On Tuesday, March 8, President Biden announced a ban on all Russian oil imports to the United States. "The decision today is not without cost here at home,” he said. “Putin's war is already hurting American families at the gas pump. Since Putin began his military build-up at Ukrainian borders, just since then, the price of gas at the pump in America went up 75 cents, and with this action it's going to go up further. I'm going to do everything I can to minimize Putin's price hike here at home."
What will this mean for the US and global economy? How much can prices rise, and what does this mean for inflation and job growth? Professor Gabriel Mathy, an economist from AU’s Department of Economics, answers our questions, proposes a new Marshall Plan, and gives advice on what we can do to reduce our reliance on fossil fuels.
Q. Even before President Biden’s announcement on March 8, Americans were already facing record-high gasoline prices, just as many people are planning summer road trips and going back to the office for the first time in two years. How will a ban on Russian oil affect gas prices in the United States?
A. It will raise gas prices for Americans. Russia is a major oil producer, and while the United States doesn’t import much Russian oil, further sanctions will reduce the Russian ability to export oil, reducing global supply and raising prices at the pump in the USA. Those summer road trips will be much more expensive than last year, so closer destinations of a vacation accessible by rail like New York could be good options.
Q. Gas prices affect overall household budgets, and these increases come at a very bad time, with inflation up 7.9 percent in the past year. How will consumers react to this new reality? How will it affect their overall spending? And, in turn, how will these projected consumer spending habits further affect the economy?
A. Consumers are going to cut back on other spending to be able to afford gas. This is why recessions often accompany big oil shocks like this as spending overall (on things other than oil) fall, reducing how much companies can sell, which reduces economic growth and hiring. While inflation was high before the Russian invasion, job growth was strong, now we will see higher inflation and weaker job growth. The economic prospects for the next few months (at least) are not good.
Q. What would be the worst-case scenario, and are there any bright silver linings as we look forward?
A. The absolute worst-case scenario involving a broader war with Russia, a major nuclear power, is not economic. The worst-case scenario for the economy is a serious stagflationary global recession, with high inflation and a recession. This case is, unfortunately, not that unlikely, and some European countries with closer economic ties to the Russian economy will see recessions.
In terms of optimism, we can hope for a swift peace treaty and withdrawal of the Russian invasion forces and a ratcheting down of sanction to more reasonable levels, which will result in an easing of the economic crisis. There should be a Marshall-Plan style reconstruction program for Ukraine, which is the poorest country in Europe.
Q. What are the economic impacts of sanctions, and will they persist? What can the United States do to foster economic stability in the region after the Russian invasion?
A. Sanctions are a big reason for the economic problems of inflation that will worsen if oil price prices stay high. Unfortunately, given past experience, temporary sanctions imposed during a crisis often become permanent sanctions meant to punish. If this is the case, that will mean the economic fallout will continue, both in the United States, but especially in Russia. We are far beyond sanctions that just hit Putin and his inner circle, and I hope there will be a sense that the kind of comprehensive sanction the United States is imposing will cause enormous suffering for the Russian people. The Russian economy is going to implode, and hyperinflation is not unlikely at this point. Sanctions are justified to end the war quickly, but we need to allow the Russian economy to stabilize once there is peace. A country with nothing to lose is not one that will be peaceful. The United States already missed a chance for a Marshall-Plan style program to help Russia in its post-communist transition, and Russia went down an authoritarian path while the countries that received Marshall Plan aid became free democracies. The economic collapse in Russia in the 1990s after the dissolution of the USSR largely set the stage for the Putin government. We should consider how to learn from our mistakes, especially if there is a new, better government in Russia soon.
Q. What can people do? Obviously not everyone can run out and purchase an electric car right away. Are there other things that ordinary people, or the US government, can do to alleviate some of this suffering?
A. Unfortunately, there is not that much that can be done in the short run. On a personal level, try to work from home if you can. Take the metro, ride a bus, ride a bike, and walk whenever possible. These are all ways to reduce gasoline usage. New cars are still in short supply due to the microchip shortage, which has eased a bit but is still ongoing. There are long waitlists for most electric cars. While other cars are also in shorter supply than before, getting a more fuel-efficient vehicle is an option. Governments should make all public transit or any other alternatives to driving free and for the duration of the crisis. Governments should expand service whenever possible and build up better service going forward.
But ultimately, we will need to solve these problems on a societal level, and there are few solutions the government can do in the next few months that will make a difference. It’s clear the enormous SUVs and trucks that Americans bought in increasing numbers in the past few years were a terrible mistake on many levels. We’ve built our cities to be less dense than that should be, requiring long commutes by car with poor public transit options. Despite the growing threats of climate change, we have not really taken the problem seriously. Now we are seeing that we are vulnerable economically from our adversaries due to our continued use of fossil fuels.
For reasons of climate and national security, we need to phase out fossil fuels ASAP and electrify our economy, using carbon-free electricity. Solar panels have fallen in price in ways many homeowners may not realize, and the return on your investment is both safer and larger than many other investments. All new home construction should be mandated to include a heat pump system to reduce natural gas use. Fuel economy standards need to be tightened to push electrification of cars forward faster. Whenever you can, support politicians that will end our reliance on fossil fuels.