Economic impact of banning Russian oil
Global stock markets have been severely impacted this week as the Russian invasion of Ukraine has shown no signs of resolution. Early economic sanctions by the U.S., EU, and much of their allies targeted Russian banks, personal assets, and access to payment delivery system. These sanctions were unlikely to negatively impact the U.S. stock market, but the announcement that the U.S. would ban Russian crude, and the EU would decrease their exposure over the next few years has led to some economic fallout.
Most economists had been projecting a dramatic drop in Covid supply chain related inflation this spring, but the potential of rising energy prices has quickly soured that possibility.
What will the impact be on the U.S. economy?
Rising oil prices have the potential to increase (already high) inflation, which can erode consumer spending power, and negatively hurt corporate profits. A prolonged period of high energy prices would make inflation longer lived, and less “transitory” than had been expected.
However, the long-term impact to U.S. businesses should be small as Russia only accounts for one percent of total U.S. imports and around 5-7% of crude oil imports. If increasing energy prices dramatically slow-down transport infrastructure, supply chain issues will likely return and further push inflation upwards. Oil prices hit their highest point since 2008, as Brent crude (international benchmark) was up 3.7% and Texas intermediate (U.S. benchmark) was up 1.8%. National averages for gasoline prices were around $4 per gallon, which greatly overexaggerates the effect banning Russian oil has on U.S. supply. But oil is a global commodity, and so U.S. prices reflect global supply, and of course there is the added “opportunistic” behavior of petroleum companies’ inflation prices artificially due to geopolitical issues.
How does this impact your portfolio?
All markets tend to overreact to negative news, then slowly adjust over time. While there are certainly major headwinds to fighting inflation, the Russian oil market was never a significant part of the U.S. economy. However, uncertainty around inflation is going to drive high-risk technology and growth stocks downwards over the short-term, and likely provide some inflows to more stable government bonds, “blue-chip” stocks, and inflation protected securities. Obviously, stock in oil companies is going to benefit over the short-term, but investors should be very hesitant to gamble on individual oil companies when the energy market is so volatile. One small policy change could lead to massive drops, similar to what we saw in 2021.
The absolute worst thing investors can do during a potential prolonged inflationary period is hold cash. Even though there are certainly risks in the current stock market, you at least have the potential for growth to fight inflation. Holding cash will erode your spending power with no potential source for growth to combat the effects. Good inflation hedges right now include government bonds, gold and other precious metals, I-bonds, real estate, and blue-chip value companies.