How war between Russia and Ukraine will impact the global economy : The Indicator from Planet Money Russia's invasion of Ukraine has sent markets all over the world into a frenzy. Just how widespread could the economic fallout be?

How the Ukraine crisis could affect your pocketbook

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This is THE INDICATOR from PLANET MONEY. I'm Adrian Ma.


And I'm Paddy Hirsch. Just how concerned are Americans about the war between Russia and Ukraine? Just the day before Russia invaded, an Associated Press poll found that fully 20% of Americans think the U.S. should not have any role at all in this situation. And 52% think that if the U.S. does play a role, it should be a minor one.

MA: Which is kind of understandable, right? Ukraine is on the other side of the world. Neither Russia nor Ukraine is really, like, a vital U.S. trading partner. And a lot of the things that we import from those countries, like oil and wheat, the U.S. can actually easily produce itself. So it might be tempting to think that because the U.S. doesn't really rely on Russia or Ukraine, their war won't have a huge consequence for us.

HIRSCH: Yeah, Adrian, that would be a mistake. The last year has shown us how inextricably interconnected the world has become and how events in one part of the world can affect all of us. Yesterday, you touched on some of the ways a war in Ukraine will affect the U.S. economy. Today, we're going to take a closer look. That's coming up after the break.

MA: The most obvious way Russia's invasion of Ukraine might affect us is in the form of higher energy prices and particularly high gas prices. In a speech the day before the Russian attack, President Biden warned already high gas prices could get higher. But he said he's working with other oil-producing countries to try and protect consumers.


PRESIDENT JOE BIDEN: This will be - this will blunt gas prices. I want to limit the pain the American people are feeling at the gas pump. This is critical to me.

HIRSCH: It's worth noting that none of the sanctions that Biden has put in place are directly affecting the flow of oil from Russia. But the price of oil jumped on the news of the invasion regardless. That's because Russia produces about 10% of the world's crude, and traders are worried that supply may be cut off either by sanctions or a Russian response to sanctions or by disruption caused by a drawn-out war in Ukraine.

MA: They're also worried the supply of natural gas, which has been painfully short for almost a year now, is going to get shorter. And this is partly because the German government decided to shelve a pipeline project that would have delivered Russian natural gas to Europe.

HIRSCH: That doesn't just affect natural gas prices but also oil prices. A lot of energy companies who had switched from burning oil to natural gas are now switching back because of the expense. And that's putting even more upward pressure on the price of oil. I spoke to William Hauk about this. He's an associate professor of economics at the University of South Carolina. He says that even though the U.S. doesn't depend directly on Russian oil or natural gas, those shortfalls would affect us just the same.

WILLIAM HAUK: This is a very tightly integrated world market. If prices go up somewhere, they're going to go up everywhere. When oil prices go up, prices at the gas pump go up. So that's obviously something that's going to be coming out of a lot of consumers' pocketbooks most immediately.

MA: And the president can't do much to protect consumers. There has been some talk about the U.S. tapping its strategic oil reserve, but the U.S. consumes so much oil - right? - like, 20 million barrels a day, that even a big release from its oil reserve won't do much to move markets. The strategic reserve is roughly 600 million barrels, and we would guzzle that amount in about 30 days.

HIRSCH: If American companies were to get back to producing the 13 million barrels of oil a day they did before the pandemic, that might take the edge off. But William Hauk says that wouldn't happen overnight.

HAUK: It's hard to just suddenly crank up oil wells, producing more, drilling more and have stuff come on to the market immediately. There is, you know, a bit of a lag in terms of prices go up. Maybe we want to produce more, but there's, you know, permitting involved. There's investment involved. And the supply doesn't immediately jump up right away.

HIRSCH: The second area that Americans could feel a direct effect of the war in Ukraine is the price we pay for food. This isn't immediately obvious because Ukraine is not a big trading partner of the U.S. It is, however, a big deal in Europe.

HAUK: Ukraine has been nicknamed at various points the breadbasket of Europe. It produces a lot of wheat and grain, corn especially but wheat exports, as well, really, one of the world's largest producers.

MA: Ukraine and Russia together produce about 14% of the world's wheat supply. And Ukraine actually produces this specific strain used in breadmaking. So yesterday, wheat prices jumped more than 5% because commodity traders were factoring in the possibility that there would be this shortfall in the world's wheat supply. And William Hauk says that is not surprising.

HAUK: You take a lot of a commodity, like, say, wheat out of the world market. It's something that demand doesn't shift very easily. I mean, people need to eat, and wheat goes into a whole lot of products. So when there's kind of a big supply shock, like, say, Ukraine wheat being removed from the world market, a lot of that price gets passed along to consumers.

HIRSCH: We could see the effects of a wheat shortage in a range of products, from bread to cookies to pizza, which would only extend a trend that we've been suffering in the U.S. for a while. The cost of food has been rising here for months. Food prices were up 6.3% in December compared with the previous year. That's hard for all Americans but particularly for poor households, who spend more of their budget on food.

MA: And it's not just supplies of oil, gas and grain that are at stake. Ukraine, for instance, is a big producer of iron ore. That's a key component in the global construction industry. Russia produces copper, palladium and platinum, which are all vital to manufacturing. They also export potash and ammonium nitrate, which I just learned are essential components of fertilizer. So if this war grinds on and supplies of all these goods are cut off, prices for everything will jump, which brings us to the most menacing consequence of this war for the U.S. economy, inflation.

HIRSCH: We were already at 7.5% even before the Russians invaded, kind of hoping that some snappy work by the Federal Reserve would bring inflation quickly into line. But the prospect of shortages of a range of important commodities is making those hopes look more like pipe dreams.

MA: That's because just like wheat is in way more of the food that we eat than we might think, oil is in way more of the stuff we consume than we might think. It is almost literally in everything.

HIRSCH: Yeah. So when the price of oil goes up, while the price of gasoline may be the most obvious place you see it, the price of everything around you is going up - from plastics to asphalt to house paint and hand lotion. And of course, as William Hauk says, so is the cost of getting all of those products delivered to your door.

HAUK: I've seen estimates that have said that if we have considerably higher gas prices, that could push inflation over the 10% mark, which we haven't seen since I think, 1980, roughly in the United States. And that could be a little bit worrying. People get spooked by higher inflation. They see their paychecks not going as far as they used to, and that increases economic discontent.

HIRSCH: It's too early to know what this war might do to the U.S. economy. What's not in any doubt, however, is that American consumers will feel the effects - if we're not already.


HIRSCH: This episode was produced by Brittany Cronin, with help from Gilly Moon. It was fact-checked by Corey Bridges. Our senior producer is Viet Le, and our editor is Kate Concannon. THE INDICATOR is a production of NPR.


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