“Recession would be inevitable without Russian oil,” says the Dallas Federal Reserve

The global economy may not be able to avoid a recession if Russian energy exports are not resumed this year, according to a study by economists at the Federal Reserve Bank of Dallas.

“If most Russian energy exports are off the market for the rest of 2022, a global economic recession seems inevitable,” the economists wrote. Lutz Kilian and Michael Plante in an article published on Tuesday 22 by the Dallas Fed. “This slowdown could be longer than the one in 1991.”

The authors drew a parallel with the global recession of 1991, triggered by theto invasion of Kuwait by Iraq the year before, causing an oil supply shock. Back then, Saudi Arabia partially mitigated the impact by pledging to ramp up production, helping to ensure what the researchers called “only a brief recession in the United States,” which lasted less than a year.

The refusal of financial institutions to support Russian energy exports has been the main event putting those shipments at risk, the Dallas Fed economists wrote. “This result was largely unexpected, as US and European Union sanctions originally deliberately excluded Russian energy exports.”

Oil Payment Schemes

Replacing that supply can be a challengeGiven the Saudi Arabia and United Arab Emirates have signaled that they will not provide relief, the researchers said. They also noted that US shale producers are “constrained by supply chain bottlenecks, labor shortages and investors’ insistence on capital discipline.”

“There are signs that some oil-importing countries are exploring alternative payment schemes that avoid the use of trade credits, circumvent current financial sanctions, or rely on alternative currencies,” which could help ease the blow caused by financial difficulties, Kilian and Plante wrote.

Without an offer response, the fall in Russian exports will provoke an inflationary blow that will compress spendingaccording to the authors.

“Unless the Russian oil supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and remain elevated for an extended period to eliminate excess demand for oil,” they wrote. “This demand destruction is likely to be aided by the recessionary effect of higher natural gas and other commodity prices, especially in Europe.”