Ukraine crisis: Surge in oil prices could drive inflation even higher

Russia is one of the biggest oil and gas producers in the world, and any disruptions stand to have a major impact on prices. After the Russian invasion, President Joe Biden announced that the US would ban imports of Russian oil, natural gas, and coal. The United Kingdom has said it will scrap Russian oil imports as well. These manoeuvres prompted a spike in oil prices, which have already been on the rise, and the situation is sure to have ripple effects across the global economy.

Some analysts have warned that worst-case scenario oil prices could hit $200, and Russia has warned that $300 oil prices could be on the horizon, depending on what Europe, which is much more reliant on Russian oil and gas than the US, does.

In the US, Russian oil made up about 3 per cent of shipments in 2021, according to Bloomberg, and when you include other petroleum products that rises to 8 per cent. Major oil companies, such as Shell and BP, have said they'll stop buying oil and gas from Russia and curb business with the country, which is causing volatility and prices changes as well. Europe is starting to move away from its dependence on Russia, too.

Americans - already dealing with high gas prices and annoyed at the rising costs of heating their homes - are in for a bumpy ride. Gas prices matter not just for people filling up the tanks of their cars but also because of shipping and transportation. The conflict could also translate to high diesel prices and jet fuel for airplanes.

The Russia-Ukraine conflict could push inflation to 10 per cent year over year, driven in part by gas. An increase in oil prices to $110 could increase consumer prices by 2.8 per cent over the course of a year and that oil at $120 per barrel could mean inflation at 9 per cent in the coming months.

The Biden administration has promised to try to protect Americans from a spike in gas prices. The US has also begun weighing whether it could look to Venezuela. Higher oil prices could dampen on economic growth. People and companies having to spend more on oil and gas could reduce spending in other areas, and that could cut into GDP. By one estimate, a long-term increase in gas prices could cost the typical household in the $2,000 per year.

Inflationary pressures depend "on the severity of sanctions and what happens on the ground." The US and Europe have hit Russia with severe sanctions that will devastate the Russian economy and likely have a widespread impact on economic conditions around the world. In other words, economic uncertainty, including inflation, is probably not going away anytime soon.

In the United States, this will be a headache for the Federal Reserve, which is already on track to likely start to raise interest rates in an effort to combat inflation and otherwise roll back some supports for the economy.

The big picture is that the US economy is strong and is well-positioned to absorb a shock like higher energy prices or disruptions to commodity supply from the Russia-Ukraine war. Still, for Americans already navigating inflation, the current crisis is likely going to push prices up before they come down.

Jet fuel prices in India were hiked by over 18 per cent - the steepest ever increase - to all-time high levels after international oil price surged to a multi-year high. The increase - sixth straight this year - led to prices soaring past the Rs 1-lakh-per-kilolitre mark for the first time ever.

Aviation turbine fuel (ATF) - the fuel that helps aeroplanes fly - was hiked by 17,135.63 per kl, or 18.3 per cent, to Rs 110,666.29 per kl in the national capital, according to a price notification by state-owned fuel retailers. Jet fuel prices are revised on the first and 16th of every month based on the average international price of benchmark fuel in the preceding fortnight.

International oil prices had climbed to a 14-year high of near $140 per barrel last week on fears of supply disruption following Russia's invasion of Ukraine. Rates have since mellowed to around $100 per barrel. In Mumbai, ATF price soared to Rs 109,119.83 a kl and it costs Rs 114,979.70 in Kolkata. Jet fuel is priced at Rs 114,133.73 per kl in Chennai.

Jet fuel, which makes up for almost 40 per cent of the running cost of an airline, has this year surged to new highs.

India depends on imports to meet 85 per cent of its oil need. At 3.6 million tonne, Russian crude accounted for 2 per cent of 176 million tonnes imported by India between April 2021 and January 2022.