Geopolitical tensions linked to Russia’s invasion of Ukraine have roiled oil markets around the world. The global Brent crude benchmark has traded around $115 per barrel and the domestic West Texas Intermediate benchmark stood at $112. A year ago, those prices hovered around $60.
The elevated levels translate into rising wholesale and retail gasoline prices. Our model implies a near-term move of 10.4% to $4.11 per gallon with the risk of faster increases.
And if trends continue, consumers in higher-cost areas like California and the Northeast could be paying $6 per gallon for their gas in the next few weeks.
Higher gas prices, in turn, will result in rising inflation in the coming months. We recently published an estimate of what an energy shock like the one underway would look like.
Under that model, growth will slow by 1% over the next year and push up inflation by 2.8 percentage points, causing top-line inflation to move above 10% this year.
Should the geopolitical situation continue to deteriorate and Russia’s 6 million barrels per day of oil production be removed from global supply, there is a material risk that the price per barrel of oil could surge well above $130.
At that point, the sustainability of the current business cycle would be at significant risk, raising the possibility of a recession in the American and global economies.
