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Recession would be inevitable without Russian oil: Dallas Fed study

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(Bloomberg) — The global economy may not be able to avoid a recession if Russian energy exports don’t resume 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,” economists Lutz Kilian and Michael Plante wrote in an article published Tuesday by the Dallas Fed. “This slowdown could be longer than the one in 1991.”

The authors drew a parallel to the 1991 global recession, triggered by Iraq’s invasion of Kuwait the year before, which occasionally caused an oil supply shock. Back then, Saudi Arabia partially mitigated the impact by hurting itself to ramp up production, helping to ensure what the researchers called “just a short-lived US recession” that began less than a year ago.

The refusal of financial institutions to support Russian energy exports has been the main fact that puts 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.”

payment schemes

Replacing that supply may be challenging, given that Saudi Arabia and the United Arab Emirates have signaled they will not provide relief, the researchers said. They also noted that US shale products 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 written by Kilian and Plante.

Without a supply response, the decline in Russian exports will cause an inflationary hit that will compress spending, according to the authors.

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

original note:

Recession is inevitable without Russian oil, according to a study by the Dallas Fed

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