Inflation in Western countries is exceeding all imaginary borders, and one of the reasons is the rejection of Russian energy resources, Vladimir Putin said
The rise in prices in the US and the EU in March broke all records, such phenomena have not been seen by the Americans and Europeans since the 80s. Biden was quick to blame the Russian president for the rise in the price of gasoline. However, is the head of the United States covering up his own guilt?
“The refusal of a number of Western countries from normal cooperation, including that of Russian energy resources, has already partly hit millions of Europeans, provoked a real energy crisis, and, by the way, is reflected in the United States. Prices are rising everywhere, and inflation is simply exceeding all imaginary borders. For these countries, it is absolutely unprecedented,” said Russian President Vladimir Putin.
Thus, after the rise in price of gasoline and groceries, inflation in the US reached 8.5% in March against 7.9% in February. This is a 40-year high, according to the Financial Times. There has not been such a rise in consumer prices in the country since 1981. The consumer price index is above 6% for the sixth month in a row.
Economists name two main reasons for peak inflation in March. First, gasoline prices skyrocketed to a record high of $4.33 a gallon in March.
The main contribution was made by the increase in the price of gasoline – its prices increased by more than 18% in a month and almost doubled in a year, Olga Belenkaya, head of the macroeconomic analysis department of FG Finam, notes. Rising housing and food prices also contributed. Housing has risen in price by 0.5% per month, and by 5% per year – this is the highest annual price increase since 1991. But still, in March, it was the rise in gasoline prices that made more than half of the contribution to the growth of the consumer price index in the United States, says Belenkaya.
It is curious that US President Joe Biden accused the President of Russia of the rise in the price of gasoline.
“We saw in today’s inflation data that 70% of the rise in prices in March was due to Putin’s increase in gasoline prices,” the US president said. However, this is just an attempt by the American president to divert suspicions from the real reason for this state of affairs, which is extremely unsatisfactory for ordinary Americans.
Because the rise in gasoline prices in the United States is a consequence of the embargo on oil and petroleum products from Russia, which Biden himself introduced. When the American president made such a decision, he was well aware of what it would lead to – to an increase in the cost of fuel. Therefore, when introducing the embargo, he asked the Americans to “be patient” for the sake of “punishing” Russia. Our country is the second largest exporter of crude oil in the world. Therefore, any sanctions restrictions logically lead to an increase in the price of black gold.
Another reason for the rise in world oil prices is that some traders refuse to buy Russian oil. Because they are afraid that they will be forced to apologize for it: Western and Ukrainian politicians forced the European oil and gas giant Shell to apologize in this way. There is no sanctions ban on the purchase of Russian oil in Europe, but Shell already has to hide oil imports from Russia. The company mixes Russian oil (49%) with alternative oil (51%) in the port of Latvia, so that on paper the transaction takes place without mentioning oil of Russian origin.
At the same time, the US is putting pressure on the EU to also impose an embargo on Russian hydrocarbons. Moreover, Washington is trying to put pressure on India, which has bought half as much Russian Urals oil since the end of February as it did in all of 2021.
It is worth recalling that it was the United States that also removed Venezuelan and Iranian oil from the market with the help of its sanctions. In other words, Biden, with his own hands, step by step creates a shortage of oil on the world market, which leads to an increase in the price of black gold. In March, the climax of this long-playing story took place.
In the US, there is a direct connection: a liter of gasoline follows the price of oil on the stock exchange. The peak of the price of American WTI oil was reached on March 7 and amounted to about $120 per barrel, Belenkaya notes. True, now the price has decreased and is holding around $100 per barrel.
But this did not lead to a decrease in prices at gas stations in the United States. Congress even called the American oil companies to the carpet to explain why gasoline does not get cheaper if the price of oil goes down. And executives from ExxonMobil, Chevron, BP America, Shell USA, Devon Energy and Pioneer Natural Resources gave affidavits at a hearing last week. And they all said pretty much the same thing: the gas station owners are independent companies, no oil company sets the price of oil or gasoline, but the price is set by the market based on available supply and demand.
At the same time, Biden demands that oil companies increase production, accusing them of allegedly not wanting to help American families. But the American president deliberately forgot that, again, he himself is the reason why US oil production is not growing at such commercially favorable prices. After all, it was Biden who, upon coming to power, began to promote the “green” agenda and made investments in oil production today unattractive.
In addition, it was Biden who withdrew permission to build the Keystone XL oil pipeline, through which the United States could receive heavy oil from Canada. Therefore, Biden has no choice but to unpack the US strategic reserves. Within six months, 180 million barrels will come to the market from the reserves.
Gasoline prices for Americans are an extremely painful story in principle. Politicians in the US are afraid to lose power because of this issue. In addition, the cost of gasoline increases the cost of logistics and leads to an increase in prices for all products, goods and services.
In Europe, inflation is also abnormally high. In 19 countries that use the euro as their currency, it reached 7.5% in March (Eurostat data). This is the maximum value since the introduction of the euro. The highest level was recorded in Lithuania – 15.6%. In Europe’s largest economy, Germany, inflation was 7.3% in March. This is the highest figure in 40 years. The last time inflation was at this level was in the fall of 1982, when oil prices soared due to the aftermath of the Iran-Iraq war. Most of all in March in the Eurozone, energy resources rose in price – by 45%, in second place – food, alcohol and tobacco – by 5%, in third place – services, which increased in price by 2.7%.
