Why Are Gas Prices Going Up Because of Russia

Thank you for sharing!

We all watched in horror last week as Russia invaded Ukraine, completely unprovoked. We have also watched oil and gas prices escalate in recent months as the likelihood of this conflict escalated. President Biden, in announcing the initial sanctions against Russia, also indicated “defending freedom will have costs for us as well and here at home.” And as many of you have likely already noticed, those costs here at home largely come in the form of rising energy prices, with food prices likely to follow. But not defending freedom can be even costlier. Late last week, I collected your questions around Russia-Ukraine, why are gas prices going up because of Russia, and the broader economic implications of this conflict both here in the US and around the world. Here are some facts to frame and address those questions.

How Does Russia Invasion of Ukraine Affect Gas Prices?

Before we delve into the details of the global energy market and global trade dynamics, it is important to provide some background and context on the countries and international organizations surrounding this conflict. Full disclosure – I am not an expert in political science or foreign policy, and broadly will stick to the economic facts here, but this background is important to better understand the economic impacts as well.

First, Some Background…

To better understand the conflict and economic impact, it’s important to understand some of the history and basic data points of the players involved. In our global economy, conflicts are no longer just about how great your military might is… it’s also the weight you carry economically in the broader world.

While Russia and Ukraine are the countries directly engaged in war, the US and Germany as part of NATO, as well as Germany’s (and Europe more broadly) dependence on Russian energy, and China as a major trading partner with Russia and the last major country to distance itself from Russia, following Putin’s actions last week.

Ukraine is the second-largest country in Europe by land size, second only to Russia, with a population of over 40 million people. They are major exporters of grains in the regions, as well as a major refiner of metals. The population of Ukraine is nearly 80% Ukrainian, who consider themselves culturally distinct from Russia, with their own language and traditions, and who politically, have become increasingly democratic, with its leaders less and less under Russian control. In 2008, Ukraine first applied to begin a NATO Membership Action Plan. However, they are not currently a NATO member and have not met all the criteria to do so.

And while economics play a major role, it also cannot be ignored that this is a sovereign nation, that wants to be independent of Russia and did nothing to warrant or provoke an invasion other than a desire to maintain independence and more closely ally itself with the West.

Why is Russia invading Ukraine?

As foreign policy is NOT my area of expertise, I’m sharing the summary from The American Moms, former journalists and White House staffers, on this one, along with a map to help you better understand the history and geography.

First, as Westerners, we have a totally different perspective of democracy, freedom and sovereignty than Putin. I will not validate his motives by even attempting to rationalize them. They are the motives of a dictator. He has publicly stated his desire to reunite the former Soviet Union, which fell in 1991. Countries to the southwest, including Kazakhstan, Uzbekistan, Turkmenistan, and countries in Eastern Europe, including Ukraine, as well as Estonia, Latvia, and Lithuania, the latter 3 of which are all part of NATO, were all formerly part of the Soviet Union.

All the countries named below were part of the former Soviet Union, also known as the USSR, up until 1991.

This is also not Russia’s first invasion of Ukraine. Back in 2014, Russia invaded and annexed the Ukrainian peninsula of Crimea, which today Russians recognize as part of Russia, but which the rest of the world still recognizes as part of Ukraine.

As far back as November 2021, satellite intelligence images showed Russian troops massing on the Ukrainian border, prompting President Biden to warn of economic sanctions should Russian invade the country. In mid-December, Putin presented an eight-point list of demands or security guarantees, including:

  • NATO expand no further, and not allow Ukraine into alliance
  • NATO remove any troops or weapons deployed to countries who entered NATO after 1997, which includes much of Eastern Europe, including Poland and the former Soviet countries of Estonia, Lithuania, Latvia, and the Balkan countries

In short, Russia is threatened by NATO having direct access to its borders through its members.

Putin, in his hourlong speech just before invading Ukraine last week, claimed the invasion was justified by recognizing the Donbas and Luhansk regions of Eastern Ukraine as independent republics and claiming they had asked for Russia’s aide. He accused the Ukrainian government of “abuse and genocide” against these regions and stated his intentions to “de-militarize and de-nazify” Ukraine, a country that fought against the Nazis in WWII and is currently led by Jewish President Volodymyr Zelensky. Putin also blamed the US and its allies for rejecting its security demands and crossing Russia’s “red line” by expanding the NATO alliance.

What is NATO?

NATO is the North Atlantic Treaty Organization formed in 1949 after World War II, and at the outset of the Cold War. There are currently 30 NATO members: the 12 founding members, including the US, and 18 members who have joined since inception, including countries who were formerly part of the Soviet Union and other Eastern European countries who have joined since 1999.

