From the archives: An Economic Sheikh Up

Wednesday 28 September 2022

political risk

Author: Maha Khan Phillips

The 1990 oil price shock played a significant role in the global recessionary period that followed. As our archives reveal, there were significant concerns about the cost of energy, and subsequent impacts on inflation and economic outlooks.

In August 1990, a dictator invaded a neighbouring country, stunned the world, and sent oil prices spiking. That dictator was Saddam Hussein, who occupied Kuwait, also an oil producing nation, and contributed to the recessionary period that followed. 

In his subsequent September 1990 opinion piece for Professional Investor, Stephen Lewis looked at some of the ramifications of that invasion. He highlighted the fact that, after the shocks of the 1970s, economists had tended to take cheap energy supplies for granted. However, as Saddam Hussein had aptly demonstrated, they had forgotten to take political factors into account.

Today, political factors are once again heavily impacting energy prices and helping drive inflationary pressures. As Lewis argued at the time of the Iraq crisis, it was near impossible to determine the course of oil prices over the coming years, but it was possible to examine the ripple effects of what was occurring. In the US, escalating energy costs could put pressure on people and make them harder pressed to pay off their loans, he suggested. Other, poorer oil producing countries like Japan, Germany, and even the US itself, were all better adapted to withstand an oil shock than they were in the 1970s, but Eastern Europe and smaller industrial economies without indigenous energy resources - for example Spain and Greece, could be hard-hit. This would have global implications, with G7 countries seeing their foreign markets contracting.

“The search is likely to be on for a financing mechanism to soften the impact of higher oil prices on the vulnerable oil-consuming countries”, wrote Lewis. 

With the US likely to step in and intensify the Iraq conflict, it was also a time of continued heightened political risk, with political dynamics driving macroeconomic outlooks. Today, geopolitical risks and their impact on economic outlooks have proved to be as significant a concern as they were when Lewis wrote his piece over three decades ago.

 

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