Russian oil embargo offers mixed results for sustainability’s future

Reading between the trend lines with AIA's chief economist

As AIA projects a recovery in building construction to continue into 2023, most businesses right now have undoubtedly noticed a jump in prices—notably on gasoline—sparked by a U.S.-led embargo of Russian oil. Most architecture and construction firms have also noticed it in the cost of transportation in an already vexed supply chain. But, according to AIA’s Chief Economist Kermit Baker, Hon. AIA, the concern bigger than oil is still rising inflation and rising interest rates. “That’s going to have a much bigger impact on the supply chain in the long run,” he says, “just as it was before the Russian invasion of Ukraine.”

We were on the path of needing to act against inflation even before Russia’s invasion of Ukraine—so now that we have an oil embargo, has that exacerbated or accelerated the situation?

Prices have spiked and prices are volatile, and it’s difficult to plan when you don’t know what the situation will be day to day moving forward. The embargo on Russian oil and higher oil prices on the international market filters through the entire economy, whether you’re talking about fertilizers, transportation, or just the price at the gas pump down the street. We’re seeing the Federal Reserve Board become much more what I’d call hawkish in terms of what an interest rate hike looks like to tamp down inflation. After all that plays out, we’re going to see a slowdown in the economy, and many say these oil prices will lead to an economic recession in the U.S., in large part because of the Fed’s response—to raise interest rates, which slows down economic activity, thereby affecting firms across the board.

When the price per barrel peaks above $100, as it has with alarming frequency since the early 1970s, is it worth thinking about where we fall in the last 50 years of volatility?  

What we had in the 1970s was an oil-producing cartel limiting supply. What we have now is not any one entity limiting supply but a lot of uncertainty in terms of who will buy it and how much. The net effect on demand because of Russia’s invasion could be modest in the end, or it could be grave. But one thing is certain: There are a lot of dimensions to oil. For instance, the spike in its price we saw a couple of weeks ago seemed to be because of some pandemic weakness in China, which is another aspect to the discussion and nothing to do with Russia. Now that we are in this post-embargo situation, however, Russia has made things a lot more complicated as we try to manage our expectations around the global supply chain in the third full year of a pandemic.

What is this embargo on Russian oil going to do for sustainability and carbon neutrality goals?

I think what we have are two very strong competing forces at play in terms of the impact this oil embargo will have on sustainability. The net positive for sustainability is that with oil and natural gas more expensive, people will use less of it—and there will be a lot more attention to efficiencies and energy use. We’ll see a decline in the purchase of gas-guzzling cars and trucks. Related to that is the promise that green energy alternatives and renewables that were once at a financial disadvantage are now looking attractive. How many people will be more serious about electric vehicles now? I think a lot.

As strong as the net positive, and maybe even stronger, is the negative aspect of this embargo: The U.S.’s general reliance on foreign energy sources will increase the “Drill, baby, drill” sentiment and prompt more people to ask, “What’s wrong with mining more coal?” and “Why can’t we open up more oil and gas exploration?” The environmental impacts of these activities are well-documented, so I won’t go into them, but looking for domestic—or at least nearby---sources of oil and gas will be the countervailing force and proverbial other side of the double-edged sword.

If I’m a firm owner, what am I supposed to do?

I think keeping their ears open to market trends and listening to what owners are thinking is the only thing architects can do right now. This oil embargo is a speed bump in the long road for greater sustainability in the design and construction of buildings of all sizes. It’s still a bump and one worth thinking about from the perspective of the people paying for our buildings. It’s a tough one because of all the uncertainty, number one, but, number two, because each firm has its own business strategy keyed to local factors. I’m guessing there are some clients that are going to be very reactive to higher energy costs—and will want to do something differently right away.

What does the client landscape look like beyond the speed bump? Who is able to hold that long view that’s not as reactive?

Some clients, though, will keep looking at the longer view well beyond this oil embargo’s volatility. The institutional market and the government and leading corporations have longer views, and the Googles and the Apples of the world won’t be as reactive as the local developer for a 25-acre mixed-use project, for instance. As architects help their clients work through these issues, they can be most helpful by modeling energy costs over the next six years or longer, as well as the next six months, to get their clients thinking about that long term.

This interview has been edited for length and clarity. William Richards the editorial director of Team Three, an editorial and creative consultancy, and a writer whose most recent book, Bamboo Contemporary: Green Houses Around the Globe (Princeton Architectural Press), appears next month.