NATO is an alliance, both politically and militarily, with most of its military forces provided by members on a voluntary basis. Their stated purpose is to “guarantee the freedom and security of its members”, which historically has largely meant protecting Western Europe against the threat of Russian aggression.

Article 5 of the Washington Treaty which established NATO declares the principle of Collective Defence: an attack against one NATO member is considered an attack against all members. It has only been invoked once, following 9/11, and NATO allies came to the aid of the US in the War on Terror that followed.

While Ukraine is not a NATO member, other Eastern European and former Soviet countries are. Should Ukraine fall, these NATO members are likely to be next, and if attacked, Article 5 would require NATO member support.

Why Are Gas Prices Going Up Because of Russia?

Now, with background on the political and now military conflict, let’s address the main economic question, both here in the US and globally: why are gas prices going up because of Russia and its invasion of Ukraine? And moreover, why aren’t the US and its European NATO allies doing more to stop it?

It’s a lot to do with energy – who produces it and who needs it. Russia supplies approximately 40% of Europe’s natural gas and more than 25% of its oil. And it would be impossible for Europe to replace all of that without falling short and crippling their own economies. And because energy trade is global, and Russia is a major supplier of the world’s energy, their restriction of natural gas supply to Europe leading up to the current conflict, in addition to surging demand following a reduction in global supply due to the pandemic, has led to surging natural gas and oil prices in recent months.

We are also in a more tenuous position economically with inflation rising globally, and energy prices being a major driver of that. And energy prices ultimately impact the price of all goods due to transportation costs. This conflict is driving energy prices higher, therefore, further driving inflation, and therefore, a major global economic threat.

To learn more about the global energy market, and the impact of the pandemic, as well as recent economic and geopolitical events, check out this episode of Finance Explained with Gas Buddy’s Head Petroleum Analyst (please note – this was recorded prior to the invasion last week):

Global Energy Supply

Globally, oil accounts for more than 30% of the world’s energy supply, followed by Coal (which more developed economies are turning away from in favor of cleaner sources given increasing ecological concerns), and Natural Gas, which accounts for about 23% of global energy supply.

Who Controls the World’s Oil Supply

Russia is the second-largest producer of oil in the world, second only to the United States, based on 2020 data from the International Energy Agency (IEA). However, while the US uses most of its production, Russia exports more than half of its oil production. Oil and other natural resources account for 60% of Russia’s GDP.

And who depends on Russia’s oil exports? China, the United States (although we don’t have to), as well as many of our European NATO allies, especially Germany, Spain, Italy, and the Netherlands.

The Global Freedom of US Energy Independence

Under President Trump, there was a major push to increase domestic oil production in order to reduce our dependence on foreign oil. This resulted in a significant decrease in foreign oil imports, and in 2020, the US became energy independent, and a net exporter of oil. It also drove down global oil prices, reducing the control of global prices by OPEC. However, in 2021, under President Biden, domestic production declined, and we have again begun to increase imports of foreign oil.

This decline is due in part to the pandemic, but also in part to the push for green energy under the current administration, and the generally hostile attitude towards energy companies. Instead of investing in domestic oil production, energy companies are investing in green energy alternatives to appease progressive politicians pushing greener energy initiatives via regulation, restricted federal drilling leases, and even threats of financial lending restrictions, while also investing cash in share buybacks to appease nervous shareholders.

These increases in foreign imports include an annual average over the last year of 0.7 million barrels per day from Russia, second only to Canada in 2021, and 0.9 million barrels per day collectively from OPEC. If the US produced more domestically, we could 1) cease imports from Russia ourselves, 2) increase exports to our European allies to reduce their dependence on Russia for energy as well, and 3) reduce the global pricing power of OPEC and Russia.

What is OPEC?

OPEC is an oil cartel aligning many of the largest oil-producing countries in the world. They meet to coordinate production and by doing so, have significant control over the global price of oil. The 5 founding members include Saudi Arabia (who alone is the third-largest producer of oil in the world after the US and Russia), along with Iran, Iraq, Kuwait in the Middle East, and Venezuela in South America.

Russia is not part of OPEC but is one of 10 nations that are part of what has become known as OPEC+. These countries attend OPEC meetings and cooperate with their production management plans. Collectively, OPEC+ controls more than 50% of the current global oil supply and 90% of proven oil reserves (oil contained under a piece of land with a 90% or greater probability of profitable extraction).

Who Controls the World’s Natural Gas Supply

The picture for natural gas supply is not dissimilar. Russia is the world’s second-largest producer, after the United States, and exports nearly 1/3 of its production, with many of our European NATO allies dependent on those exports.

