Letters: Back to the history books on the energy crisis
[Re: We must end our dependency on Russia’s gas and embrace renewable, Feb 18]
For an escalation to have a large and lasting impact on markets beyond Russia and Ukraine, it would probably have to result in a significant hit to energy supply (something which did not happen after the annexation of Crimea). In fact, major disruption to global energy supply stands out as the key feature differentiating the few geopolitical crises that have had significant, enduring implications for global markets from the vast majority that have not.
Three specific events are worth highlighting: the 1973 Yom Kippur War/OPEC oil embargo, the 1979 Iranian revolution, and the 1990 invasion of Kuwait by Iraq. All three hit global oil supply hard, causing prices to more than double in a short space of time. In each case, the surge in energy costs contributed to recessions in the US and elsewhere.
The reaction to Iraq’s 1990 war in Kuwait may provide a reasonable first approximation for the potential fallout in global financial markets if a full-scale Russian invasion goes ahead. While equities in general struggled, the shares of energy producers held up as energy prices surged. Bond yields didn’t fall despite the scale of the sell-off in equity markets, reflecting the (subsequently realised) threat of higher inflation whereas gold performed very well.
Ed Smith