Fifty Years of the Oil Crisis: How Six Rounds of Middle East Conflicts Reshaped Oil Prices, Inflation, and Market Trading Logic

``` Looking at several Middle East-related conflicts over the past half-century on a single timeline, oil price "spikes" are not always correlated with the intensity of the wars, but rather function as a variable of two factors: whether there is a real supply cut, and whether the supply cut can be quickly filled by other oil-producing countries, strategic reserves, or decreasing demand. This in-depth macro report from Changjiang Securities breaks down and reviews six different conflicts, linking the main line of oil prices— inflation—growth—Federal Reserve (Fed) policy—asset trading, which is more useful than just looking at a single event. Changjiang Securities macro analyst Yu Bo writes directly in the report: "The impact of a geopolitical conflict on oil prices depends on the intensity of supply disruption; subsequent oil price trends are determined by the recovery/alternative supply capacity and potential demand." This sentence basically summarizes the "discriminant" that runs through the entire article: the starting point of the shock depends on the supply cut, and whether the impact becomes a long-term issue depends on repair and substitution. The historical divide is also clear. The two oil crises in the 1970s saw oil prices multiply several times and dragged the U.S. into stagflation; but in the 1990 Gulf War, 2003 Iraq War, and 2011 Libyan Civil War, oil prices did rise, but tended to fall back once supply disruptions were hedged or expectations were set. By the time of the 2022 Russia-Ukraine conflict, the increase in oil prices was compounded by "high inflation constraints," and the result was not looser policy to save growth, but rather a reinforcement of tightening logic. On the trading level, the main line often shifts from "inflation" (inflation/reflation) to "stagnation" (growth decline/recession), but the Fed's actions do not follow a fixed script— the key is whether the inflation level at the time is high and whether inflation expectations are unanchored. The report also provides some time windows: supply shocks usually bottom out in 1–3 months, oil prices peak in about 2–4 months; the peaks and troughs of inflation and PMI, however, depend more on how long oil prices remain high and where policies finally land. Oil price swings are not about "the scale of the conflict" but about "how severe the supply cutoff is." The report quantifies "supply cut" very intuitively. During the first oil crisis, "output cuts + embargoes" by Arab oil-producing countries reduced global crude oil output by up to 6.7% compared to pre-war levels, with a demand gap calculated at 6.9%, and oil prices surged up to 3.8 times. The second oil crisis occurred in two stages: during the Islamic Revolution and stockpiling shock, Iran's output plunged 88% from 6.09 million barrels/day to 0.73 million barrels/day, global output fell by 3.7%; during the Iran-Iraq war, output dropped a further 6.1%, demand gap was estimated at 5.6%, and oil prices peaked at 2.2 times the original. By comparison, the later conflicts’ “hard supply cutoffs” were much more easily offset. For example, during the 2003 Iraq war, the report records the largest drop in global supply as just 2.4%; during the 2011 Libyan civil war, the biggest drop was only 3%. The Russia-Ukraine conflict is even more extreme: despite policies such as "banning imports of Russian oil" pushing up risk premiums, the report estimates the global oil supply's largest drop at only 0.1%, with the maximum oil price increase at 32% compared to pre-war. This also explains one point repeatedly emphasized by the report: When no real supply gap is formed, oil's response to geopolitical conflicts is more like a "pricing of potential supply risks," and usually gives back in the subsequent "confirmation that supply is not actually hurt." The report lists these sentiment-driven events separately— from the 2001 Afghan war/9-11, 2011 Syrian civil war, 2014 ISIS attack on Iraq, Yemen civil war, to the 2020 U.S. killing of Soleimani, 2023 Israel-Palestine conflict, and 2024 Iran-Israel attacks, their core similarity is: markets first trade the worst-case scenario, but if real supply remains intact, oil prices are unlikely to be "continuously revalued." First and Second Oil Crises: What really dragged the U.S. into stagflation was unanchored expectations The report notes a detail about the first oil crisis that's easily overlooked: the oil crisis was not the starting point of U.S. inflation. Before October 1973, U.S. inflation was already heading upward, driven by overheated demand from loose monetary and fiscal expansion, compounded by the collapse of the Bretton Woods system, rising food prices, and the lifting of price controls. The embargo acted more as an "amplifier," pushing existing inflationary pressure into a more unmanageable territory. The corresponding policy path was not either all gas or all brake: first, a slowdown of tightening, then resumption after the embargo eased, and a shift to easing as recession deepened. The key issue in the second oil crisis was a "deterioration of expectation mechanisms." The report summarizes Volcker's turning point very clearly: the real danger was not just the price of oil itself, but high oil prices reinforcing inflationary stickiness through the "wages-costs-prices" chain and expectations, leading markets to doubt anti-inflation capabilities and policy credibility, with pressure added to the dollar's credibility. So in October 1979, the Fed's response was not mild rebalancing, but changing the policy framework to "focus on controlling money and credit supply, rebuilding anti-inflation credibility," and allowing for large interest rate volatility. Looking at both crises together, the report is answering an old question: Why did a similar supply-side shock in the 1970s result in long-term stagflation? The answer is not just “how much oil went up,” but also whether inflation expectations could be re-anchored. 