What’s On Our Minds This Week

As we wait for news on an Iranian response to the U.S. bombing of its nuclear facilities, here are a few things to keep in mind:

1.  The United States is less dependent on oil as an input to economic growth than it has been in decades. In the 1970s, each quadrillion BTU of energy consumption produced less than $100 billion of real gross domestic product. Today, that same amount produces nearly $250 billion. We also now import roughly 10% of our petroleum from the Persian Gulf, down from a peak of nearly 30% in the mid-1970s.
2. Historical analogs tell us that most military activity doesn’t tend to be a major driver of financial markets over anything longer than the short term. Often, threats of energy supply disruption fail to fully materialize as feared. A few recent examples are the January 2020 assassination of Iranian General Qassem Soleimani (see charts above), the Russia-Ukraine war, and the 2019 bombing of Saudi Arabian oil facilities.
3. Despite memories of recessions from the Arab oil embargo of 1973 and Persian Gulf War of 1990, the link between oil supply shocks, economic activity, and financial markets is not always as clear. For example, in the six weeks following the 2011 NATO airstrikes in Libya (when production fell by nearly 2 million barrels per day), oil prices rose from $101 per barrel to $113, but the S&P 500 also rose by nearly 7%.

Like most geopolitical events, the events over the weekend introduced a new set of “unknown unknowns,” most important of which will be linked to the Iranian response. If that response is limited, as it was in 2020, the most important macro drivers for the U.S. economy will continue to be the impact of trade, tariffs, and shifting labor markets on the U.S. consumer. A modest rise in oil prices is unlikely to move the needle for these dynamics. If the situation does meaningfully escalate from here, timing of a response from OPEC and the U.S. shale patch will be a key factor.

Past performance does not guarantee future results.