will have a significant impact.

This is because very high natural gas prices will force some power plants and factories in Europe and Asia to move from gas to oil. In other words, the demand for oil will be higher.

‘Weapon Energy’

At the same time, there may be a question mark on the supply.

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

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

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

And then there is the risk that the White House responds to the invasion by imposing sanctions on Russian oil and natural gas.

President Biden warned on Wednesday that the Russian economy would be inflicted “serious costs and significant damage” if Putin attacks Ukraine.

“It’s going to be overwhelming, it’s going to be real and it’s going to be consequential,” Biden said.

Biden said Russia is dependent on its oil and gas exports for its economy. However, he stopped threatening to impose energy restrictions.

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Croft, a former CIA analyst, suggested that the reluctance of US officials to threaten energy sanctions on Russia is a vulnerability to Putin.

“If you drain energy, you’re indicating that you’re worried about energy,” she said.

Any conflict could work against Russia’s future as a major gas supplier.

“When you do a long-term contract, you have to trust your partner that you will get this gas in any case,” said IEA’s Birol.

Restrictions can make inflation worse

Leveling sanctions will be a difficult decision for Biden.

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

According to the US Energy Information Administration, crude oil and natural gas made up an average of about 43% of the Russian government’s annual revenue between 2011 and 2020. According to the World Bank, oil and gas revenues grew 60% during the first nine months of last year, making them the biggest growth driver for government revenue.

“Russia is a pony city. They have energy. This is a clear weakness in their economy,” said Mizuho’s Yegor.

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And yet overcoming that weakness by limiting Russia’s natural gas and oil supplies will push prices up at a time when they are already high.

“This war situation will be pretty bad. But if you start putting restrictions on energy, it super-shapes the whole inflation story and takes it to the next level,” Yoger said. “You would be committing economic, and political, suicide by doing this.”

Will OPEC and Big Oil come to the rescue?

Croft, an RBC analyst, said the Biden administration would likely respond to the price hike by issuing more barrels from strategic petroleum reserves in a coordinated fashion with other countries. This can help cushion the blow.

Biden may try to persuade Saudi Arabia-led OPEC to open spigots, 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 increase production, would respond by cranking up production to more than $100 of oil.

But that won’t translate into more gasoline overnight. And in the meantime, prices at the pump will remain high.

, CNN’s Chris Liakos contributed to this report

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