Dallas Fed: Global recession 'seems unavoidable' if Russian sanctions continue

Warning in report “The Russian Oil Shock of 2022” was made prior to President Joe Biden calling for additional sanctions Monday.
U.S. dollar notes

The Dallas Federal Reserve is warning that ongoing sanctions against Russia will lead to a global recession.

The warning, which comes in the Fed report “The Russian Oil Shock of 2022,” was made prior to President Joe Biden on Monday calling for additional sanctions against Russia after reports of mass killings and war crimes committed by Russian troops in Bucha, Ukraine.

Russia denies the claims made by Ukrainian eye-witnesses. Biden called for a war crimes tribunal and the U.N. High Commissioner for Human Rights called for an investigation.

If Russian sanctions continue, and international markets don’t have access to Russian exports of oil, natural gas and key agricultural exports for the rest of the year, a global recession is inevitable, Dallas Federal Reserve economists project in the report.

The economists don’t address whether sanctions should be imposed; they focus on economic factors contributing to a global recession.

In the Fed report, economists Lutz Killian and Michael Plante argue that immediately after Russia invaded Ukraine, “early estimates suggested that perhaps 3 million barrels a day (mb/d) of petroleum production – almost 3 percent of world production – had been effectively removed from the global oil market, constituting one of the largest supply shortfalls since the 1970s.”

Russia accounts for roughly 10% of global petroleum production.

The report refers to the “oil shocks” of 1973 and 1979 when the U.S. and other countries suffered economically from OPEC policies and weren’t energy independent.

Since then, however, the U.S. became the largest producer of crude and natural gas worldwide. It has the opportunity to become fully energy independent if those in Washington prioritized energy policy as national security policy, industry leaders argue.

“Our nation has an opportunity to reshape American energy policy that recognizes oil and natural gas as an asset rather than a liability,” Texas Oil and Gas Association President Todd Staples said.

Under the Trump administration, in 2019, the U.S. became a net exporter of energy for the first time since 1953, the EIA reported, with Texas leading the nation. In 2018, it surpassed Saudi Arabia to become the world's largest producer of petroleum. The increases in production in 2018 “was one of the largest absolute petroleum and natural gas production increases from a single country in history,” the EIA reported.

Texas’ and the U.S.’ energy prowess “gave us affordable energy, thousands of new jobs, economic growth, and national security,” Texas Railroad Commissioner Wayne Christian said. “Our country achieved this by simply empowering, instead of attacking, domestic oil and gas producers.”

Texas Gov. Greg Abbott has argued that Texas already leads the U.S. in crude production and can easily generate more if the Biden administration will “get out of the way.”

Rather than encourage increased U.S. oil and gas production, the Biden administration has turned to the regimes of Venezuela and Iran. Even if negotiations with these countries were reached, production won’t be fast enough to thwart a recession, the Fed economists argue.

“The increases would be much smaller than the shortfall that likely must be covered,” thy wrote.

Because of COVID-related shutdowns that led to layoffs, and federal policies restricting domestic production, American producers aren’t in a position to ramp up production fast enough to meet the demand or offset worsening inflation-associated costs.

“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 Fed economists argue.

If the bulk of energy exports from Russia were to be “off the market for the remainder of 2022, a global economic downturn seems unavoidable,” Killian and Plante wrote.

In addition to these factors, other consequences of sanctions exist. Because nearly 30% of wheat harvested comes from Russia and Ukraine, and a large global share of fertilizer production, supply of both is expected to be limited.

“Wheat and fertilizer supplies could be disrupted in 2022 and beyond and make it more costly to put dinner on the table,” they said. Additionally, “the diminished supply, along with a shortage of fertilizer produced from natural gas, will drive up global food prices and reinforce the growth-retarding and inflationary effects of higher fuel prices.”

However, the U.S. may fare better than other countries, Andy Lipow of Houston-based Lipow Oil Associates LLC, told The Center Square.

“The high cost of crude oil and record prices for diesel fuel combined with increases in the price of wheat, corn, soybeans, rising food insecurity and the higher cost of raw materials such as steel and aluminum may first lead to a recession in Latin America and Southeast Asia where per capita income is far less than in the United States or Europe,” he said. “This could result in slowing economic growth in China and India, raising the risk of a recession in the rest of the world.”