The more Russian oil supply comes off the market in the coming months, the higher the chances of a global recession later this year, economists and analysts have started to warn since Russia invaded Ukraine a month ago.
The latest warning came this week from two economists from the Research Department at the Federal Reserve Bank of Dallas. Should a large part of Russia's energy exports remain off the market throughout this year, a global economic downturn seems unavoidable, Lutz Kilian and Michael D. Plante wrote in an analysis on Tuesday. The analysis also warned that this slowdown could be more protracted than the 1991 recession following the oil supply shock from Iraq's invasion of Kuwait in 1990.
This oil supply shock crisis is different from previous ones because it's not the result of a war in a major-oil producing country but rather the refusal of many banks to back transactions in Russian oil, Dallas Fed economists noted.
Buyers, especially in the West, are shunning trade with Russian oil, tanker rates for Russian destinations shot up to record levels, also because of the war premium for vessels in the Black Sea. Then there is mounting public pressure on companies not to involve themselves with the Russian oil cargo trade anymore. Such was the case with supermajor Shell, which was slammed for buying a cargo from Russia and later apologized for this as it announced it would immediately stop all spot purchases of Russian crude and shut its service stations, aviation fuels, and lubricants operations in Russia.
"Oil tanker rates for Russian destinations rose to record levels, reflecting public pressure on oil companies to avoid purchasing Russian oil, fear of official sanctions on Russian energy exports at a later date and attacks on vessels in the Black Sea. This outcome was largely unanticipated, as U.S. and European Union sanctions originally deliberately excluded Russian energy exports," the Dallas Fed's economists wrote.
There's a general consensus among analysts that soon, around 3 million barrels per day (bpd) of Russian oil may not make it to the market.
"If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991," Kilian and Plante say.
Since there isn't much that other oil producers can offer in terms of immediate supply, and the two countries with enough spare capacity—Saudi Arabia and the UAE—have so far signaled an unwillingness to fill the gap, a shortage of supply is to be expected.
"Unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period to eliminate the excess demand for oil," the economists at the Dallas Fed wrote. "This demand destruction is likely to be assisted by the recessionary effect of higher natural gas prices and other commodity prices, especially in Europe," they added.
Last week, Moody's Analytics said in a report on the Fed's first interest rate hike since the end of 2018 that "Most of our probability of recession models suggest that the odds of a recession in the next 12 months have risen recently."
"Russia's invasion of Ukraine could cause a recession. The principal channel through which it impedes the global economy is energy prices," Chris Lafakis, Director at Moody's Analytics, wrote.
"Every recession in the past 50 years has been preceded by an oil price spike, and it is déjà vu all over again," Lafakis added.
Still, analysts say that recession is not the most likely scenario, but the risks of such a slide in the global economy have risen considerably over the past month since Russia invaded Ukraine.
ADVERTISEMENT
Russia's war in Ukraine has reshaped the economic outlook, with lower global GDP expected now, but "the world economy has sufficient resilience to avert a recession," IHS Markit said in an analysis on Tuesday.
Recession this year "is not the most likely scenario, but obviously the risks of recession have risen quite considerably," Moody's Analytics chief economist Mark Zandi told Fox Business' Maria Bartiromo on Tuesday.
"I'd put the risk of recession now in the next 12 months, at least one in three. That's uncomfortably high," Zandi added, but noted that the most likely scenario is slowing growth, not outright recession.
By Tsvetana Paraskova for Oilprice.com
More Top Reads From Oilprice.com:
- Big Oil Is No Longer “Unbankable”
- The World Could See A Record-Breaking Oil Supply Shock
- Huge Russian-Run Iraqi Oilfield May See Near-1 Million Bpd Output Boost
The first unsubstantiated claim is that customers are shunning Russian crude oil imports. If this is true, we would have seen Brent crude hit $140-$150 a barrel by now. The oil price doesn’t lie.
Rising oil tanker rates adversely affect those who receive their imported oil supplies by sea and those who export oil by sea. The bulk of Russian crude oil exports particularly to China and the EU go via pipelines. Therefore, rising cargo rates affect oil consumers around the world far more than Russia.
I have always maintained that in normal circumstances the robust global economy that has been prevailing before the Ukraine conflict came on the scene, could tolerate a Brent crude oil price ranging from $100-$110 a barrel.
Whilst allowing that the geopolitical price premium over the Ukraine conflict is temporary and would disappear once a peaceful settlement is reached, the current prices are above the tolerance level of the global economy. If they continues for long at that level, they could precipitate a demand destruction and spark a global recession.
An example of flawed assumptions is the claim that there’s a general consensus among analysts that soon around 3 million barrels a day (mbd) of Russian oil may not make it to the market. How could this happen if Russia hasn’t reduced its exports? Moreover, such a consensus is based on an unsubstantiated claim that customers are shunning Russian oil. There is no evidence of that otherwise it would have been reflected in far steeper prices rises.
The unvarnished fact is that the global oil market can’t do without Russian oil exports and furthermore there is no one single producer or even a group of producers including OPEC+ and US shale oil that could replace 8.0 mbd of Russian crude now or ever.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London