1979 Again: The Oil Shock Could Trigger a Recession

I was a just kid in the 1970’s, but I can still remember the images of long lines at the gas pumps on television. Even then, I understood the importance of oil: it was precious, expensive, and hard to get.

During that time, and then again during the Gulf War of the early 1990’s, the oil price shot up to around $40 per barrel. It felt like the oil shock would never end – and it didn’t help that there was an inflation crisis happening in the 1970’s as well.

Since then, it’s been a roller coaster ride in the petroleum market. A barrel of oil once cost $140 in 2008 – but then, oil futures contracts sank to -$30 (that’s right, a negative dollar figure) for a moment in April of 2020.

As I’m writing this, a barrel of light, sweet, crude West Texas Intermediate petroleum costs $82 and change. It’s a sharp surge from August’s $62 short-term bottom, and from the early January price of less than $50.

Everybody knows by now that the Fed’s narrative of “transitory” inflation was complete nonsense. Along with high food prices, it’s the pain at the gas pump that reminds all of us that elevated prices are here to stay.

Courtesy: macrotrends.net

While higher food prices might hurt struggling families the most, the oil shock is bound to have far-reaching ripple effects throughout the American economy.

The timing couldn’t be any worse, as the holiday season is approaching quickly. Friends and family members will feel the pinch as they pay up to travel this year – if they can even afford it.

Amid a hyper-inflationary backdrop and severe supply shortages, there’s no easy alternative to petroleum as natural gas and coal prices are also sharply elevated.

Now, an argument could be made that eventually, drivers will make the switch to electric and hybrid vehicles. With that, we can conclude that silver and lithium will be in high demand.

Silver is needed for components of electric vehicles, including the batteries. But unlike some other commodities, silver is trading at a bargain price right now:

Courtesy: Yahoo Finance

It’s easy to find folks who are bullish on oil, after it’s gone up so much. The challenge is to be a contrarian and buy silver at a low price, when few traders are paying attention to it.

Besides, precious metals are a great hedge against economic crisis situations, which can result from a high oil price. If you’re not old enough to remember what happened in the 1970’s, then consider the double whammy of 2008, when there was a financial crisis and a spike in the price of gasoline.

JPMorgan chief economist Bruce Kasman sees the warning signs, and the implications on the larger economy.

“The periods of spiking oil prices tend to be what gets you into trouble. They tend to be largely supply driven, and they tend to have disruptive elements that are more broad in terms of their potential drags on growth,” Kasman commented.

Furthermore, Kasman added that the rise in energy prices will be “a drag on fourth quarter growth.” Add to that some economists’ predictions that a barrel of oil will soon top $100, and you have a financial train wreck that’s unstoppable.

Even if you didn’t witness the 1970’s oil shock yourself, you can still learn from history’s most important lessons. When you make energy more expensive, everything is affected – and when we don’t learn from history, we’re only bound to repeat it.