Recession is unavoidable without Russian oil, Dallas Fed study says

According to a study conducted by economists at the Federal Reserve Bank of Dallas, the global economy will be unable to avoid a recession unless Russian energy exports resume this year, Bloomberg reported 

"If the majority of Russian energy exports are taken off the market for the remainder of 2022, a global economic downturn appears unavoidable," Dallas Fed economists Lutz Kilian and Michael Plante wrote in a Tuesday article. "This slowdown could last longer than the one in 1991."

Bank of America analysts noted that if Russia's oil is cut off, the market could face a 5-million-barrel shortfall which could push oil prices to $200 per barrel.

Russia produces close to 11 million barrels per day of crude oil. It uses roughly half of this output for its own internal demand, which presumably has increased due to higher military fuel requirements, and exports 5 million to 6 million barrels per day.

Today, Russia is the second-largest crude oil producer in the world, behind the US and ahead of Saudi Arabia. About half of Russia’s exported oil – roughly 2.5 million barrels per day – is shipped to European countries, including Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania and Bulgaria.

Replacing Russian oil may be difficult, given that Saudi Arabia and the United Arab Emirates have indicated they will not provide relief, according to the researchers. They also stated that US shale producers are "constrained by supply-chain bottlenecks, labour shortages, and public investors' insistence on capital discipline."

"There are indications that some oil-importing countries are exploring alternative-payment schemes that avoid the use of trade credit, bypass current financial sanctions, or rely on alternative currencies," Kilian and Plante wrote, which could help alleviate the impact of financing difficulties.

"Unless the Russian petroleum supply gap can be addressed, it appears that the price of oil will need to rise significantly and remain high for an extended length of time in order to alleviate the excess demand for oil," they said. "The recessionary effect of increasing natural gas and other commodity prices, particularly in Europe, is likely to assist this demand erosion."