I’m sure I’m not the only one who has been reading many articles on the impact of the current war in Iran and, in particular, the impact on energy prices and inflation.
Aside from the outbreak of the war in Ukraine, which saw Brent crude prices surge to over $137 per barrel in March 2022 and inflation eventually peak at 11.1% in the UK, a 41-year high, commentators have recently been referencing the Yom Kippur War in the 1970s.
As a brief recap, on 6 October 1973, the Egyptian and Syrian armies launched a surprise two-front assault on Israel under the codename of Operation Badr. The offensive, coordinated by Presidents Anwar Sadat and Hafez al-Assad, began with 100,000 Egyptian soldiers crossing the Suez Canal, supported by 1,000 armoured vehicles. At the same time, 35,000 Syrian troops, backed by 800 tanks, broke through Israeli lines on the Golan Heights.
However, after making significant initial gains, the Israel Defense Force (IDF) counterattacked swiftly and, within a few days, were on the west bank of the Suez Canal at a distance of 100 km from Cairo and within artillery range of Damascus. After initially refusing a ceasefire, both Egypt and Syria accepted a UN-backed ceasefire. The war finished on October 26 and had lasted for only 20 days.
The United States, under President Richard Nixon, had been reluctant to help Israel, but this changed rapidly when the Soviet Union began resupplying Egyptian and Syrian forces. An emergency supply line was provided to Israel, but at what cost? Immediately following President Nixon’s request for Congress to make available $2.2 billion in emergency aid to Israel, the Organisation of Arab Exporting Countries (OAPEC) imposed a costly oil embargo on the United States (and other countries that had supported Israel). The embargo ceased US oil imports and triggered a series of production cuts that drove up oil prices.
By March 1974, the price of oil had risen by nearly 300%, from US$3 per barrel to nearly US$12 per barrel and later came to be referred to as the First Oil Shock. Incidentally, a second oil shock occurred in 1979 in the aftermath of the Iranian Revolution. Although the embargo only lasted for five months, inflation in the US surged to 8.7% leading to the start of a severe ‘stagflationary’ period, where high inflation, slow economic growth and high unemployment resulted in difficult economic conditions and a collapse in the stock market.
Coming back to the present, we are starting to see inflation tick up and market expectations of a slowdown in interest rate cuts (and now murmurs of possible rate increases!).
In the early 70s, there were other factors at work including the financing of the Vietnam war, the devaluation of the US Dollar and, already, high energy prices. Although certainly different this time, there is no doubt that the current conflict has resulted in a structural shock to the global economy, causing significant volatility in financial markets and energy sectors. Global stock markets thus far have been relatively resilient, perhaps indicating that investors are expecting a quick, positive outcome to the situation in the Gulf. Furthermore, the world’s largest economies are more immune this time, with the US now the world’s top producer of oil and natural gas and China now the global leader in renewable energy investment. It is therefore no surprise that the trend this year has started to reverse, with the US stock market now starting to outperform Asia and Europe whose economies are more dependent on oil and gas imports.
History may not repeat itself, but looking at the performance of financial markets over the long-term, staying invested has consistently proven to be the most effective strategy for long-term returns, with market corrections very often providing attractive entry points.
