Frederica Freyberg:

Amid the horror of what’s happening in Ukraine, consumers here at home are railing against high gas prices. And like all things, the cost of a gallon of gas has turned up the political blame game. We wanted to put some context to the price of oil, its geopolitical implications, and what the war means economically going forward. We sat down with Mark Copelovitch, professor of political science and public affairs and international relations at UW-Madison. We came here to talk about oil and gas prices but in this moment with what’s happening in Ukraine, that just seems like such a mercenary discussion. What about that?

Mark Copelovitch:

Yeah. I mean, the most important thing is, this is a tragedy for Ukraine. It’s a war. We’re seeing the pictures of the massacring of civilians, and so there’s terrible human suffering. And the military aspect, and there’s huge implications for democracy in Europe. So this is a sovereign democratic country that has been attacked for essentially, you know, no reason of its own, and so those are paramount issues, but also, you know, I teach international relations, and the security issues and the economic issues in international relations intertwine. So one of the major things in the last week has been the coordinated economic sanctions from the U.S. and the European Union, the Japanese, kind of the world’s major democratic economies, and they’re targeted at Russia’s ability to sustain its economy which ultimately is related to Russia’s ability to sustain the conflict. So I think the economic issues are actually very important to talk about.

Frederica Freyberg:

How meaningful is the U.S. sanction of ending Russian oil imports, both for that country, but for ours?

Mark Copelovitch:

I mean, it’s important. I actually don’t think that’s the most important of the sanctions. So Russia is one of the world’s largest oil exporters. We are relatively not dependent on Russia. Europeans are incredibly dependent on Russia for natural gas exports. The most important ones have been these financial sanctions to block the Russian Central Bank and government and Russian banks from participating in the global economy. Basically the financial flows in the world economy are the oil that keeps the engine running, and if you cut off the oil, the Russian economy basically can’t function. So that’s much more important. You know, I think the hit to the Russian economy of cutting off oil exports is something that happens over the next month to a year or two. The financial sanctions are already hitting them very, very hard.

Frederica Freyberg:

In terms of the hit to their oil economy, what will that do in the U.S.? I mean, will this result in higher prices here?

Mark Copelovitch:

It will result in higher prices at least temporarily because global prices will jump. So when you have one of the world’s largest oil producers, not exporting as much, you’re going to have these short-term spikes. But we are not very dependent on Russia, right, and there’s already talk of how you’re going to reallocate global oil supply chains, the U.S. government releasing oil from the strategic petroleum reserve, moving to alternative energy. So you know, you saw the short-term spike. I think oil went up to about 125 or 130, it’s already back down today below 110. So oil prices are going to be higher, gas prices are going to be higher, but it’s not going to be a sort of things are going to keep going up. For the next six months to a year, I think. And for the U.S. really, again, the economic hit in terms of inflation in the real economy, less than 1% of our trade is with Russia.

Frederica Freyberg:

So if you go in and put gas in your car, it’s now like above $4 a gallon.

Mark Copelovitch:

Right.

Frederica Freyberg:

Is that a major shock?

Mark Copelovitch:

You know, it’s sticker shock, right? People see it, and oil prices were very low at the start of the pandemic and gas prices were down probably to $2.20, somewhere around there. From 2011 to 14, gas prices were higher than even the high prices now, and if you adjust for inflation, I think the number I saw yesterday was we’d need another 32% rise in prices to get to where we were in real terms in 2011 to 2014. So they’re high, but they’re not historically incredibly high. And again, if you think about how much the average household spends on gas, you’re talking about probably about a thousand dollars a year, which is a big hit, but there are other things that have been big hits too, like the tariffs with China from the trade war actually raised household spending costs even more than that.

Frederica Freyberg:

When you combine the cost of gas, though, with the high inflation, and we really are talking about a hit on individual consumers.

Mark Copelovitch:

Yes, absolutely. I mean, inflation is now — the numbers today were 7.9%, and so it is a material hit. I mean, I think — I like to put it in perspective both to history and the experience of the last year, so historically, if you look at the 1970s, we had inflation up to 15%. And that lasted for several years. So this is high relative to a world where we got very used to having really low inflation for two decades. The other thing to think about is, you know, it’s a hit to real income and consumption, but the average household actually received about $3,400 in federal relief of various forms in the last year. So real income and real consumption actually didn’t go down, if you look for the average household in the last year. So a lot of the talk about suffering of inflation is looking forward now, because there’s probably not going to be another big stimulus package to offset the cost of inflation going forward.

Frederica Freyberg:

What’s the expectation of inflation trending down?

Mark Copelovitch:

You know, I think we were — before 14 days ago, we were talking about this is probably the peak over the next month or two. Because the vast majority of the inflation was cross national and about the pandemic and supply chains. You know, it’s 5, 6% inflation in European Union countries, it’s 7-something here. On the margin, it was about the stimulus package and things like that in the U.S., but most of it was about the inflation in the pandemic and the economy freezing up, so as things were re-opening, we were starting to think about over the next six months probably inflation is going to come down. It’s a little less clear if it’s going to come down. I don’t think it’s going to keep going up, you know, at faster and faster rates every month, but I think we’ve extended the time horizon now going forward of when does it get back to what we thought was normal inflation of 2% or 3%. So you’re definitely going to see it over the next several months and we don’t know how long the conflict in Ukraine is going to last. What the broader ramifications of that are.

Frederica Freyberg:

Okay. Mark Copelovitch, thanks very much.

Mark Copelovitch:

Thanks so much.