Analysts have warned that the US embargo on Russian oil could exacerbate already high oil and food prices, and could trigger a recession if it escalates further.
Andy Lebow, president of Lipow Oil Associates, said that if Russia responded by refusing to supply Europe with oil, it could “easily” raise oil prices by $20 to $30 a barrel. Moscow has previously threatened to cut off gas supplies to Europe if Western countries target its energy sector.
After President Joe Biden announced a ban on Russia’s fossil imports on Tuesday, US crude traded above $128 a barrel, while Brent jumped above $130 before paring gains. The United Kingdom and the European Union have also said they will do so Phasing out of Russia’s fossil fuels. Prices had already been climbing in recent weeks, jumping to levels not seen since 2008.
“My biggest fear is that these prices have gone up so fast that they are causing recessions in Europe and Latin America, moving to the United States, and ultimately affecting China’s ability to sell consumer goods to the rest of the world,” he said. CNBC’s “Squawk Box Asia” on Wednesday.
Russia provides 11% of global oil consumption, 17% of global gas consumption, and up to 40% of gas consumption in Western Europe as of 2021, according to Goldman Sachs statistics.
In a worst-case scenario, a complete ban on Russian energy imports in all major consuming nations would “severely reduce and disrupt energy supplies,” and send prices into “uncharted territory,” writes Carolyn Payne, chief commodity economist at Capital Economics.
“Inflation in advanced economies will end the year at around 5% versus the 2.4% we projected before the invasion, and the effects of the decline in household purchasing power and energy rationing in Europe will push the eurozone into recession,” Bain wrote in a note on Monday.
In theory, oil flows could be rearranged to ease supply tightness in the West, but in practice it might not work, according to Goldman Sachs’ chief economist, Jan Hatzius.
“If Western countries buy less Russian oil, China and India can initially buy more Russian oil and thus buy less Saudi oil and other oil, which can then flow to the West,” he wrote in a March 6 memo.
“But this ‘deck chair rearrangement’ is not ideal, not only because of increased transportation costs and other technical frictions but also because China and India may be reluctant to increase their imports and corresponding payments sharply at a time when Russia is becoming a global pariah.”
Reflecting these concerns, oil prices have already jumped more than $20 a barrel and Goldman Sachs sees further gains potential. Hatzius said the investment bank estimates that the “persistent $20 shock” in oil prices will reduce real GDP by 0.6% in the eurozone, and hurt the cost of living for consumers.
Matt Smith, chief oil analyst at Kpler, told CNBC on Wednesday that “self-sanctions” would exacerbate pressure in energy markets.
“Even before the sanctions were announced, I think we had a lot of American companies actually rejecting the idea of buying Russian crude oil products,” he said. He raised the example of Shell, which was “completely reprimanded” for it Buy Russian oil at a discount. She later apologized and said she would Stop all purchases of Russian oil and gas.
“I think the self-penalty is really starting,” Smith said. “We’re already seeing a halt in buying.” “By all means, yes, self-punishment is as effective as the punishments themselves.”