The Big Idea
Stephen Stanley | March 4, 2022
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
While the sanctions imposed on Russia will have little direct impact on the U.S. economy, the run-up in oil prices will obviously exacerbate inflation and take a bite out of household budgets. A quick set of calculations indicates that the hit to consumers from higher gasoline prices so far will be noticeable but not a game-changer for the US economy. Luckily, households are in a very good position to handle the price shock given elevated holdings of liquid assets and a stellar balance sheet.
According to the US Energy Information Administration, the US in February consumed about 8.7 million barrels or 365 million gallons of gasoline a day. While demand will presumably decline in the face of steep fuel cost increases, assume for the purposes of our calculations that demand holds steady.
Gasoline prices had already been on a noticeable upswing long before Russia’s invasion of Ukraine, but the events of the past 10 days have created a sharp run-up in petroleum futures prices for both oil and gasoline (Exhibit 1).
Exhibit 1: Gasoline Futures Price
From February 23, the day before Russia’s full-scale invasion, to the close on March 3, the current month gasoline future has increased in price by 55 cents a gallon. I have no strong insight into whether gasoline prices will rise or fall from here. It will depend, of course, on how the invasion develops and on a number of other variables that are difficult to predict.
The 55 cent per gallon increase in gasoline futures since the invasion, if it is fully passed through to retail prices, would amount to $200 million a day—365 million gallons times 55 cents per gallon—or about $73 billion annualized. To put this in perspective, it amounts to roughly 0.45% of consumer spending and 0.3% of GDP. While a hit to GDP of three tenths of a percentage point is more than trivial, it is not enough to alter the trajectory of the economy in a meaningful way.
Alternatively, if we measure the increase in gasoline prices going back to the end of January to capture the rise that took place before the invasion, the price hike is likely to be closer to 70 cents per gallon. This would add another tenth or so to the cumulative impact on GDP.
One might also consider that other energy commodities could also be impacted. However, natural gas and electricity costs in the U.S. are determined predominantly domestically, so that the only other significant item to consider is heating oil, which only accounts for $20 to $25 billion of spending a year and would only be impacted by a few billion dollars.
There could also be some effect on food prices, but those would be more difficult to calculate. For example, wheat prices have jumped, but it is unclear how much that translates to in terms of the price of a loaf of bread or a hamburger bun.
While there will undoubtedly be other ripple effects, I would argue that the gasoline price surge will be the predominant factor in the impact on the consumer.
While financial market participants have been trained over the years to think of an energy price spike as a drag on the consumer, it also has obvious implications for inflation, which, in the current context, could be as important or more important to the outlook for monetary policy compared to the growth effects.
In the CPI, the 55 cent per gallon, or roughly 15%, jump in retail gasoline prices would add between five and six tenths to headline inflation. Such a move would likely be sufficient to push off any deceleration in the year-over-year inflation advance for at least a few more months.
Household finances cushion
A tally of $73 billion sounds like a huge amount of money, but the household sector is unusually well positioned to absorb such a blow. As of the end of the third quarter last year, the most recent available data, household liquid assets—mainly cash, bank accounts, and money market holdings—have risen by about $4 trillion since the start of the pandemic, or about $3 trillion more than the pre-pandemic trend would have suggested. Households saved much of the windfall that they received in the form of several rounds of federal rebate checks, supplemental unemployment benefits, and so on. Undoubtedly, families are hoping to spend some portion of that stash on all of the activities that were foregone during the pandemic, such as travel, dining out, amusement parks and more. And no one would take any enjoyment from using some of it to pay for more expensive gasoline. Nonetheless, a $75 billion hit to the consumer suddenly looks small in the face of $3 trillion in extra funds that households have at their disposal.
Duration of the hit
The final piece of the puzzle to consider is the length and persistence of any oil shock. Typically, oil price spikes last for a month or two but then fade. Alternative sources of supply arise. In this case, Russia could be subject to strong sanctions for much longer than a month or two, and its energy supply may be largely unavailable to the West for a while. Nonetheless, even if Russian oil ends up flowing mostly to countries like China that are not participating in the sanctions, that would free up oil from other sources from which China is currently buying to fill in the gap. As a result, it seems unlikely that the entire oil price spike seen over the past few weeks will prove persistent beyond the next few months.
To the extent that the price spike is likely to prove at least partially temporary, real consumer spending in the U.S. may be impacted for a few months but not for a prolonged period. In that case, the impact on both economic growth and inflation would be mostly rearranging the timing of increases over the next few quarters without having much of a durable impact on the underlying trends.