Why Are Economic Sanctions Against Russia Insufficient?

Many of you asked why the economic sanctions imposed by the US and our NATO allies against Russia aren’t helping or why people are saying they are not enough. To date, the US and Europe have imposed sanctions primarily targetting the assets of Russian banks, oligarchs, and more recently Putin himself. This limits the Russian government’s access to Western capital markets and hampers their ability to fund their military efforts.

This weekend they announced the most punitive financial sanctions yet – cutting “select” Russian banks off from SWIFT, the international messaging system of the global banking industry, which facilitates international trade. This slows and increases the cost of trade for Russia globally, even with China.

But to date, we have yet to impose sanctions on Russia where it will really hurt them – on energy trade. NATO allies, the US, and China are still buying billions of dollars worth or oil and natural gas from Russian-government-owned energy companies. As Russia continues to engage in battle with Ukraine, it drives the price of energy exports even higher, and Europe continues to buy, adding to Russia’s coffers, allowing them to continue to fund their military and the occupation of Ukraine. Just a week before the invasion of Ukraine, Russia announced a deal with China to sell them 100 tons of coal worth $20 billion.

While the US does import some oil from Russia, they are not a major trading partner for us, the way they are for much of Europe and China. Our European allies’ dependence on Russia for energy limits their ability to inflict maximum economic damage – without also inflicting significant economic damage on themselves.

Germany recognized this and is in large part why they have been dragging their feet on opening the Nord Stream 2 pipeline despite its construction completion in September 2021. The pipeline directly connects Russia to Germany through the Baltic Sea for the transport of natural gas. It should also be noted that currently, many of Russia’s energy transports go through Ukraine to reach their European trade partners. The NS2 pipeline would bypass them – so Ukraine is more strategic to Russia with the NS2 pipeline closed for business.

Additional Trade Concerns

In addition to energy prices rising, last week we also saw wheat future prices spike as much as 16%. Russia and Ukraine together produce nearly one-quarter of the world’s wheat. They are also both producers of other major food products, like barley, sunflower seed oil, and corn.

Again, with global inflation already a concern outside of this conflict, and food prices being one of the driving factors of inflation, this will not help in food price inflation subsiding.

Nuclear Threat

For Ukraine, this conflict is about independence, democracy, and freedom. But it should be for the rest of the world as well. Europe not only depends on Russia for energy, but they are also closest in proximity to Russia, a nuclear power.

Putin reminded the world of this in his speech last week: “Whoever tries to hinder us … should know that Russia’s response will be immediate. And it will lead you to such consequences that you have never encountered in your history.”

NATO members, including the US, UK, and France, have nuclear weapons as well. As does China. While China is a major trading partner of Russia, even they have begun to distance themselves from his latest actions – because the rest of the world’s trade matters even more to them. And no one wants to see World War III among nuclear powers.

Threats like that from an unscrupulous dictator like Putin should put the whole world on alert. Should any NATO member actively engage militarily on the ground in Ukraine, beyond just sending weapons and economic aid, this immediately becomes World War III.

What Can You Do

Financially, in the immediate term, prepare your budgets. Gas prices will go higher. Food prices are likely to increase as well. For the longer term, realize global conflicts add to market volatility. Invest for the long-term and look at down days as potential buying opportunities.

Inflation is likely to persist, which means there’s even more pressure on the Fed to raise interest rates, so interest rates are more likely to continue to increase. Recent interest rate declines are more driven out of short-term market behavior – a flight to safety, away from risky assets and into more certain ones, like US treasuries, in a period of uncertainty.

You can also be aware of the economic trade relationships in the world, and vote with your dollars every day accordingly. As Americans, we buy nearly $500 billion worth of goods from China every year, our largest trade partner. Do you want to buy products from China, which in turn is Russia’s biggest trading partner and has yet to impose any economic sanctions on them? You can also write to your elected officials to demand harsher economic sanctions against Russia and to end all US trade with Russia, including oil imports.

Last, and most importantly, you can support the people of Ukraine and the innocent families being displaced by war. I know people want to know reputable charities and ensure their money is going to help people who actually need it right now. A small local business I frequent is owned by a Ukrainian immigrant. They are hosting a fundraiser for a long-established Ukrainian charity that my family will be supporting this week. I would encourage you all to do your research and diligence to support organizations you feel can best help those in need currently.

Thank you for sharing!

About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

1 Comment

  1. […] check out past podcast deep dives on Agriculture featuring farming experts from last month and with Gas Buddy’s Petroleum Analyst, Patrick DeHaan, from earlier this […]

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.