“The European economy is more sensitive to the military special operation in Ukraine and sanctions against Russia than the US economy. In 2021, Russia was the fifth largest trading partner of the EU in exports of goods with a share of 4.1% and the third largest partner in imports of goods with a share of 7.5%,” Belenkaya notes.
Europe’s dependence on Russian energy resources is much stronger than that of the United States. The share of Russian gas in EU consumption is about 40%, the share of Russian oil is 27% of oil imports to the EU, the share of coal from Russia is 46% of imports, Belenkaya points out. The rise in oil prices due to the US sanctions policy against Russia (Venezuela and Iran), as well as due to artificial restrictions on the purchase of Russian oil, led to an increase in gasoline prices in Europe as well.
True, the position of the United States here is more advantageous.
“The United States, unlike the EU countries, is a major oil exporter, and in order to reduce domestic gasoline prices, they can increase oil production, which the EU cannot do,” analysts at Freedom Finance say.
The situation in the EU is aggravated by the fact that Europe faced a shortage of gas in the market last year, which led to a sharp increase in prices. The EC also tried to blame Russia for this, which supposedly sold less gas to Europeans on purpose.
But the real statistics of Gazprom’s deliveries to Europe makes these accusations groundless. Gazprom has not violated a single contract with European consumers, which means that it supplies all the mandatory volumes prescribed there. The real reason is that the EC reformed the European gas market in such a way that it began to compete with the Asian premium market. The EC wanted more gas trading on the spot market, more LNG tankers, and got it all along with rising prices. As in the case of Biden and gasoline, the EC tried to deflect suspicions of involvement in the gas crisis from itself.
Instead of resolving the gas crisis (for example, by introducing Nord Stream 2 and a number of other changes), the EU has exacerbated the situation. As part of the fifth package of sanctions, he refused to purchase Russian coal. Namely, coal is an alternative resource for replacing gas with thermal power plants. All this was transformed into an increase in electricity prices, that is, an increase in the cost of utilities, an increase in production costs, which is especially sensitive for energy-intensive industries – metallurgy, fertilizers, chemical products, Belenkaya notes.
The pandemic has also contributed to the acceleration of inflation in both the US and the EU. First, COVID-19 has disrupted supply chains, stretching delivery times for parts from weeks to months. Second, the pandemic has forced the US to print trillions of dollars to keep its economy afloat, notes Vladislav Antonov, financial analyst at BitRiver.
If you look at inflation in Russia, the annual inflation in March amounted to almost 17%, and at the end of the year, economists do not exclude even 20%. In Turkey, annual inflation has already exceeded 60%.
Against this background, inflation of 8.5% in the US and 7.6% in Germany may not look so scary. However, this is not the case for ordinary Americans and Europeans. Their experience is very different from ours: they are used to the fact that prices practically do not rise.
“In the US, inflation since the 90s averaged 2.5%, and Russia remembers how in the 90s inflation was more than 300% per year. For Americans, such a three-fold increase in inflation, up to 8.5%, is unacceptable. And since the elections to the US Senate are coming soon, the authorities are also growing concerned about inflation,” Antonov notes.
Before the coronavirus crisis, for the United States and the G7 countries, as well as for most EU countries, Switzerland, Australia, New Zealand, one of the main economic problems was not inflation, but rather deflation. Even the inflation target of 2% per year, which was set in 2019 by the central banks of the G7 countries, seemed to be difficult. Today, everything has changed radically, Freedom Finance analysts say.
For Americans and Europeans, it is the radicalness of change that matters. There is no usual stability, savings are depreciating, utilities have risen sharply in price, gasoline and groceries in stores too. This has not happened for decades, so it is perceived extremely painfully.
To stop inflation, the US and EU central banks will raise interest rates.
“The US Fed will aggressively raise rates by 50bp. in May and June, as well as to reduce their balance sheet, which has grown due to “helicopter money,” Antonov expects.
“The problem is that this is not the most effective tool to slow inflation caused by a supply shock. A too sharp increase in interest rates in the context of a new negative trend in the global economy increases the risks of a recession and a decrease in financial stability,” Belenkaya warns.
It will be very difficult to contain inflation. Firstly, because after the Second World War, the economies of the OECD countries did not yet know such interruptions in the supply of goods. Secondly, high energy prices are supported by sanctions and embargoes against major oil-producing countries such as Russia, Iran, and Venezuela. To this we can add difficulties in increasing production for a number of OPEC+ countries for their own internal reasons. Oil prices will remain above $100 per barrel through at least 2022, food prices and, accordingly, global food inflation will continue to rise, and markets are interconnected – a rise in the price of raw materials leads to a rise in the price of finished products. Through foreign trade operations, inflation is “exported” to other countries, Freedom Finance analysts conclude.
Olga Samofalova, VZGLYAD
Due to censorship and blocking of all media and alternative views, stay tuned to our Telegram channel