Inflation is the main economic and political concern right now. Before Russia invaded Ukraine on Feb. 24, it was possible inflation would peak early in 2022, then ease as supply chain kinks unwound and consumers returned to normal spending patterns.
Russia’s barbaric war on Ukraine changed that equation, sending oil and gasoline prices soaring as a major source of world energy supply suddenly looked endangered. Russia is the world’s third largest supplier of oil and natural gas, and markets prepared for several disturbing possibilities. Sanctions or boycotts could have prevented Russia from selling some or all of its energy. Russia could have weaponized its energy by refusing to sell, which would particularly harm Germany and other European countries heavily dependent on Russia's gas for winter heating. There was also a chance of wartime damage to energy infrastructure running through Ukraine, another threat to supply.
There have definitely been disruptions—but so far, they’re nowhere near the worst-case scenario. Russian gas continues to flow to Europe, and the global market has so far managed the loss of some Russian oil as nations such as the United States ban imports and financial sanctions make other sales difficult or impossible. As a benchmark, oil prices tell the story.
Analysts say that in a full-blown energy crisis, oil prices could easily exceed $150 per barrel. The record high in 2008 was $145—which would be $187 today, adjusted for inflation. The 2008 spike didn’t even stem from a supply shock, suggesting prices could go higher still if supply shrank abruptly, without any replacement oil backfilling the loss.
This hasn’t happened yet—despite the reluctance of swing suppliers such as Saudi Arabia and the United Arab Emirates to produce more. Before the Russian invasion, U.S. crude oil prices were around $92. After the invasion began, they hit a peak of $123. The price then fell back to $95 on March 16 and is now around $103. That’s about 70% higher than it was a year ago, which is doubtless a pain point for oil consumers. But it’s nowhere near the worst that a major war could produce.
Stock markets indicate a similar whiff of relief. Stocks drifted down the week before Russia's Feb. 24 invasion, then went lower still, hitting a low for the year on March 8. But the S&P 500 stock index is up 7% from the March 8 low and has recouped all its losses since Russia invaded, and then some.
The Russia-Ukraine war is obviously unpredictable, with a variety of outcomes possible, including some that would be terrible. But the direction of the war so far tells us a couple of important things we didn’t know when it started.
Ukraine's odds of winning are better than once expected
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One is that the odds of Ukraine prevailing and remaining an independent nation are a lot higher than analysts once thought. Russia still has a firepower advantage, but it has sustained massive losses of troops and equipment, while revealing its once feared army to be a creaky and poorly managed relic. Russian President Vladimir Putin, once considered a chess master who routinely outsmarted the West, has stumbled repeatedly, overestimating his own nation’s abilities while underestimating Ukraine’s. He also misjudged Western unity and Russia’s ability to withstand sanctions.
Ukraine has obviously demonstrated a remarkable ability to punch above its weight, and its capabilities may grow as Western weapons flood the country and Russian troops grow more demoralized. Russia can shell cities from a distance and cause widespread destruction, but that alone isn’t a path to victory. In four weeks of warfare, Russia has taken few or none of the cities that would be key to seizing political control of Ukraine, and it may never.
The relative stability of energy markets
Another surprise is that energy markets have remained relatively stable despite tougher sanctions on Russia than most analysts expected and a legitimate hit to global energy supplies. It’s worth noting that Saudi Arabia, which in the past often produced more to stabilize markets during shocks, has declined this time and basically told President Biden, sorry, you’re on your own.
Here in America, people wonder why U.S. drillers aren’t producing more. The United States is the world’s biggest oil producer, so can’t we solve this on our own? Yes and no. Often overlooked is the fact that the government doesn’t control U.S. oil production; private-sector companies do. And big ones such as Exxon and Chevron no longer want to crank up production just because prices tick up for a while. They’d rather focus on profitability and err on the side of underproducing.
The good news is that some independent drillers are, in fact, producing more, and for now, cashing in. The U.S. rig count hit 663 in mid March, up 50% from a year ago. That will bring more oil to the U.S. market and eventually lower gasoline prices, though it can take several months for the oil to flow through to final purchasers. If there are no other shocks, that new supply will help lower gas prices by the summer driving season.
There’s still a lot that could go off the rails in Ukraine. One big concern is the possible Russian use of chemical, biological or even nuclear weapons in Ukraine, which would force a draconian change in the U.S. and European response. Russia could miscalculate further and bring the war to a NATO country, turning a regional war into a bigger conflagration. It’s possible Russia could regroup and turn the battle back in its favor, and energy disruptions could still happen.
But Russia already faces the biggest humiliation of Putin’s 20-year reign, and a disastrous rupture with much of the world economy. Many onlookers think he can’t win, and it may just be a matter of time until Putin himself accepts that. Wars rarely end cleanly, but they do end, and it’s becoming possible to glimpse the last gasp of Putin’s Ukraine misadventure.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.
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