People line up to fill up their cars and motorbikes outside a gas station in Tehran on Saturday. Oil price shocks have a long history of dragging the economy – and the stock market – down with them.ATTA KENARE/AFP/Getty Images
Though the human and geopolitical fallout from a drawn-out conflict in the Middle East may be massive, on the financial side of things, it all comes down to oil.
Suddenly, US$100-a-barrel oil is back on the table for the first time since 2022, when Russia’s invasion of Ukraine sparked a run-up in energy prices.
Oil price shocks have a long history of dragging the economy – and the stock market – down with them. It happened in the mid-1970s, the early-1980s and the early 1990s.
What is the likelihood of adding 2026 to that list?
Judging by the odd action in financial markets on Monday, next to nil. After gapping down at the opening bell in what was shaping up to be a classic scramble to safety, financial markets regained their composure by lunchtime.
U.S., Iran could use oil as a weapon in the war. They may not
U.S. and Canadian stocks ended the day with small gains. The main benchmark for U.S. crude oil rose by about US$5 a barrel by the close of stock trading in North America – hardly the stuff of panic and fear.
It’s a fool’s errand to try to rationalize a single day’s trading. But it says a lot about investor priorities these days that a frightful war in the world’s biggest oil-producing region can be simply shrugged off.
Perhaps investors are getting smarter, less reactionary. After all, markets are rarely fussed by conflicts in the long term, and investors who sell at the first sign of trouble do so at their peril.
“Never let geopolitics get in the way of your investment decisions,” economist David Rosenberg wrote in a note on Monday. “Had you bet against the stock market from the last military conflict which lasted around two weeks in June, 2025, you would have made a bad decision.”
What has become known as the Twelve-Day War between Iran and Israel saw U.S. stocks rise through its duration, while crude prices actually declined.
And yet, the current episode is of a higher order of magnitude. Iran’s senior leadership is dead, and regime change may be next. U.S. President Donald Trump said the “big wave” is still to come and the bombing could last four or five weeks.
Opinion: An Iran oil shock darkens prospects for all the money in the world
Iran is proving willing to attack the energy facilities of other oil producers in the region, including Saudi Arabia and Qatar. The big fear is that Iran blocks or sabotages the Strait of Hormuz, through which one-quarter of the world’s seaborne oil travels.
“We estimate that if the conflict lasts more than three weeks, [Persian Gulf] oil producers would exhaust storage capacity and would be forced to shut in production,” Natasha Kaneva, head of commodities research at JPMorgan, wrote in a note.
If that happens, Brent crude oil could rise to the US$100-to-US$120 range, she added. (Brent trades at about a US$7 premium to West Texas Intermediate.) This scenario is well within the range of potential outcomes.
An old rule of thumb is that oil prices need to at least double over a one-year period to instigate a recession. That was the case after the Yom Kippur War in 1973, the Iranian Revolution in 1979, and the Iraqi invasion of Kuwait in 1990.
Of course, the economy has changed a lot since the 1970s. It’s much less oil intensive, in large part because cars are far more fuel efficient. The U.S. consumes about the same amount of oil it did in the late 1970s, even though its economy has tripled in size.
That helps reduce economic sensitivity to spikes in energy prices. Same goes for the fact that the U.S. is now a net energy exporter, as is Canada.
Oil prices jumped on Monday as the U.S., Israel and Iran stepped up their conflict in the Middle East, with attacks damaging tankers and disrupting shipments from the key producing region.
Reuters
In some other ways, however, very little has changed over the last half-century. The world still runs on oil. And crude from the Middle East accounts for more than 30 per cent of global oil production, which is only a shade lower than its share in 1978, economist Paul Krugman wrote in an online post on Monday.
“I don’t want to engage in doomsaying. But I do worry that people are too complacent about the economic risks this war creates,” he said.
The distant potential for a doubling of oil prices shouldn’t send any investors scrambling to de-risk their investment portfolio. Nor should they be caught off guard if the economic shock waves from the Middle East war reach our shores.