1990, 2003: When supply can be replaced, oil prices revert back to pre-war levels The third oil crisis (Gulf War) was not mild in data terms: Iraq and Kuwait’s output dropped to zero, global crude oil output fell by 6%, demand gap was 5.5%, and oil prices soared up to 93%. But this did not lead to long-term stagflation, because “hedging came quickly”— other oil producers increased output, strategic oil reserves were tapped, and expectations of non-escalation helped oil prices quickly return to near pre-war levels after a surge. The macro results were also different: the report notes that U.S. CPI YoY rose from about 5% to around 6%, then fell back; the Fed quickly shifted its policy focus from containing inflation to preventing recession, accelerating rate cuts beginning October 1990. The 2003 Iraq War is even more of a "lesson in expectation management." The report emphasizes that the oil price rise occurred mainly before the war (from November 2002 to February 2003, cumulative increase of about 30%–50%), and the outbreak of war actually became a turning point downward: the conflict was quick, the supply gap did not widen, and the market shifted from "pricing in the worst scenario" to "risk materialization." Macroeconomically, the main contradiction at the time was the weak recovery and lagging employment after the dot-com crash; core inflation stayed low, and the Fed did not tighten because of higher oil prices. Instead, in June 2003, it cut the federal funds rate to 1%, maintaining it until mid-2004. These two episodes together underline the point: "oil shocks are not necessarily scary"—when supply substitution and policy tools can be quickly implemented, it is difficult for oil prices alone to drag the macroeconomy into long-term imbalance. Libya and Russia-Ukraine: Both saw oil price rises, but policy context determined the “consequences” During the Libyan civil war, the report breaks down oil price rises into three drivers: demand recovery as a trend base, a second round of QE begun November 2010 amplifying liquidity and inflation expectations, and geopolitical risks further raising premiums. Oil prices rose up to 23% compared to pre-war, but the global supply shock was not large (largest drop only 3%). More critical was the macro backdrop: the U.S. was still in post-financial crisis recovery, with high unemployment, and inflation was mainly concentrated in the energy sector; core inflation and long-term expectations were stable, and the Fed's policy focus was still on economic and employment stabilization. The main trade shifted from "liquidity-driven reflation" to "growth weakening/recession expectations," rather than inflation dominating all. The Russia-Ukraine conflict was the opposite. The report points out: this oil price rise was based on supply-demand tightness after the pandemic due to demand recovery/slow supply response, and conflict/embargo further pushed prices up (up to 32% pre-war). But macro constraints came from inflation: U.S. CPI YoY rose from 7.6% in January 2022 to a 9.1% peak in June. Against this background, the conflict did not lead to policy easing but further narrowed the room for maneuver—the Fed started tapering in November 2021, began raising rates in March 2022, and hiked a total of 425bps for the year. Market logic also shifted rapidly from "safe haven and inflation shock" to "monetary tightening." This contrast is stark: rising oil prices themselves do not automatically determine the Fed’s next move—what matters to the Fed is the level of inflation and expectations, not the headlines. Switching from “inflation” to “stagnation” is the norm, but the Fed doesn’t always coordinate The report describes the shift from inflation to stagnation as the common feature of all shocks: initially, markets play up inflation and safe-haven assets (oil, gold, USD, or Treasuries), then as growth pressure appears, the focus shifts to recession and policy turning points. But the report also cautions: higher inflation and economic pressure do not inevitably mean the Fed will hike or cut rates—you have to look at whether inflation is actually high and whether expectations are unanchored. On timing, the report offers several direct reference benchmarks: supply shocks usually bottom out in 1–3 months, with oil peaking in 2–4 months; in instances where oil peaked in 3–6 months (third oil crisis, Iraq war, Russia-Ukraine war), U.S. inflation also usually peaked in 3–6 months; in cases where oil peaked above 6 months and remained high (first, second oil crisis, Libyan war), inflation peaked in 12–18 months. For manufacturing PMI, the timing of the trough depended more on policy: with a short oil price spike and loose/stabilizing monetary policy, PMI bottomed in about 5–6 months; with long oil price rises or tight policy, PMI troughs lengthened to 16–20 months. The report’s final risk warning is worth reading verbatim: Historical experience is limited; the transmission mechanisms from oil prices to inflation and the economy change with energy intensity, wage pricing, expectation anchoring, and policy credibility. Attributing every Fed decision only to oil/inflation/growth may overlook decision-maker beliefs, internal disagreements, and external constraints. Asset prices are influenced by multiple factors, making historical review prone to "over-attribution." In other words, what this report really offers is a harder set of questions: First, ask about the supply cut; then about substitution and repair; finally, put inflation levels and expectations on the same chart. If these four steps are not complete, market reactions to oil prices are usually just sentiment. Risk Warning and Disclaimer The market carries risks, and investors should be cautious. This article does not constitute personal investment advice, nor does it take into account any individual user's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their individual circumstances. Investing based on this is at your own risk. ```