Stagflation: Is the 1970’s Economic Collapse Coming Back to Haunt Us?

In the 1970s, developed countries faced a significant oil shortage coupled with incredibly high commodity prices due to the West’s beginning reliance on the Middle East for its supply. As both the Yom Kippur War and the Iranian Revolution dampened the global oil supply in the ’70s, the result was stagnant growth and price inflation, known as stagflation. Certain countries and companies benefitted from increased oil prices like Texas, Alaska, and Venezuela, but these are outliers in contrast to many others. Factors at play during the ‘70s included incredibly high oil prices, unseen inflation rates, and a Fed with their hands tied – all strikingly reminiscent of today’s circumstances. An analysis of today’s market reveals unsettling similarities to the 70s shortage, raising the question: should the economy prepare for major stagflation? 

In October, oil prices reached their highest levels since 2014 at $84 per barrel. When COVID first started impacting global economies, oil prices dropped to a low of $20 per barrel, representing a drop of 54% over a month; within the next year, oil prices rebounded to $61 and finally rose to October’s price. Both supply and demand responses fueled this recovery. Demand has skyrocketed due to robust gasoline consumption and increasing international travel as more countries have reopened their borders. In tandem, both the West and OPEC have loosened their grip on supply, unwinding the cuts made back in Spring 2020. With the ensuing increase in supply, the equilibrium between the two diverging factors has produced an equilibrium at around $70-80 a barrel. 

The price of oil controls the energy sector, and energy producers like Royal Dutch Shell have seen their bottom line and stock price increase significantly due to recent jumps. Two of the largest energy producers in North America, Exxon Mobile and Suncor Energy, have seen their stocks rise 46% and 48% year-to-date, respectively. These types of firms are similar to the regions and companies during the ‘70s that flourished due to the spike in prices. 

The new Omicron variant has caused significant alarm over the past two weeks, spreading fear across markets and thus the energy industry. However, prices stabilized around $73 because many analysts expect the wave to be short-lived due to the rollout of boosters. Comparing this stabilization to the 70s, the disparity between now and then arises from the fact that countries today have access to a healthy oil supply and if they wish to increase production, they can. Fifty years ago, war took hold of key oil partners and as a result, Western countries lacked access to more oil. 

In addition to unseen oil prices, there have been unprecedented inflation levels not seen for decades. In November, it was announced that the U.S. inflation rate for October was 6.2%. The last time the U.S. saw inflation rates this high was in 1990, 30 years ago. Analysts posit that increased consumer spending along with recovering supply chains contributes to this inflation. Individuals have free money in their pockets due to the Federal Reserves' (Fed) actions made at the beginning of the pandemic. The Fed dropped interest rates to between 0%-0.25% and, they were buying billions of bonds on a monthly occurrence. Just this past month, the Fed announced they would stop buying back bonds (by mid-year 2022) but have remained quiet on raising interest rates. Chairman Jerome Powell is resistant to raising interest rates due to the potential negative impact on already-damaged supply chains. 

There are three primary factors at play in the economy including seven-year high oil prices, unforeseen inflation rates, and a Fed unable to raise interest rates without damaging the economy worse than inflation already has. At the same time, a few groups like energy companies are reaping the benefits while the majority are being left behind to suffer the effects of inflation and high oil prices. These elements are all akin to what happened in the 1970s with stagflation. The causes behind the effects are different from five decades ago, but individuals feel the same effects at an incredibly high magnitude.  

However, it is imperative to note the one key difference between today and the 1970s. The cause behind the increase in oil prices in the 20th century was due to oil supply shortages – countries desperate for energy and fuel could not get access to it, forcing individuals to pay an incredibly high price. What made it worse was that even if the global economy wanted to produce more oil, it could not because of warfare. Today's situation is drastically different– demand has gone up significantly and, supply has gone up to meet it, but some countries and organizations do not wish to meet that expectation. Here lies the significant disparity between the two timelines: if countries want to increase their oil supply, they physically can. Oil prices in the 70s pushed up inflation as oil is used as an input in everyday goods such as plastics or gas. On the other hand,  consumer spending drives today's inflation with access to such cheap cash and damaged supply chains. 

Today’s situation is like that of the 1970s but for different reasons. In the past, countries struggled significantly to control their economy due to the lack of control over outside elements, while today, countries have considerably more control and access to external elements. Stagflation will not be allowed to form in today’s current economic climate, but inflation will be allowed to flourish until unemployment rates continue to go down, supply chains fix themselves, and the hold on and use of free cash has diminished significantly.