Energy prices have come down slightly from their immediate post-invasion highs but remain well up from their levels before the fighting started. The agony of Ukraine and the question of Russian energy supplies still stand in the forefront of most current thinking on energy. Understandable as this focus is, it would be a mistake to attribute all the rising cost of energy only to these events. The pressure on energy prices has more fundamental roots as well – in for instance President Biden’s decision to discourage domestic oil and gas production and in the general inflation that has had a disturbing presence for over a year now. Even if the war and the associated sanctions were to disappear overnight – hardly likely – energy prices, perhaps after a brief further retrenchment, would remain high by historic standards and almost certainly begin to rise again.
The recent surge in prices certainly deserves the headlines it has received. In just days after Russian troops crossed into Ukrainian territory, the price of a barrel of crude oil rose some 35 percent from $92.00 to $124.00. It then drifted down to about $95.00 only to rise again to $116.00 in late March. Since the invasion, natural gas prices have risen some 23 percent. Most important to the American consumer, the price of gasoline at the pump has risen, with the national average price of a gallon going from $3.50 just before the invasion to a high of $4.34 before coming off ever so slightly to $4.11 in late March.
Little of this rise has to do with actual shortages. Rather the immediate surge reflects feelings of fear and uncertainty. Severe as the sanctions on Russia are in other respects, they pointedly excuse Russian sales of oil. Even the decision to throw Russia out of the SWIFT global financial communications network included a carveout for Russian energy sales. This huge exception was not done for Russia’s sake. It was done to spare Europe, which is highly dependent on Russian exports of oil and natural gas. Any interruption in that flow now would plunge Europe into recession, imposing considerable hardship on elites and ordinary people alike and perhaps eroding the solidarity of the alliance now trying to punish Russia for its unprovoked aggression. Nor is the recent White House decision to ban imports of Russian energy a factor. Russian oil and natural gas amount to a mere 2.5 percent of domestic U.S. energy consumption.
Instead of actual shortages, the recent price hikes reflect a scramble to get ahead of what might happen. Fears that the United States and its allies might soon ban Russian oil altogether have prompted pre-ordering and hording, both of which created an immediate increase in demand. Fears that Putin, in extremis, might spite his tormenters by refusing to sell Russian oil and natural gas have also played a role in encouraging such buyer behavior. It also seems that just as fears prompted an immediate jump in demand, some supply interruptions have occurred because insurers are reluctant to cover Russian shipments and some carriers are reluctant to facilitate those shipments.
For all this fear, there is evidence that the world could do without Russian supplies. According to the International Energy Agency, Russia at most supplies the world with 10 percent of its energy consumption. Marginal production facilities could easily cover such a loss. Because it would take time to work up such sources and bring their output to where it is needed, the immediate scramble of pre-ordering and hording seems reasonable, but matters are not, as some more hysterical media treatments have suggested, that Russia has the world in an energy stranglehold.
Nor has it helped that the Biden administration has discouraged North American fuel production. This White House has hampered the flow of Canadian oil to consumers by shutting down the Keystone XL Pipeline, while government agencies in Washington have made efforts to limit conventional drilling and fracking. Mostly because of the actions of this administration and the implicit threats they level at anyone considering investing in oil and gas, U.S. fossil fuel production has fallen some 10 percent below late-2019 levels. The United States has ceased to be an energy exporter and returned to the status of net importer. Had this North American production been available, there can be little doubt that its existence would have blunted the immediate price pressures of the last few weeks.
Behind all these more immediate considerations is the effect of this country’s general inflation. In the past 12 months, consumer prices in the United States overall have risen some 8.0 percent, a pace not seen for forty years. Energy prices have led that increase. The Labor Department’s measure of all consumer energy prices has risen 26 percent during this time, the bulk of the increase, some 22 percent, occurring before the invasion was even rumored. Instead of war, sanctions, or even post-pandemic supply-chain disruptions, the inflation, in its generality and its particulars, has its roots in the decades-long stretch during which Washington — under both Republican and Democratic administrations – has run huge budget deficits and worse, at least where inflation is concerned, the Federal Reserve (Fed) has financed those deficits with an extremely expansive monetary policy. This practice of effectively financing government spending with the digital equivalent of the printing press is a classic prescription for inflation.
Fundamental inflationary pressures will remain, whatever the outcome of today’s conflict. To be sure, the Fed has begun to curb its monetary excesses. In time such efforts should ease the general inflationary pressure. But it will take time and no doubt much more such Fed restraint to curb this fundamental upward pressure on prices, including energy prices. President Biden has chosen to blame the Russians for all the price pain. It makes political sense for him to do so. With apologies to the great wisdom of Mandy Rice-Davies in a very different context: “He would say that, wouldn’t he?” To admit to the larger picture would indict his Fed, his predecessors, and partly himself. But presidential rhetoric cannot change the reality that fundamental inflationary pressures will likely outlive the immediate effects of the conflict, the fears, and the sanctions.