Last night, at the opening of trading on the U.S. market, the price of WTI oil hit $130 per barrel. The highest level since July 2008, having slightly less than doubled since the beginning of the year.

The current geopolitical situation is leading us straight to a new oil shock, which is why it seems important to review the history and implications of the last few:

– 1973 the members of OAPEC* led by Saudi Arabia decide to implement an embargo on oil exports aimed at countries that had given aid to Israel following the Yom Kippur war. In less than a year, the price of oil quadrupled (from $3 to $12), bringing world growth to a halt and causing significant inflationary pressures (US GDP 1974: -6%).

– 1979 in the course of the Iranian revolution, oil production drops drastically, leading to a doubling of the price per barrel (to $40). This event led to the acceleration of an already galloping inflation in the United States (+9% at the time) and to the appointment of Paul Volcker as head of the Federal Reserve in August 1979, who ended up raising rates to 19% (!) in 1981 in order to combat this upward spiral. Inflation was certainly reduced, but the US economy suffered a lot, undergoing one of its biggest recessionary shocks since the Great Depression of the 1930s (US GDP 1982: -4%). Gentle reminder for Jerome Powell.

– 1990 bis repetita, the Gulf War is declared with the launch of the "Desert Storm" operation in Kuwait. Oil prices doubled at the same time (from $17 to $36), adding to the inflationary pressures to which the Federal Reserve decided not to respond, confident of the rapid success of the operation (US GDP 1991: -2%).

– 2003 – 2008  the multiplication of tensions in the Middle East, as well as the growing demand from China, led oil prices to rise from $30 to $147 (x5). It is a combination of factors that led to this increase - which is still responsible for more than 3% of inflation in 2005-06 - but it is not the main cause of the bursting of the subprime bubble (even if some see it as the beginning of the Fed's willingness to raise rates). This event should therefore be considered as the "icing on the cake" of a situation that was already very untenable (2009 US GDP: -2.5%). Would we be in the same situation today?

Indeed, even if we do not have a direct view on the links between the explosion of raw material prices and the shock on the markets, historically there has always been a recessionary period. In the current context, it is certain that recent events are not conducive to a lull in markets already on steroids.

Despite the fall in the indices, valuations remain very high, volatility is taking on increasingly lively colors, inflation is at its highest since the last 40 years (a point on which the energy situation is not ready to lift) and the room for maneuver is more restricted than ever on the side of the Central Banks.

In such a context, it seems appropriate to ask the right allocation questions and to do so quickly.

Have a great week,

Max

* Organization of Arab Petroleum Exporting Countries
Note: Prices shown are not adjusted for inflation