War in Russia drives up gas prices and upends financial markets

It’s an exaggeration, but not much. The price of gasoline was already rising before Russia invaded Ukraine on February 24, and it has risen every day since then. As the single most important measure of inflation that most Americans see on a regular basis, this daily increase is a big deal in and of itself.

But it’s more than that: it’s a tax on workers, a drag on economic growth and a clear emblem of the acute problems affecting a range of financial assets, from stocks and bonds to commodities like gold, nickel and wheat.

These problems are minor compared to the anguish that the Russian attack inflicted on the Ukrainians. But it should be noted that Russia’s brutal invasion and Western efforts to counter it and help Ukraine are reverberating through global financial markets, affecting, to a greater or lesser extent, virtually everyone in the United States. United and in the world.


Consider that since the Russian invasion, the average regular gas price in the United States has risen 17% through Wednesday. It is up 23% since the start of the year.

On Tuesday alone, the average price of a gallon of regular fuel rose 8 cents to $4.25, according to statistics compiled by the AAA automobile club, and is much higher in states like California, where a gallon of regular fuel costs an average of $5.57. For various reasons, the price in many communities is much higher than that.

Further price increases, and big ones, are already inevitable.

Gasoline prices are based on the cost of crude oil, which jumped in response to the invasion and Western sanctions. With the announcement on Tuesday that the United States and Britain would ban imports of Russian energy, the rise in global oil prices looked far from over.

Where oil prices go, wholesale and retail gasoline prices eventually follow, as Paul Ashworth, chief U.S. economist for Capital Economics, explained in an interview on Monday. Even if the price of oil didn’t rise (although it already has), the average U.S. retail gasoline price would hit $4.50 a gallon in April, he said. declared.

“It’s just the way markets work,” he said. Further increases seem likely.

In fact, after the U.S. and U.K. announcements, Mark Zandi, chief economist at Moody’s Analytics, said on Twitter on Tuesday that he expects global oil prices to rise to $150 a barrel – an increase in l 20% order – “at least for a few weeks until things start to pick up. That would translate to about $5 for a gallon of regular unleaded gasoline, on average.

Current gasoline prices are already above previous highs, which were set in the summer of 2008, if inflation is not taken into account. If you factor in inflation, the picture isn’t very comforting either. In July 2008, a gallon of regular fuel cost about $5.35 in today’s money. Remember what happened next? Two months later, Lehman Bros. collapsed, helping to trigger a global financial crisis, a stock market crash and a severe recession.

Gasoline and oil prices were not the immediate causes of these calamities but, as James D Hamilton, professor of economics at the University of California, San Diego, concluded in a 2009 paper, they “contributed materially” to the recession.


Price increases for gasoline and other basics are already hurting people on tight budgets who have to drive to work or school and can’t cut back on food purchases.

Yardeni Research, an independent economics and stock market consultant, estimated that the average U.S. household would spend about $3,100 on gasoline in 2022, based on December 2021 price levels. Price increases since then mean households would have to pay about $2,000 more.

It doesn’t matter if you’re rich or own an electric vehicle. But for many workers, this amounts to a tax.

“A lot of people have little choice,” Ashworth said. “They have to drive.”

In addition, food prices have increased. Russia and Ukraine accounted for 28% of world wheat trade and 18% of corn exports last year. The price of wheat futures has risen 37% this year and 28% since the start of the war on February 24.

The story is similar for corn, barley and sunflower oil, raw materials for which Russia and Ukraine are major players. Shipments through Black Sea ports have been blocked, financial sanctions are limiting trade and futures prices are soaring.

This is starting to translate into food inflation in the United States – and most likely a hunger crisis around the world in the months to come.

In the United States, Yardeni Research estimates that the average household will need to spend $1,000 more on food this year, given the difference between current price trends and those of December 2021.

Together, these increased costs for food and gas this year could add up to around $3,000. They have the effect of a heavy, extremely regressive tax, in that they hit the low-income people much harder than the wealthy.


This creates additional challenges for the Federal Reserve, which already has plenty of them.

Inflation has been heating up for a while. February’s consumer price index, due out Thursday, is expected to be even higher than the 7.5% annual rate reported last month.

Fallout from the war is likely to translate into high inflation next month as well. After that, year-over-year comparisons with high inflation caused largely by supply chain disruptions during the pandemic will start to improve the inflation numbers.

But if commodity prices continue to rise, inflation numbers won’t come down as fast as I and many economists thought only a month ago. Thus, the Fed will remain under considerable pressure to begin raising interest rates at its meeting next Tuesday and Wednesday. Higher interest rates could slow the economy.

At the same time, war-imposed price hikes and cuts in consumer spending are likely to dampen the economy. With the combination of rising interest rates and an oil shock, two nasty words are coming back into circulation: stagflation and recession.

These are just possibilities, but worries about them are weighing on the markets.


Yields on long-term bonds have fluctuated, suggesting markets have little conviction about the direction the economy is headed.

If the Fed raises rates, it won’t take much for short-term interest rates to rise above the level of long-term rates, which would be another bad omen for the economy. Such juxtaposition of interest rates, known as an inversion of the yield curve, has often preceded recessions.

The broader stock market has had one of its worst starts since 1900, according to Bloomberg records. Markets swing up and down. But already this year, the S&P 500 has fallen more than 10% from its peak, a decline known on Wall Street as a correction, while the Nasdaq composite has fallen more than 20% from its November peak. , putting it in what Wall Street calls bear market territory.

Commodity bets paid off. The iShares S&P GSCI Commodity-Indexed Trust, an exchange-traded fund that tracks a diversified group of commodities, is up 51% this year. Energy stocks soared, but nothing else did well.

For long-term investors with balanced, diversified portfolios containing stocks and bonds, drops like this happen periodically. They may be painful, but if history echoes, the stock market will recover and surpass past highs.

If the effective shutdown of Russian financial markets and rising commodity prices lead to a steeper decline in stock markets or other unintended consequences, the Fed will be in a tough spot. It is moving towards tighter monetary conditions but may have to backtrack and engage in another bailout, as it did in March 2020.

It’s a risky time, as Charles Schwab’s Liz Ann Sonders and Kevin Gordon said in a note Monday. It’s conceivable that the war could end abruptly and energy prices drop sharply, but “betting on it in the short term seems like a wild ride.”

It is remarkable that in March 2022, decades after the oil shocks of the 1970s and the fall of the Berlin Wall, we were worrying about oil and gas prices and a new Cold War, and not focusing on the fight against climate change and the end of the pandemic. But to return to these preoccupations, it will be necessary to go beyond the Russian war.

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