Nouriel Roubini on BizNews: Gulf tensions simmer, but oil shocks aren't what they were in the 1970s

Nouriel Roubini argues that even as tensions over the Strait of Hormuz simmer unresolved, oil shocks have lost their power to derail economies the way they did in the 1970s. Strategic reserves, energy efficiency gains, OPEC discipline breakdowns and the AI investment boom have all blunted the impact, he writes. For South Africa, a net fuel importer where petrol price adjustments feed directly into inflation, the rand and SARB rate decisions, that resilience matters: milder, shorter global oil shocks would mean less imported inflation pressure, even as Sasol and Transnet's fortunes remain tied to the same volatile Gulf risk premium..By Nouriel Roubini*.NEW YORK—The Persian Gulf is in an unstable disequilibrium. There has been no lasting deal to reopen the Strait of Hormuz, because the United States and Iran remain far apart in their demands, with the Iranians holding more leverage than President Donald Trump ahead of the US midterm elections this November. In the absence of a full deal, renewed skirmishing was highly likely, reflected in the growing risk of a return to full-blown warfare.Still, equity markets did climb higher on the hope that a temporary ceasefire would lead to a full deal, and market reactions to the latest re-escalation of tensions have been subdued. The overall economic impact—in terms of growth and inflation—has been relatively modest. Despite this being the largest-ever disruption to global oil supplies, the oil shocks of the 1970s had a greater impact.The Iranian strategy remains centered around the weaponization of oil, a practice that has a long history. Some historians argue that Germany lost World War I partly because an Allied sea blockade deprived it of oil. Similarly, Imperial Japan made the fateful decision to attack the American fleet at Pearl Harbor because US President Franklin Roosevelt’s administration had imposed an oil embargo on it for invading China, and Stalin would later claim that the Nazis lost World War II because the Soviets had prevented the Axis powers from seizing oil fields in the Caucasus.After the war, the 1956 Suez Crisis disrupted shipments of oil from the Middle East to Europe, with France, the United Kingdom, and Israel launching an operation to seize the Suez Canal after its nationalization by Egypt. (They were ultimately forced to withdraw under pressure from the US, whose focus was on preventing a conflict that could pull in the Soviets.) A decade thereafter, the immediate trigger for the Six-Day War between Israel and various Arab states was Egypt’s attempt to block shipments of Iranian oil to Israel through the Straits of Tiran.The geopolitical shocks of the 1970s brought on a lost decade of stagflation (several recessions and high inflation), weak global stock markets, and double-digit bond yields. So severe was the fallout that the 1970s remain a fixture in our collective memory. But like this year’s war, later politically-driven oil shocks—following the 1990 Iraqi invasion of Kuwait, the oil price shock of 2000–01, the US invasion of Iraq in 2003, and last year’s 12-day war against Iran—produced much milder economic and market effects.There are several reasons for this. For starters, after the 1970s, OPEC producers realized that weaponizing oil can be counterproductive. An oil-price shock that is big enough to cause global stagflation will lead eventually to a collapse in oil demand and prices, as happened in 1981–82. Thus, some responsible players, such as Saudi Arabia and the Gulf States, have been willing (and able) to increase supplies when geopolitical shocks trigger spikes in oil prices.Moroever, since the 1970s, energy-efficiency gains have tended to reduce the share of imported oil used in production and consumption. And OPEC’s market power has declined as its members have put their own interests ahead of the need to move in lockstep (with the United Arab Emirates being the most recent defector), and as new sources of supply have come online—not least in the US following its shale-energy revolution.After the 1970s shocks, major oil consumers—including the US, Europe, China, and Japan—also built up strategic petroleum reserves that could be released when prices spiked (a major source of resilience this year). And alternatives to oil—natural gas, renewables, and new, safer modular nuclear reactors (with fusion energy potentially coming in the next decade)—have gained traction and market share. Looking ahead, a growing share of the demand for energy (via electric vehicles and batteries) will be met with electricity that can be produced without oil.At the same time, the standard macro-policy response (both fiscal and monetary) to oil shocks has improved, which has helped prevent a 1970s-style de-anchoring of inflation expectations. And partly as a consequence of these factors, oil shocks have become less persistent and shorter than those of the 1970s, which dragged on for around a decade. The 1990-91 oil shock lasted nine months, the 2000-01 shock was even shorter, and the one following last year’s 12-day war lasted only a few weeks..Read more:.Javier Blas on Iran War: How long can US oil exports keep oil prices low?.Finally, and most importantly, unlike previous episodes in which macro and market trends were dominated by an oil shock that became a negative aggregate supply shock, the current situation features a secular positive aggregate supply shock in the form of the AI investment boom. Tech-industry tailwinds are promoting stronger growth and lower inflation in many countries and regions, which explains why US equities peaked at new highs even when oil was above $100 per barrel this spring. Though there has since been a correction following renewed hostilities, it has remained modest.Of course, if the latest skirmishes lead to a full escalation of hostilities, the economic consequences and market implications could be more serious, with a protracted conflict raising the risk of a truly stagflationary outcome. This is not the baseline scenario; but recent developments do suggest that the tail risks are larger than what financial markets are currently pricing in..*Nouriel Roubini, a senior economic strategist at Hudson Bay Capital Management, is Professor Emeritus at New York University’s Stern School of Business and the author, most recently, of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022). Copyright: Project Syndicate, 2026.www.project-syndicate.org.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Nouriel Roubini on BizNews: Gulf tensions simmer, but oil shocks aren't what they were in the 1970s

Related Stories

FT’s Gideon Rachman: Are we sleepwalking into World War III? And where does that leave SA?

Roubini on BizNews: Why is the global economy so resilient?

The Economist: Has Iran lost its grip on Middle East oil exports?

Nouriel Roubini on BizNews: Where will the global bond rout hit growth and equities?