What Russian invasion means for U.S., California economies
OIL PRICES on both sides of the Atlantic jumped toward or above $100 a barrel after Russia invaded Ukraine. But they then gave up some of the gains. By Jon Healey, Kenan Draughorne, Suhauna Hussain and Don Lee
Russia’s attack on Ukraine comes at a vulnerable time for economies around the world. Inflation is already at a worrisome level, consumers are paying more for basic goods across the board, and the global supply chain is still recovering from pandemic disruptions.
The invasion, which has upended geopolitics and threatens a humanitarian crisis in Ukraine, put stocks on a roller coaster and sent the prices of wheat, oil and other commodities higher Thursday. Here, we answer some questions on how this might continue to play out for the economy and what this means for consumers in the U.S. and California.
Will food and gas prices in the U.S. rise?
Russia and Ukraine are major producers of a range of commodities — oil, natural gas, grains, metals — whose prices rise during big global events such as war. Those higher prices eventually ripple to grocery stores and the gas pump, and this conflict is no different.
“It is the American middle and working classes that will bear the burden of adjustment caused by another European war,” said Joseph Brusuelas, chief economist at the accounting firm RSM.
The U.S. imports relatively little from Russia directly, but what happens there and in Europe has wide knock-on effects.
Russia is the world’s second-biggest natural gas producer, behind the U.S., and it is among the top three in oil production, along with the U.S. and Saudi Arabia, supplying about 10% of what’s consumed worldwide.
Russia is also a major producer of wheat, palladium — used in catalytic converters to clean car exhaust fumes — and nickel. Ukraine is a major exporter of corn and wheat, and a key route for the flow of Russian natural gas to Europe.
Broadly, two scenarios could contribute to sending prices on this range of commodities even higher:
More supply-chain disruptions, affecting the distribution of gas and wheat across Europe, for example. Russian cyberattacks , which some experts predict may now become more frequent, could also worsen problems with global supply chains. That would drive food prices up.
Sanctions on Russia by the U.S. and allies, mainly those on Russian oil exports, could squeeze markets even more and drive oil prices higher. The Biden administration has not moved to sanction Russian oil. President Biden on Thursday announced new sanctions against Russian banks and said the U.S. would block high-tech exports to Russia.
Europe is a much bigger consumer of Russian oil than the U.S., but sanctions on Russia’s output would ripple through the global market, said Dean Foreman, chief economist at the American Petroleum Institute. Already, oil prices are high partly because there is not enough supply to meet global demand. “Any significant disruption to that would have to be made up somewhere else,” he said.
Oil prices on both sides of the Atlantic jumped toward or above $100 a barrel — their highest levels since 2014 — early Thursday. They then reversed course after Biden made clear that sanctions were designed not to disrupt energy markets, and the steps he announced were less sweeping than some expected.
The price of U.S. oil closed up 71 cents at $92.81 a barrel Thursday. The spot price for natural gas in Europe, which relies on Russia for the fuel, jumped more than 50%.
Wholesale prices shot up for heating oil, wheat, corn and other commodities.
What else might get more expensive?
Your COVID-19 test kits, your Amazon order, your lip balm — and more.
Petrochemicals derived from crude oil are used to make a range of medical and personal care products as well as packaging materials. Huge demand for these products is one of the factors that drove oil prices higher in the pandemic to start with — millions of COVID test kits, a surge in online shopping and all the packaging and delivery truck fuel associated with that.
The demand for petrochemicals used in medical products and packaging rose to the highest level since 1965, according to the petroleum institute. The demand for truck fuel was significantly higher than its pre-pandemic level as well.
What can we expect to see in California?
Californians could feel the bite of higher crude prices even more. Gas prices here are well above those in the rest of the country — the current average price in the state, about $4.77 a gallon, is about $1.20 more than Thursday’s U.S. average, according to AAA .
California doesn’t import any oil from Russia. Still, the absence of a major exporter such as Russia would increase global demand for oil from other countries, which could affect the retail price in California. The state has become increasingly dependent on oil imports as it attempts to move away from fracking , making it increasingly vulnerable to external price swings.
Higher energy costs typically also affect agricultural production, a big part of the state economy, by crimping crop yields and raising consumer prices on produce. Economists said it was too soon to see these effects on California farms, though another factor looms: a fertilizer shortage.
Russia is a major global producer of fertilizers, which are already at record-high prices, and turbulence in the region will threaten their supply and raise prices even more.
Another area of particular vulnerability: cybersecurity, especially in Silicon Valley, Hollywood and at the ports.
“Between Los Angeles’ content and Silicon Valley and Seattle, which control software, those are places of vulnerability,” said Jonathan Aronson, a professor of international relations and communication at USC. “People get paranoid about who’s watching you and when. That’s a place where some trouble could break out.”
The Port of Los Angeles has already been preparing for higher cybersecurity threats, Executive Director Gene Seroka said. The L.A. port sees more than 40 million cyberintrusion attempts a month, more than double the number before the pandemic, he said.
Will sanctions on Russia affect California trade?
Russia is not among California’s top export markets, and it’s too soon to say, local officials and experts said. The U.S. Commerce Department announced export controls meant to restrict Russia’s access to technology, primarily in the defense, aerospace and maritime sectors. “It feels a bit premature,” said Susanne T. Stirling, vice president of international affairs at the California Chamber of Commerce. But looking at California’s trade with Russia can give clues.
Out of about $175 billion in California exports to foreign markets, approximately $400 million worth of goods flow to Russia each year. A quarter of exports to Russia are computer and electronic products. Chemicals, manufactured commodities and machinery are other large exports to Russia.