Colliding Forces: Russia, Oil, Inflation, and Market Volatility ForCaterpillar Employees

And with geopolitical tensions and rising oil prices continuing to hammer global markets, it's critical that Caterpillar employees and retirees remain disciplined and avoid emotional decisions in favor of long-term financial goals, 'says Kevin Landis, of The Retirement Group, a division of Wealth Enhancement Group.

Caterpillar employees and retirees should consider broader economic trends and disruptions like energy prices while sticking to a structured financial plan, says Brent Wolf, a representative of The Retirement Group, a division of Wealth Enhancement Group.

In this article we will discuss:

• 1. Russia-Ukraine conflict affects world oil prices.

• 2. Possible disruption to oil exports and European energy supplies.

• 3. High oil prices have an effect on inflation and the stock market.

The United States, Europe, and allies have condemned the Russian invasion of Ukraine with punitive sanctions. War has a humanitarian cost and the economic effects could last months or years. The conflict nevertheless pushed oil prices up and sent the U.S. stock market tumbling - with more volatility likely.

It may be helpful for some Caterpillar employees and retirees to consider how the Russia-Ukraine dispute could affect the global oil market and U.S. consumers and investors now.

Expensive Oil

The spot price of Brent crude - the world oil benchmark - surpassed USD 100 per barrel for the first time since September 2014 in part because of the Russian troop buildup on the Ukrainian border - February 14, a week before the Russian invasion began. Prices eased on reports sanctions on Iranian oil could be lifted but a full-scale Russian invasion again sent Brent crude above USD 100 a barrel.

Though geopolitical factors helped drive recent price movements, oil prices have been rising since April 2020 as the global economy reopened and demand outpaced production. After slashing global consumption by 20% in the first months of the pandemic, oil producers cut back as demand increased and haven't caught up. The U.S. Energy Information Administration said global production matched consumption in January 2022 and was expected to exceed demand in the coming months, pushing prices lower, but the Russia-Ukraine conflict could tip that balance in the wrong direction.

The Russian Threat

Russia produces about 10% of the world's oil and is the second-largest exporter after Saudi Arabia. Structuring Russian oil exports would skew global supplies and raise prices.

Only about 3% of U.S. daily oil consumption comes from Russia and could be replaced by other sources. The biggest disruption would come in Europe, which imports about 25% of its oil and 40% of its natural gas from Russia. Central and Eastern European countries would be most vulnerable.

But cutting off oil and gas supplies unilaterally is unlikely because Russia depends on the revenue as much as Europe depends on the energy. In the longer term, however, Russia may shift energy exports from Europe to China and force Europe to find other sources of energy. U.S. and European officials said sanctions on Russia will not include energy industries but exclusion of Russian banks from the SWIFT global payments system could affect oil and natural gas purchases by Europe and the U.S.

Wheat and corn are also among Russia's exports that could be impacted by sanctions or a prolonged conflict besides precious metals like nickel, aluminum, and palladium. Ukraine also exports wheat and corn, and Russian and Ukrainian grain supplies are needed by many countries of the Middle East, Africa, and Asia. Any breakdown of these supplies would not directly affect the United States but would create widespread hardship and add to the global economic woes.

Pain at the Pump

Theory would predict that high oil prices cause inflation because higher costs for fuel and raw materials for petroleum-based goods could be absorbed by consumers. This occurred in the 1970s but the connection hasn't been as clear in recent years. When oil prices last hit USD 100 a barrel in 2014, annual inflation was below 2%.

Petroleum prices drive gas prices and high gas prices feed a broad inflationary trend fueled by supply-chain disruptions and high consumer demand. Although general inflation rose 7.5% for the 12-month period ending in January 2022, gas prices have risen 40% and the Russia-Ukraine conflict has pushed them higher still. The national average price of unleaded regular gasoline stood at USD 3.61 a gallon at the end of February, 90 cents higher than a year earlier.

And with the Russian invasion, gas prices may spike even more - driven by global worries rather than serious supply issues in the United States. It may also depend on consumer behavior whether prices stay high. Gasoline consumption would feed the inflationary spiral, but reducing driving because of high prices could push prices down.

Geopolitics and the Market

The theory is that rising energy costs for businesses and lower discretionary income for consumers would theoretically dampen the stock market, as with inflation. But an older Fed study showed little association between oil prices and stock market performance. Nonetheless, rising prices in recent months matched stock market volatility and may have contributed.

The market's ups and downs from the Russian invasion suggest rough times ahead for investors but it's impossible to predict how volatile it will stay. The effects of most geopolitical events - serious or not - are relatively short - often settling in days. But the Iraqi invasion of Kuwait in 1990 had a major effect and the market sank for six months.

Whatever happens, the stock market is shaped largely by U.S. business activity. Although high oil prices in California and armed conflict raise eyebrows, Caterpillar employees and retirees should invest with logic and not emotion. For most investors, a steady strategy based on individual goals and risk tolerance is prudent.

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Sources: 

1. 'The Impact of Russia–Ukraine War on Crude Oil Prices.'   Nature Communications , Oct. 2023, pp. 1-10.

2. 'Spooked by the Russia-Ukraine Crisis? Don't Do This...'   SmartAsset , Aug. 2023, pp. 1-5.

3. 'Energy Prices Rise Amid Russia's Attack on Ukraine.'   Russell Investments , Mar. 2023, pp. 1-8.

4. 'How Has the Russian Invasion of Ukraine Affected Global Financial Markets?'   Economics Observatory , Jun. 2023, pp. 1-12.

5. 'Russia / Ukraine Conflict – Impact on Markets and Investments.'   Columbia Threadneedle Investments , Mar. 2023, pp. 1-6.