DALLAS — Now that Russian threats have turned into a Russian invasion of Ukraine, the top concerns are humanitarian and moral. But this will also affect the world economically. Many pressures the worldwide economy was already experiencing are likely to be amplified.
Stock market volatility
Let’s start with stocks, which have experienced some extremes because of the invasion and the military build-up and rhetoric leading up to it. Markets hate uncertainty…and Russia has provided plenty of that this year. And there’s potentially a lot more ahead. What happens next? How will the world punish Russia? How will Russia retaliate? Uncertainty equals continued volatility. The volatility index—a measure of the traders’ expectation for wild swings—soared at the beginning of the pandemic and has spiked many times since because of Covid and worries about pandemic-related inflation. It also increased in the weeks leading up to the Russian invasion.
Oil and natural gas volatility
The unprovoked offensive against Ukraine has also caused energy prices to surge. Again, this continues a trend. As economies emerged from the pandemic and needed more oil and gas, prices went up. Now with Russia waging war—there’s more uncertainty. Russia produces the 3rd most oil and the 2nd most natural gas in the world. Will countries limit Russia’s ability to sell? Will Russia withhold its oil and gas? Petroleum futures have been up sharply, and that affects gasoline prices. Gas Buddy says prices are up for the 8th straight week, with the national average at $3.52 per gallon—up 20.7 cents from a month ago.
Measuring oil and gas production and price changes through a Texas lens
Just to give you an idea how much oil and gas prices have risen because of Russia’s military moves and the pandemic inflation that came before this: In the current Texas budget, consider that officials had forecasted the state would take in $14,279,447,000 in oil and gas production taxes.
The state only has legislative sessions every two years. The last was in 2021, so legislators don’t re-convene until 2023. Because of the long stretch between sessions, lawmakers have to create a budget that lasts for 24 months; in the latest case that goes from September 2021 through August 2023.
So that lawmakers know how much money they can spend in that budget, the state comptroller gives an estimate of how much money the state will take in during those two years. Sometimes the actual revenue can differ significantly from those predictions. Two huge sources of income for the state that can be particularly unpredictable (as has been proven again by recent events) are oil and gas production taxes.
Early on in this budget cycle, those two revenue streams have diverged from the estimates significantly. For months, as the economy has been kicking into high gear here and elsewhere, the world appetite for oil and natural gas has increased. Because of the big spike in demand, the price of oil and the price of natural gas have been rising. Now that major oil producer Russia has invaded Ukraine, there is uncertainty about whether Russian oil and gas exports, which are a significant portion of the global energy market, could eventually be affected by sanctions.
So, in the first five months of the current 24-month Texas budget, the state has taken in $2,158,290,000 in oil production taxes and $1,554,105,000 in natural gas production taxes. If that pace were to continue for the rest of this budget cycle (19 more months), Texas would collect $10,359,792,000 in oil production taxes instead of the estimated $9,560,111,000.
But the bigger surplus would be in natural gas production tax revenue. If prices stayed on pace with what we have seen in the last five months (and that is a big IF considering that such extraordinary world events are driving this phenomenon), Texas would collect $7,459,704,000 in gas production taxes instead of the estimated $4,719,336,000 budgeters had forecast. At the current pace, the state would collect $3,540,049,000 more in oil and gas production taxes than it anticipated. That gives an idea of how much volatility there has been in energy markets in the months since the comptroller's office made its projections.
The number of rigs actually exploring for or developing oil or natural gas in Texas has tripled since hitting a pandemic low about 18 months ago.
Texas and the rest of the U.S. supplying more natural gas to Europe recently
There has been a lot of concern in Europe about the supply of oil and gas the continent receives from Russia. With that in the background, the United States has been playing a larger role in supplying oil and gas to the European market. The Texas Independent Producers & Royalty Owners Association (TIPRO) says this winter, U.S. exports of liquefied natural gas (LNG) to Europe is breaking records, and that, “Of the 98 LNG cargoes that departed the United States in January 2022, 75 were sent to Europe”. The association adds that U.S. LNG exports to the E.U. and the U.K. went, “From 3.4 billion cubic feet per day (Bcf/d) in November 2021 to 6.5 Bcf/d in January 2022—the most LNG shipped to Europe from the United States on a monthly basis to date”.
And if there is an interruption of Russian oil and gas to that continent, TIPRO predicts Texas could be positioned to have a role in filling some of that potential void, “Texas single-handedly accounts for roughly a quarter of U.S. natural gas production. In fact, more than 85 percent of the additional planned U.S. LNG export capacity will be located in the Gulf of Mexico and supplied largely by Texas natural gas.”
Food price volatility
Food prices, which have also seen a steep run-up during the pandemic because of supply and demand issues, could also be affected by increased uncertainty because of the Russian invasion. Russia and Ukraine produce a lot of grain products. Following the Russian attack on Ukraine, corn futures and wheat futures went charging toward price levels not seen in many years. If that trend continues, we could see extra costs tacked on to some food products that have already gone up substantially in price during the pandemic.