WorldMoney & Business

The Recipe for $150 Oil

How do the wars in Ukraine and Gaza impact global economic growth and the U.S. economy in particular?

Both wars are ongoing and cataclysmic impacts may yet be felt. Here’s where events stand at the moment. Let’s start with the war in Ukraine…

From a strategic perspective, the situation in Ukraine resembles a smaller-scale version of the situation in Europe in late 1944. At that point, the Allies had successfully completed the D-Day invasion and liberated Paris.

On the Eastern Front, the Russians had annihilated the combined armies of the German Wehrmacht and were advancing through Poland toward Berlin.

Hard fighting remained. The Allies had to fight the Battle of the Bulge in December 1944, and the Russians encountered stiff German resistance in Poland even though they had superiority in numbers, supplies and weapons.

Still, no one doubted that the tide had turned, and Germany was on its way to defeat.

Likewise, the Russians are clearly defeating the Ukrainians despite the fact that a lot of hard fighting remains. Ukraine’s so-called spring offensive that began in early June was a complete and utter failure.

Nearly six months after it began, Ukraine only captured a few pinprick villages it was expected to take within the first few days.

Casualties are horrendous and Ukraine is reduced to calling up young teenagers, women and old men. The average age of a Ukrainian soldier is 43.

Russia has also demonstrated that NATO weapons systems are hardly wonder weapons.

Russian mines, drones and artillery have destroyed the most advanced German Leopard and U.K. Challenger tanks. The U.S. has held back on letting Ukraine use its Abrams tanks for fear they’ll end up burning on the battlefield like the Leopards and Challengers.

On the economic front, the Russian victory is even more clear-cut than on the military front.

U.S. economic sanctions have failed across the board. The Russian economy is expected to grow at a 5% annualized rate in the fourth quarter of 2023. The best estimate for the U.S. economy in Q4 is 2%, although one can expect that rate to drop as the quarter progresses.

The Russian ruble has withstood Russia’s ejection from global payments networks; it is trading only about 25% lower than when the war began after holding its level against the U.S. dollar over the first 15 months of the war. Inflation in Russia is low.

The Russian economy is on a complete war footing. There are even labour shortages as Russians take jobs in the weapons factories or enlist in the military.

Hamas and Israel

The war between Israel and Hamas in Gaza has been more contained from a global economic perspective, but it also has potential to spin out of control and rock the global economy.

The potential for economic calamity in Gaza is not the fighting in Gaza itself but the possibility of escalation.

Israel faces an enemy 10 times more powerful than Hamas in the form of Hezbollah, which is located in Lebanon on Israel’s northern border, and which is heavily subsidized by Iran in terms of money, weapons and intelligence.

In addition to Hezbollah, the Houthi rebels in Yemen are firing missiles at Israel. The Houthis are a direct Iranian proxy intended to threaten Saudi Arabia, but are equally capable of threatening Israel.

If Hezbollah and Houthi attacks on Israel escalate, Israel will not limit their response to those two groups. They are likely to launch attacks on Iran itself going to the root of the problem. At that point, Iran may fire missiles at Israel and close the Straits of Hormuz.
In anticipation of that, the U.S. has moved two aircraft carrier battle groups to the Eastern Mediterranean and stationed one Ohio-class nuclear submarine in the Red Sea. The idea is to deter Iran from attacking Israel, but they can be used to attack Iran if the war escalates to that level.

Russia is watching on the sidelines and will support Iran if necessary.

Saudi Arabia and Qatar, two of the world’s largest energy producers, are caught in the middle.

If those escalation scenarios play out even in part, expect oil prices to go to $150 per barrel or higher. That would put the U.S. and Western Europe in a recession worse than 2008 and the earlier oil shock of 1974.

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