The war between the United States, Israel and Iran that erupted in late February, and the closure of the Strait of Hormuz that followed, has delivered one of the sharpest oil price shocks in more than half a century. Brent crude, around $70 at the start of the year, briefly touched $125 and has since settled around $100, more than 40 per cent above pre-war levels. In this month’s Portfolio Perspectives, we ask what the previous oil crises of the 1970s and 1990 can tell us about how the current episode is likely to unfold.
In raw barrels off the market, the 2026 disruption is larger than any of its predecessors. The World Bank estimates an initial supply reduction of about 10 million barrels a day, with the IEA’s figure running as high as 13 million at the peak. By comparison, the 1973 Arab embargo removed roughly 4 million barrels a day, the 1979 Iranian revolution about 5 million, and the 1990 invasion of Kuwait around 4 million. The disruption also extends well beyond crude: around 35 per cent of global urea exports, used in agricultural fertiliser as well as plastics, transit Hormuz, and container freight rates have climbed as much as 40 per cent. This is therefore a more complex transmission mechanism than either of the 1970s episodes.
Of all the post-war energy shocks, only the two oil crises of the 1970s share the essential ingredients of 2026: a Middle East conflict, a physical loss of regional supply, fear of Gulf contagion and an inflationary impulse. The 1990 invasion of Kuwait offers a useful third reference, another Middle East war but one that dissipated quickly once the geopolitics resolved. Yet while today’s supply disruption is larger than 1973, the conditions that produced 1970s-style stagflation are largely absent.
The 1973 OPEC embargo, imposed in retaliation for Western support of Israel during the Yom Kippur War, saw oil prices quadruple from around $3 to nearly $12 by March 1974. US output fell roughly 2.5 per cent over the 1973-75 recession and inflation accelerated from 3.2 per cent to 11.0 per cent. Yet the embargo did not occur in isolation, and this is the crucial point for any analogy with 2026. By 1973, Bretton Woods had collapsed, the dollar had been devalued, and inflation was already running hot. Today’s backdrop is different: inflation was closer to target, central banks have established credibility, and currencies are free-floating. The 1973 shock was also deliberate, oil withheld as a political weapon, whereas today’s shock is collateral.
The 1979 episode offers the closer parallel, triggered not by cartel action but by political upheaval inside a major Middle Eastern producer. Strikes in Iran’s oil fields in late 1978 cut crude production by 5 million barrels a day, but Saudi Arabia and others made up much of the volume, leaving a net loss of only around 5 per cent. Yet prices nearly tripled, from $13 in mid-1979 to $34 in mid-1980. The reason was panic: buyers feared the upheaval would spread across the Gulf, hoarded inventory, and turned a minor physical shortage into a doubling of prices.
The policy response to the late 1970s disruption is what ultimately made matters worse. By the time Volcker’s Fed sought to bring inflation down at all costs, US inflation had exceeded 14 per cent and expectations had become unanchored. The federal funds rate was raised to nearly 20 per cent by mid-1981, producing a deep double-dip recession with US unemployment peaking at 10.8 per cent. Crucially, the Volcker recession was not directly caused by oil but by the response to the inflationary regime the oil shock had aggravated. The danger for 2026 is therefore not the oil price itself but a policy over-reaction layered on top. The 1990 invasion of Kuwait offers a more reassuring counterpoint: Brent rose 90 per cent in two months, but by spring 1991, with the war over and Saudi spare capacity deployed, prices were back near pre-war levels.
Beyond policy, several structural changes since the 1970s should also dampen the impact. Energy intensity has roughly halved: the oil required to produce a unit of GDP has fallen from around 0.12 tonnes of oil equivalent per $1,000 of GDP in 1970 to about 0.05 by 2022, the direct legacy of the efficiency investment that followed the original shocks. The economic mix has shifted from manufacturing to services, which now account for around 70 to 80 per cent of GDP in most OECD economies. The energy mix itself is more diverse: oil supplied around half of world energy in 1973 but only about a third today, with renewables in particular insulated by definition from events in the Strait of Hormuz. The supply structure has also been transformed: the United States is now a net oil exporter rather than a large net importer, with US shale providing a supply response measured in months rather than years.
The risk that bears closest watching is a much longer drawn-out conflict, in which case prices must do the work diplomacy cannot. Demand destruction operates in two phases: households consume less and industry idles energy-intensive processes in the short run, while in the longer run high prices accelerate substitution towards heat pumps, electric vehicles and renewables. The 1979 to 1986 cycle is the textbook case: world oil demand fell about 10 per cent between 1979 and 1983 while non-OPEC supply rose 5.6 million barrels a day, driving crude prices significantly lower by 1986. From a macroeconomic perspective, this would likely be the most adverse outcome.
The plausible outcome for 2026 probably sits somewhere between the crises of 1979 and 1990, depending almost entirely on how long the Strait of Hormuz remains closed and how central banks respond. The 1970s taught us that the worst outcomes come not from the oil price itself but from the loss of monetary and inflationary anchors that follow. Avoiding that mistake is what separates a serious but containable episode from a genuinely 1970s-style outcome.
Read the May Outlook here.
