Gas prices could soar if Russia invades Ukraine
(CNN) -- If Russia invades Ukraine, inflation-weary Americans will likely pay the price at the pump.
Oil prices have already shot up to seven-year highs in recent days. A conflict between Russia and Ukraine, which the White House has warned could be imminent, would have the potential to drive them much higher.
That's because Russia is the No. 2 oil producer on the planet, behind only the United States. And Ukraine is a key energy transit hub, where a large amount of Russian natural gas exports to Europe flow through.
An invasion of Ukraine would trigger immediate fears of sanctions from Washington on Russia's vast energy resources, damage to the region's energy infrastructure and raise the specter of Vladimir Putin weaponizing exports of natural gas and crude oil.
Investors would buy first and ask questions later.
"There is a very good chance we would reach $100. That's going to be inflationary with an exclamation point," said Robert Yawger, director of energy futures at Mizuho Securities. "We don't need that at all. We can't afford that at all."
'All bets are off'
It's impossible to say how high prices would go — and how long they would stay high. But $100 oil would surely lift prices at the pump. And that means a Russia-Ukraine conflict has the potential to impact most Americans.
Gasoline prices, which move with a lag to oil, have already started to creep higher in recent days. The national average hit $3.32 a gallon on Wednesday, up from the recent low of $3.28, according to AAA.
"If there is a war with Russia, then all bets are off," said Claudio Galimberti, senior vice president of analysis at Rystad Energy.
Oil prices are up sharply this week and analysts say concerns about a Russia-Ukraine conflict have contributed to those gains.
"The market has been really slow to appreciate the risks of an invasion," said Helima Croft, head of global commodity strategy at RBC Capital Markets. "Putin is not really a bluffer. He's known for backing words with action."
The White House is talking to energy companies and countries
All of this underscores the difficult situation the White House finds itself in, economically, politically and of course from a national security standpoint.
Inflation is already a major political and economic problem for President Joe Biden. The recent rebound in gasoline prices threatens to further aggravate inflation. And $100 oil in a Russia-Ukraine conflict would make it even worse.
"Whatever we decide is the right course for our collective interest and security," a spokesperson for the National Security Council told CNN in a statement, "we are prepared to deliver severe costs to the Russian economy including its financial system and sectors deemed critical to the Kremlin and President Putin's ambitions -- while minimizing unwanted spillover."
That last part -- mitigating the impact -- could be tricky.
A senior administration official told CNN that officials are taking contingency planning very seriously "to make sure we are prepared to mitigate any impact and assess potential spillovers." That contingency planning, the official said, includes conversations with energy companies and countries.
The administration official added that the White House has been "very clear" about how it would respond to an invasion and "that should already start being priced into the markets."
Natural gas prices could spike
Europeans would pay the biggest price in a conflict. That's because Europe relies on Russia for natural gas. Heating costs in Europe skyrocketed last fall as natural gas futures spiked.
Germany has warned it would consider halting the Nord Stream 2 pipeline, a natural gas pipeline project from Moscow to Germany, if Russia attacks Ukraine. That would further limit supply of natural gas to Europe.
The impact to American consumers is less direct.
Russia ships relatively modest amounts of oil to the United States, totaling just 200,000 barrels per day as of October. That represents just 3% of total US oil imports of 6 million barrels.
However, crude is a globally traded commodity and prices at the pump are based off world oil prices. An oil shock anywhere is felt everywhere.
Not just that, but a spike in natural gas prices overseas would have significant ripple effects.
That's because very high natural gas prices would force some power plants and factories in Europe and Asia to switch away from gas to oil. In other words, demand would go higher for oil.
At the same time, supply would be in doubt.
First, a military conflict would threaten energy infrastructure in the region.
But even if pipelines and refineries are spared, Russia could decide to slash its supply of natural gas -- or even crude oil.
"Russia can weaponize energy exports -- to make everyone feel the pain," said Croft, the RBC strategist. "A lot of people believe Russia will respond by withholding supply, to make us pay the price."
And then there's the risk that the White House responds to an invasion by slapping sanctions on Russian oil and natural gas.
President Biden warned Wednesday of imposing "severe costs and significant harm" on the Russian economy if Putin invades Ukraine.
"It's going to be heavy, it's going to be real and it's going to be consequential," Biden said.
Biden noted that Russia relies on its oil-and-gas exports for its economy. However, he stopped short of threatening to impose energy sanctions.
Croft, a former CIA analyst, suggested the reluctance of US officials to threaten energy sanctions on Russia is telegraphing a vulnerability to Putin.
"If you carve out energy, you are signaling you're concerned about energy," she said.
Sanctions could make inflation worse
Leveling sanctions would be a difficult decision for Biden.
On the one hand, energy is vital to Russia's economy, making it an obvious target for sanctions and a way to make Putin face real consequences.
Crude oil and natural gas made up about 43%, on average, of the Russian government's annual revenue between 2011 and 2020, according to the US Energy Information Administration. Oil and gas revenue spiked by 60% during the first nine months of last year, making them the biggest growth driver for government revenue, according to the World Bank.
"Russia is a one-pony town. Energy is the only thing they have. It's the glaring weakness in their economy," said Mizuho's Yawger.
And yet seizing on that weakness by limiting the supply of Russia's natural gas and oil would drive prices higher at a time when they are already elevated.
"This war situation would be bad enough. But if you start putting sanctions on energy, it just super-sizes the whole inflation story and takes it to the next level," said Yawger. "You would be committing economic, and political, suicide by doing that."
Will OPEC and Big Oil come to the rescue?
Croft, the RBC analyst, said the Biden administration would likely respond to a price spike by releasing more barrels from the Strategic Petroleum Reserve, likely in a coordinated fashion with other nations. That could help cushion the blow.
Biden could also try to convince Saudi Arabia-led OPEC to open the spigots, arguing that very high prices aren't good for producers if they destroy demand.
Analysts say US oil companies, which have up until recently been reluctant to significantly increase production, would respond to $100-plus oil by cranking output.
But that wouldn't translate to more gasoline overnight. And in the meantime, prices at the pump would remain high.
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