War, markets and the myth of another 1970s oil shock

Global markets are navigating an unusually complex mix of geopolitical conflict, inflation pressures and currency volatility. But according to Vania Stavrakeva, Associate Professor of Economics at London Business School, investors should be cautious about drawing parallels with the oil shocks that reshaped the global economy half a century ago.

Speaking with Tom Keene and colleagues on Bloomberg Surveillance, Stavrakeva outlined how current conflicts are influencing currencies, bond markets and energy prices, while highlighting why today’s economic structures make the situation fundamentally different from the crises of the 1970s.

Currency markets sending unusual signals

Foreign exchange markets are often the first place economists look to gauge the global impact of geopolitical shocks. Historically, wars tend to trigger a “flight to safety”, pushing investors toward the US dollar.

Stavrakeva noted that the dollar has indeed strengthened during the current conflict. But the scale of the appreciation is larger than economists would normally expect in a traditional risk-off episode.

“Historically, flight to safety is a significant driver of the dollar during major wars,” she explained. “But the appreciation this time is significantly stronger than what we would usually observe for shocks of this magnitude.”

That currency strength is playing a stabilising role for some parts of the global economy. Countries that rely heavily on imports of energy and commodities face fewer inflationary pressures when the dollar rises, although the effect varies widely across regions.

At the same time, US bond markets are behaving differently from past crises. Instead of falling sharply during a rush to safety, longer-term US yields have remained elevated as investors anticipate continued inflation and potential interest rate increases.

Markets may be overestimating the duration of the shock

While geopolitical tensions have intensified, Stavrakeva believes markets may be overstating the likelihood of a prolonged economic disruption.

Comparisons between different conflicts can be misleading, she argued, particularly when political dynamics differ significantly.

In the current situation, the economic costs to regional partners and energy exporters could create strong incentives to limit the duration of hostilities. Countries affected by disrupted oil and gas exports face substantial financial losses alongside heightened security risks.

“For many of the countries involved, there are powerful political forces that will not allow this conflict to continue for very long,” Stavrakeva said.

Even so, the immediate threat of higher energy prices remains a major concern for economies across Europe, the UK, the United States and Asia.

Why this is not another 1970s oil crisis

Rising oil prices have inevitably revived memories of the energy crises of the 1970s, when coordinated supply restrictions triggered surging inflation and global recession.

But Stavrakeva argues that the comparison does not hold.

The oil shocks of the 1970s were driven by coordinated actions among OPEC producers aimed at sustaining political pressure on Western economies. Today’s disruptions are far less coordinated and less likely to result in a prolonged supply squeeze.

Just as importantly, the structure of advanced economies has changed dramatically.

Western economies are now far more service-oriented and less dependent on heavy manufacturing, making them somewhat less vulnerable to sustained spikes in energy prices.

Global energy preparedness has also improved. Since Russia’s invasion of Ukraine, many countries have expanded strategic petroleum reserves and diversified supply chains.

“There is much more oil stored across the world than there used to be,” Stavrakeva noted, pointing to a greater degree of resilience in global energy markets.

Broader lessons

For Stavrakeva, the broader lesson is that while today’s global economy is more resilient than in previous decades, it is also navigating multiple simultaneous pressures.

Geopolitical tensions, persistent inflation and evolving monetary policy are interacting in ways that make market reactions harder to interpret.

Currencies, bond yields and energy prices are therefore sending mixed signals, reflecting uncertainty about how quickly current conflicts might resolve.

For policymakers and investors alike, the challenge will be distinguishing between short-term market panic and structural economic shifts that could shape the next phase of the global economy.

For the full interview, click here: https://lnkd.in/dHVWsTsP