Mon, April 22, 2024

Simon Says: War is not good for the economy, here or abroad

Dr. Simon Medcalfe, AU Economics Professor

I have been asked over the past 10 days to provide an opinion on the impact of the Russia invasion of Ukraine on the local economy. I have struggled to say anything but the blindingly obvious: Oil prices will go up, and so therefore will gas prices!

With a little reflection, here are my more considered thoughts: War is not good for the economy!

A map illustrates areas of conflict in Ukraine. (Illustration via Wikimedia)

Anyone who has seen the physical destruction in Ukraine, or followed the depreciation of the ruble, and subsequent hike in Russian interest rates, could not fail to see deteriorating economies. Even in the United States, war is not good for our white-hot economy. Rising gas prices, which hit a record $4.14 on Monday and will continue to rise, will cause the headline inflation rate to increase even further.

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On Tuesday, President Biden with bipartisan support, announced a ban on imports of Russian oil, gas and energy. The United States imports about 8 percent of its energy needs from Russia, so this will also increase prices.

Gas prices rose to $4.09 per gallon in most of the CSRA on Monday. (Photo by Gary Kauffman)

The United Kingdom and Europe also announced a tapering of imports of Russian energy. Europe is much more reliant on Russian oil and gas than the United States, with 40 percent of its gas and 30 percent of its oil imported from Russia. Additionally, Russia has threatened to unilaterally restrict oil and gas exports.

Even though petroleum makes up less than 1 percent of electricity generation in the United States, natural gas makes up close to 40 percent. As natural gas prices start to rise this will affect other energy prices such as electricity to cool our homes this summer. Rising oil prices will have secondary effects on inflation because distributing goods will become more expensive.

On Sunday, my wife and I made the very deliberate, conscious decision not to buy some Russian strawberry jam. Another area that may be affected is trade, particularly agricultural products.

Russia is the 20th-largest source of U.S. imports.

Russia and Ukraine are known as the “breadbasket of Europe,” exporting about 25 percent of the world’s wheat and half its sunflower products (seeds and oil). War will hit crop production and distribution (have I said war is not good for the economy?) and I have read of wheat prices doubling this year, increasing the cost of your bread and cereal.

There is still a lot of uncertainty, but the length of the war and the response of (particularly) Western governments will determine the extent of the impact on the local economy.

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