The Russian invasion of Ukraine has drawn condemnation and sanctions from the United States, Europe, and their allies. The early stages of the conflict pushed oil prices upward and sent the U.S. stock market plunging, only to see stocks bounce back and drop again — with more volatility likely.1
Expensive oil
On Feb. 14, the spot price of Brent crude exceeded $100 per barrel for the first time since Sept. 2014. Prices eased with news that sanctions on Iranian oil might be lifted, but the full-scale Russian invasion again pushed Brent crude above $100 per barrel.2–3
Oil prices have been rising since April 2020 as the global economy reopened and demand increased more quickly than production. According to the U.S. Energy Information Administration, global production matched consumption in January 2022 and was projected to exceed demand in the coming months, which might pull prices downward.4 However, the Russia-Ukraine conflict could upset the balance.
The Russian threat
Russia produces about 10% of the world’s oil and is the second-largest exporter behind Saudi Arabia. Any disruption of Russian oil exports would have a significant effect on global supplies and drive prices higher.5–6
The United States imports only about 3% of its daily oil consumption from Russia, which could be replaced by other sources.7–8
Rising crude
It’s unlikely that Russia would cut off oil and gas supplies unilaterally because it depends on the revenue as much as Europe depends on the energy.9 Russia may shift energy exports from Europe to China, forcing Europe to develop other sources.10
Other Russian exports that may be affected by sanctions or a prolonged conflict include wheat, corn, and precious metals like nickel, aluminum, and palladium. Russian and Ukrainian grain supplies are essential to many countries in the Middle East, Africa, and Asia. While any breakdown of these supplies would not directly affect the United States, they could cause widespread hardship and place greater strain on the global economy.11
Pain at the pump
Oil prices affect gas prices, and high gas prices are exacerbating a broad inflationary trend driven by supply-chain disruptions and high consumer demand. While general inflation increased 7.5% for the 12-month period ending in January, gas prices increased 40%, and the Russia-Ukraine conflict has pushed them upward.12
With the Russian invasion, it’s likely that gas prices may spike higher, driven by global concerns rather than supply issues in the United States. Whether prices stay high might depend in part on consumers. If gasoline consumption remains high regardless of price, it would feed the inflationary spiral. If consumers cut back on driving in response to high prices, it could bring prices downward.13
Geopolitics and the market
The market ups and downs triggered by the Russian invasion suggest that investors can expect rocky times ahead, but it’s impossible to guess how long volatility might last.
Regardless of how events unfold, the stock market is primarily driven by U.S. business activity. Although high oil prices and armed conflict are causes for concern, it’s important to make investment decisions based on logic rather than emotions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
1) The Wall Street Journal, February 24 & 28, 2022
2, 4, 7) U.S. Energy Information Administration, 2022
3) oilprice.com, February 18, 2022
5, 8, 13) The New York Times, February 14, 2022
6, 9) oilprice.com, February 12, 2022
10, 11) The New York Times, February 22, 2022
12) U.S. Bureau of Labor Statistics, 2022
