The invasion of Ukraine by Russian military forces has created a significant economic ripple effect for businesses and industries at every level of the Valley economy.
For consumers, the most noticeable impact has been at the pump, where the average price per gallon of gas sits at $5.86 as of March 22, according to the American Automobile Association.
Todd Stevens, chief executive of private energy company Black Knight Energy in Valencia, said higher gas prices are not only due to the war in Ukraine, but also a lack of excess capacity in the world to increase production quickly.
“Oil and natural gas production are capital intensive businesses that require longer investment time horizons (months, but in most cases, years), and in today’s world you might also have supply chain issues getting the steel, chemicals, etc. that you need to drill wells and/or increase production,” Stevens wrote in an email.
Historically, Stevens added, the cure for high oil prices was high oil prices; when prices rise, drilling increases, leading to supply and demand coming into balance and prices moderating. However, the oil and gas industry are in a unique paradigm right now, he said.
“The oil and gas business … requires substantial investment to mitigate natural production declines, let alone grow production,” Stevens wrote, adding that if investment professionals are worried about the longevity of their investments and the geopolitical circumstances surrounding it, pause is created.
The oil price hikes also impact operating costs for small businesses. Ben Johnston, chief operating officer of small business financing company Kapitus, said that businesses, “especially those with large vehicle fleets or high production-related energy costs such as transportation and shipping companies and manufacturers,” will be impacted.
The U.S. imported an average of 209,000 barrels per day of crude oil and 500,000 barrels per day of other petroleum products from Russia in 2021, according to the American Fuel and Petrochemical Manufacturers trade association. The first number accounts for about 3 percent of U.S. crude imports.
“So, while a ban on Russian oil by the U.S. will itself have little effect on U.S. small businesses, the Russian invasion of the Ukraine and the global economic response is already having a significant impact,” Johnston wrote.
Spurring inflation
Anton Lowenberg, professor and chair of the Department of Economics at California State University – Northridge’s David Nazarian College of Business and Economics, echoed Johnston’s point, saying the domestic economic impact is primarily linked to the sanctions that have been dished out by the U.S. and other Western governments.
The Biden administration has so far created sanctions against Russia that have targeted the country’s banking systems, exports and oligarchs.
“We tried to make these sanctions as damaging or as costly as possible to the target country, but inevitably, they employ costs on the countries that are implementing these policies as well,” Lowenberg said. “We have firms, businesses, individuals, organizations and universities that are going to be inevitably impacted when you cut off these linkages, whether they’re trade linkages, financial linkages, or investment linkages, whatever they are.”
For example, CSUN has students from Russia and Ukraine who have been unable to access funds for rent, tuition, dorm fees and more, according to Lowenberg. Another local presence reacting to the invasion is Avery Dennison, which ceased investments and contracts with Russian suppliers among other economic decisions that stand in favor of Ukraine.
Lowenberg sees inflation as another potential problem that will further impact the economy.
“We have been battling higher inflation for some time now, separately from this whole Russia-Ukraine situation,” he said. “That certainly is going to exacerbate it if you have rising commodity prices, such as oil.”
In a special report released by commercial property brokerage Marcus & Millichap Inc., the Calabasas-based company wrote that rising oil prices will drive higher inflation as costs of transportation, manufacturing, plastics and other products increase.
The magnitude and duration of the inflationary increase, the company wrote, will primarily be predicated on how the war and accompanying sanctions play out.
Marcus & Millichap gave a favorable outlook on the real estate industry despite the economic uncertainty resulting from Russia’s invasion of Ukraine.
The company wrote that factors weighing on the economic outlook and driving inflation will restrain commercial real estate construction, which is a good thing for the industry.
“This will help keep vacancy rates low and boost the commercial real estate revenue outlook,” the company wrote. “At the same time, these factors will increase real estate replacement costs, further bolstering real estate values and supporting the sector’s inflation resistance.”
Eventually, a rebuilding of Ukraine could spur global economic growth according to the company, which acknowledged that similarly, sanctions imposed on Russia could persist after the conflict considering the country is under investigation for war crimes and violations of international law.
“Under the context of this longer period of regional instability, U.S. commercial real estate offers a durable yield outlook and an extended runway of growth,” the company wrote.
Although Marcus & Millichap acknowledged potential economic upsides, the company also noted that downside risks for the economy at large could show up and create surges of inflation, a recession and/or financial market instability.