In a recent Eurizon SLJ Capital research note, Stephen Jen and Fatih Yilmaz examine why global equity markets have remained resilient despite the sharp rise in oil prices following the Iran War.
The note argues that today’s oil shock needs to be viewed in real terms and relative to the structure of the global economy. While the disruption to oil supply is significant, the world is less oil intensive than it was in the 1970s, and the U.S. economy in particular has become less vulnerable to energy shocks.
As Stephen and Fatih write:
“USD100 a barrel today, we estimate, is equivalent to USD50 a barrel before the GFC or USD5 in 1973.”
The research also finds that the U.S. is now materially less exposed to oil price shocks than Europe or Asia, reflecting its greater energy self-sufficiency, larger services sector, and stronger technology-led growth impulse.
The note frames this divergence through what the authors describe as a large “K” in the global economy, where the Iran War and energy shock form the lower leg, while the technology race and associated capital expenditure form the upper leg.
For the U.S., the balance is more favourable:
“For the US, the upper leg of the K is muscular, while the lower leg of the K seems modest.”
The paper also considers the implications for central banks, bond yields, equities, and the dollar. In the authors’ central scenario, the global economy remains resilient, equities continue to find support, and the dollar can still weaken. A more severe and persistent oil shock, however, could push markets toward lower equities, lower bond yields, and a stronger dollar as the left side of the Dollar Smile reasserts itself.
As the authors conclude:
“In any case, the world is less vulnerable to oil shocks than in the 1970s, and the US is half as vulnerable as the rest of the world. These are the key points to keep in mind.”
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ESLJ-171125-R1
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