How the US-Iranian oil stalemate could harm the economy

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Investors would be well advised to closely monitor relations between the United States and Iran, where tensions escalated following Iran 's suspension of parts of the nuclear deal that took place. briefly put an end to its economic and diplomatic isolation.

History shows that soaring oil prices – and not financial panics – are the leading cause of recession in modern America.

"Oil shocks have killed more US economic expansion in the last 40 years than any other cause," wrote Nicholas Colas, co-founder of DataTrek Research, in a note to his clients.

In addition to long queues at gas stations, the Saudi oil embargo of 1973-1974 helped trigger a rise in oil prices that paralyzed the economy. The Iranian revolution of 1979 also led to a recession in the United States.

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Similarly, the US economy slumped in the wake of Iraq's invasion of Kuwait in 1990 and the US overthrow of Iraq's dictator Saddam Hussein in 2003.

"Historically, we have seen a surge in oil prices before or during a recession," said Mike Reynolds, head of investment strategy at Glenmede.

Colas noted that the last three examples had occurred "late in an extended US business cycle", much like in the current environment. The economic expansion of America, which is now nine years old, is about to become the longest in history in July.

$ 140 of oil in 2008

The Great Recession was caused by an epic real estate bubble and an overabundance of income on Wall Street. However, the fact that US oil prices skyrocketed above $ 140 a barrel in the summer of 2008 contributed to the depth of the slowdown. American motorists in shock have struggled to pay the price of gasoline at 4 gallons.

"It's the straw that really broke the deadlock for consumer spending," said Troy Gayeski, co-chief investment officer at SkyBridge Capital.

The oil shocks are frightening as they are simultaneously a blow to household spending and consumer confidence.

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And the rise in oil prices can spread to other branches of the economy, leading to higher costs, from air fare to road transport. This can put pressure on profit margins as well as on the Federal Reserve, which is responsible for ensuring that inflation does not become uncontrollable.

The 2008 oil shock led the European Central Bank to raise interest rates in July, a few months before what would turn into the most frightening financial crisis since the Great Depression.

"They increased their rates at the worst time.It was a bad choice," said Gayeski. "It would be highly doubtful that the Fed is overreacting."

Risks rise in the Middle East

The recovery after the Great Recession has proved resilient and has helped overcome countless threats such as Brexit, the slowdown of the Chinese economy and the European debt crisis. Now the economy is under pressure from the US-China trade war.

At the same time, tensions have soared in the Middle East, punctuated by allegations by Saudi Arabia that oil tankers have been sabotaged and oil facilities attacked by armed drones.

"The risks of a military confrontation in the Middle East are increasing sharply," said Helima Croft, Global Head of Commodity Strategy at RBC Capital Markets on Wednesday. "There is growing fear that the long cold war in the region is on its way to becoming a hot war."

Shale to the rescue?

Oil prices in the United States have jumped nearly 50% since the collapse of $ 42.53 a barrel at the end of last year. However, most of these gains took place before the confrontation with Iran. Prices have remained stable in recent days as worries about the Middle East have been offset by the trade war.

A conflict in the Middle East may not have as dramatic an impact on prices as in the past. Indeed, the United States is today the world's largest oil producer, thanks to soaring shale production in West Texas.
In Tehran, the specter of war has met with more challenge than fear

"The United States is a lot more energy independent than it used to be," said Reynolds of Glenmede.

Still, this is a global market and shale alone can not compensate for production losses in Venezuela and Iran, let alone a potential military conflict in the Middle East.

Skyesgidge Gayeski said he thought the US economy could withstand the rise in oil prices at Brent above 100 to 110 dollars a barrel.

"It's not the end of the world, we do not see it as a cause of recession," he said.

Above this level, however, would be much more problematic.

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