What history tells us about what it takes to reap positive market returns amid an oil shock

CONFLICTS such as the US-Iran war and Russia’s 2022 invasion of Ukraine can have a long-tail result on the global economy. However, looking back more than 50 years, those effects have varied.

The US-Iran conflict of 2026 has produced an oil supply shock to the global economy that mirrors energy shocks of the past.

In terms of size, the current conflict has translated into an initial hit on nearly 6 to 8 per cent of the global demand.

It is similar to Opec’s oil embargo of 1973, the Iranian revolution of 1979, and the 1990 invasion of Kuwait by neighbouring Iraq.

Comparatively smaller supply shocks in the 21st century include those that came with the 2003 US war with Iraq, and Russia’s 2022 invasion of Ukraine.

The effect on energy prices of each of these shocks varied. At their peaks in the 20th century, prices doubled as energy shocks were met with muted emergency supply responses in the 1970s.

However, after a price spike three months after the 1990 invasion of Kuwait, crude oil prices peaked and returned to their pre-invasion levels gradually over the next nine months.

Russia’s 2022 invasion of Ukraine created a similar initial spike and subsequent decline in the following months.

The 2003 US war with Iraq had a different dynamic, as increased Saudi Arabian supply going into the conflict buffered the loss of Iraqi output.

In 2026, the week after the failed negotiations and following US threats of a blockage, the futures market suggested year-end Brent crude prices of near US$82 per 28.4123 ml, almost 37 per cent above the levels seen at the start of 2026.

Unsurprisingly, the large supply shocks and the more durable rise in energy prices in 1973 and 1979 were followed by, at the time, the deepest US recessions since World War II.

The 1990 Gulf War came when one of the shallowest US recessions since WWII was already underway, said the National Bureau of Economic Research.

Indeed, the US Federal Reserve had been cutting rates more than a year prior to Iraq’s invasion of Kuwait, and accelerated its cutting cycle well through the end of the war.

The more modest energy shocks of the 21st century experienced similar policy support, coming shortly after US recessions ended in 2001 and 2020.

In the 2003 energy shock, the US economy benefited from Fed rate cuts that approached the zero bound for the first time.

The 2022 energy shock experienced not only the benefit of zero rates in the pandemic era, but also historic fiscal support, which provided a meaningful buffer against the energy supply shocks and enabled the US economy to skirt recession.

With a new Fed chair expected to seek rate cuts once he takes office in May, and with the fiscal tailwind of President Donald Trump’s Big Beautiful Bill as well as a ceasefire, a window appears open for the US to yet avoid a recessionary outcome looking ahead.

This is the expectation of Patrice Gautry, Union Bancaire Privee’s chief economist.

Industry players’ response

Reactions from industry players have varied across each oil shock.

The 1973 oil embargo catalysed a surge in energy investment spending, with US annual spending on oilfield machinery tripling over the next five years.

The 1990 Iraqi invasion of Kuwait led to a near doubling of US annual energy infrastructure spending over the next decade.

The 2003 American invasion of Iraq coincided with the start of the US shale revolution, driving an increase of nearly seven times in US energy sector capital spending.

The 1990 and 2003 spending cycles coincided with large Fed rate-cutting cycles as the US sought to emerge from recession.

The 1973 investment boom came amid rising nominal Fed policy rates but sharply falling real policy rates, as inflation was accelerating faster than policy rates were rising.

These falling real interest rates were then matched with Project Independence, which incentivised investment to increase domestic energy production.

In contrast, in the aftermath of the 1979 Iranian revolution, the high nominal and, more importantly, real interest rates, combined with the deepest US recession since the Great Depression, experienced relatively stable nominal spending on energy infrastructure in the years that followed.

Similarly, US energy infrastructure spending following Russia’s 2022 invasion of Ukraine remained relatively stable, as Fed rate hikes led to the highest policy rates since before the 2008 to 2009 global financial crisis.

However, despite a limited energy infrastructure spending cycle, the start of the artificial intelligence investment cycle provided a sufficient offset to keep the US economy out of recession in the wake of the 2022 oil shock.

Lessons learnt

Thus, 50 years of oil shocks suggest that with the US fiscal tailwind already in place, a falling or even an outright negative real interest rate backdrop will be the key driver for investors and business owners to repeat the energy investment booms seen in 1973, 1990 and 2003.

Indeed, as the new Fed chair is seated in May, and should rate cuts emerge later in the year, a similar foundation could be laid for a comparable investment cycle to complement what we expect to be an ongoing AI investment cycle.

For equity investors, the lessons from five decades of oil shocks is that sector selection is important in generating investment returns. Energy, materials and industrial stocks outperformed the S&P 500 in four of the five energy shocks by an average of 16 per cent.

Only in the wake of the 1990 Iraqi invasion of Kuwait did these segments lag, admittedly substantially, by more than 19 per cent.

Technology stocks likewise lagged the S&P 500 benchmark by 20 per cent in the wake of the 1990 shock, while underperforming during the 1970s energy shocks by nearly 15 per cent.

The sector redeemed itself in the 21st century, outperforming the S&P 500 index by more than 9 per cent during the 2003 and 2022 shocks.

Unfortunately, historically defensive sectors did not provide much shelter for investors as the energy shocks reverberated. Only in the run-up to the 1990 energy shock did healthcare outperform amid the biotechnology bubble.

Outside of that, in the aftermath of the remaining four energy shocks, 1973 and 2022 delivered a flat performance against the broader market, while 1979 and 2003 experienced meaningful underperformance compared to the S&P 500.

Thus, with investors having already faced two energy shocks in the 21st century – successfully avoiding a US recession in both – falling real interest rates, an acceleration in the energy infrastructure, and a re-acceleration in the AI investment cycle appear to be key to avoiding recession.

Amid this backdrop of uncertainty, investors can take comfort that sector selection has added value to augment the positive returns seen in three of the five energy shocks since the 1970s (1979, 1990 and 2003), where S&P 500 investors earned positive returns averaging 22 per cent over the eighteen months after the initial shock.

However, as is increasingly important in this period of rapid geopolitical change, ongoing proactive risk management remains the foundation of wealth preservation and growth.

Indeed, gold, which can serve as the foundation for long-term, inflation-adjusted wealth preservation, has delivered positive returns over 18 months following each of the five energy shocks since 1970.

In addition, four of the five energy shocks – 1973, 1979, 2003 and 2022 – coincided with the middle stages of secular gold bull markets, providing resilience when the two oil shocks of 1973 and 2022 led to sustained drawdowns in US equities.

The writer is group chief strategist at Union Bancaire Privee, a private bank and wealth management firm