The Australian – The ghost of the 1970s oil crisis looms large

The Australian – The ghost of the 1970s oil crisis looms large

The news that an Iranian drone reportedly struck a U.S.-linked commercial oil tanker in the Strait of Hormuz has done more than just spike the price of oil; it’s arguably shattered the fragile market equilibrium we’ve seen since the start of the year. And arguably, as intended, it has distracted everyone from the Epstein files.

At the time of writing Brent and WTI crude were up $US15 to $US107 a barrel. The Nikkei plummeted 4.5 per cent, and U.S. futures have cratered by as much as two per cent. So, why has a single drone strike erased billions in equity value across the globe?

This article was first published in The Australian on 09 March 2026.

There are a couple of reasons. Roughly one-fifth of the world’s daily oil production flows through the 34km-wide Strait of Hormuz. It’s oil’s only way out of the Persian Gulf for the massive exports of Saudi Arabia, Kuwait, the UAE, and Iraq.

Unlike the Red Sea, where ships can reroute around the Cape of Good Hope, there’s no Plan B for the nations relying on the Strait. If it closes, approximately 20 million barrels of oil per day effectively disappear from the global market.

Goldman Sachs, among others, has warned that if the disruption persists throughout March, oil could breach US$150.

The result, however, is a classic ‘flight to quality’, but with some nuances. For example, the U.S. dollar is surging, which, paradoxically, is driving down the price of gold. Meanwhile, the 10-year bond yield has spiked to 4.195 per cent, suggesting the bond market is bracing for a massive inflationary pulse.

And elsewhere, on decentralised, cryptocurrency-based prediction markets, like Polymarket, the probability of a U.S. recession has spiked from 21 per cent on February 25 (immediately prior to the commencement of the Iran War), to a three-month high of 34 per cent at the end of last week (from the time of writing). The market is no longer pricing in a ‘Goldilocks’ soft landing. Instead, investors are preparing for a bear market.

The current market panic can be attributed in no small part to the spectre of stagflation – that combination of stationary economic growth and accelerating inflation.

I was in primary school in the 1970s, but back then, two major oil shocks in 1973 and 1979 led to a decade-long market malaise. Every time energy prices spiked, central banks were forced to choose between raising rates to fight inflation (killing growth) or lowering rates to save the economy (letting inflation run wild).

It wasn’t until Paul Volcker chaired the U.S. Federal Reserve from 1979 to 1987 that the rampant inflation of the 1970s was tamed. However, investors suffered. In the 14 years between the beginning of 1968 and the end of 1981, the Dow Jones had risen just 7.48 per cent.

Today, markets face a similar concern. The Federal Reserve and the RBA were already struggling to bring inflation down to target. While a sustained oil price above US$100 adds “input cost” pressure to every sector of the economy – from fuel for transport to the plastics in the supermarket – some investors are concerned that even a short-term spike will be enough to spark longer-term economic issues.

The main cause of anxiety for investors is that if the Strait remains a “no-go zone”, it could contribute to a structural supply-side shock that the tweaking of interest rates will do little to fix.

Some respected forecasters, including Ed Yardeni, who were bullish prior to the outbreak of military conflict, now believe a 10-15 per cent correction in the S&P 500 is looking increasingly conservative.

I am of the view the trajectory of the global economy now hinges on a binary outcome. But keep in mind the data indicates there is no correlation between the economy and the stock market over any single one-year period.

The first scenario is a swift diplomatic or military resolution that restores safe passage through the Strait. In this case, the US$15 ‘war premium’ on oil could evaporate overnight, prompting a relief rally in equities.

The second scenario is a prolonged, low-intensity conflict where insurance premiums for tankers remain prohibitively high and shipping volumes through the Strait drop materially.

If the second scenario were to transpire, a recession isn’t a 34 per cent probability; it becomes something akin to an inevitability. When energy prices stay high, consumer discretionary spending is the first casualty. A US$107 oil price acts like a massive global tax on the consumer.

The good news – if ever there is good news in a war – is that times of chaos often provide the best entry points. In fact during World War I and World War II the U.S. market rose by an average of 11.4 per cent per year.

But investors might want to focus on companies with fortress-like balance sheets. High-debt companies are particularly vulnerable to rising bond yields, while ‘capital-light’ businesses with pricing power may be able to pass on the energy costs.

Investors are right to be concerned. We’ve transitioned from a period of post-pandemic ‘normalisation’ into a geopolitical crisis that directly impacts the most critical commodity on Earth.

Until the tankers can sail freely through that 34km stretch of water, the 1970s ghosts of stagflation will continue to haunt every trading desk in the world.

Fortunately, for readers of this column last year and earlier this year, we have already discussed the need to diversify by taking profits from the most expensive equities.

This article was first published in The Australian on 09 March 2026.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.