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The war in Iran has led to a spike in oil prices, from $65 a barrel before the U.S./Israel attacks to roughly $115 at the end of March. While it's moderated in varying amounts over the last 6 weeks, it’s not an exaggeration to call this an ‘oil shock,’ and some of the shock is felt when people refuel their cars at $4 to $6 a gallon.
Of course, there are other add-on impacts. Higher oil and gas prices raise the cost of transporting goods and services to market, and any manufacturing that requires energy experiences higher costs and either lower profit margins or lower sales as they pass on the additional costs to consumers.
It’s natural to ask how any of this will affect the American and foreign stock markets. There are no definitive answers, but we have seen some significant sell-offs and recoveries as the price of oil fluctuated.
In the long term, the economic effect may be temporary, assuming that oil prices return to prior levels. Longer-duration energy cost increases tend to be associated with higher inflation, lower profits, decreased consumer spending and economic downturns, while shorter spikes can be taken in stride.
A recessionary scenario happened following the Arab oil embargo in the 1970s. This led to a 1,000% rise in the price of oil that became a permanent fixture of business life. The American investment markets declined in 1973 and 1974 and failed to recover those losses until 1982. Compare that to when oil prices temporarily rose more than 60% during the first Gulf War in the early 1990s, the stock market indices reported gains—perhaps because there was no recession.
Looking back over the past 40 years, the S&P 500 has tended to perform better in years when oil prices rose than when oil prices were declining. That may be because a robust economy means more oil consumption, which means rising oil prices—and markets tend to go up in robust economies. When the economy is less robust, there is less demand for oil and prices go down—and that’s associated with less-robust stock market movements.
The truth is that oil price movements, in the short term, are poor predictors of stock market performance, and the recent spikes are no reason for panic. So far, there is no sign that the current disruption in oil supplies will permanently reset the price of oil—but it might lead to more upcoming volatility as investors process new information.
Article adapted with permission of financial columnist, Bob Veres.
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