Economist warns stocks are more vulnerable to an oil crisis than in 1979

Steve Hanke, market analyst and professor of applied economics, discussed the rising oil prices and escalating tensions in the Middle East, which could trigger broader economic damage through financial markets.

Speaking on The David Lin Report on March 8, Hanke warned that elevated stock valuations, the so-called ‘stock bubble,’ make the global economy more vulnerable than it was during the oil crisis of the late 1970s.

More precisely, in 1979, the market traded at a price-to-earnings ratio of roughly eight. Today, valuations are closer to twenty-nine. This suggests a much larger potential downside if sentiment turns. That is, if stock prices fall sharply, households that have benefited from rising asset values may reduce spending.

“The stock market takes a hit. Your wealth takes a hit. You start hunkering down,” he said.

The silver lining, however, is that the world is unlikely to face a repeat of the 1970s oil crisis because the global economy is now less dependent on oil and supply is more diversified.

Do higher oil prices mean inflation?

Comparing the current situation with that of nearly fifty years ago, Hanke noted that Middle Eastern production accounts for a smaller share of global output today. Specifically, he noted that in 1978, Iran produced about 8–8.5% of global oil supply, whereas today the number is closer to 5%. 

At the same time, the U.S. share of global oil production has also increased, going from roughly 15.6% in 1978 to nearly 19%, reducing reliance on foreign supplies. Meanwhile, energy efficiency has also shot up. For instance, the amount of oil used per unit of GDP has dropped sharply from about 1.5% in the late 1970s to roughly 0.4% today.

Therefore, the key takeaway of the discussion was that inflation is less likely. Inflation is always, and everywhere, a monetary phenomenon, the professor said. Higher oil prices mainly cause relative price shifts rather than broad inflation, which follows only if central banks expand the money supply to accommodate the shock.

“Inflation is always, and everywhere, a monetary phenomenon. You have to look at what’s going on with the money supply, and that is a causal factor behind inflation.” 

The interviewee pointed to Japan as an example. Namely, during the 1973 oil shock, the Bank of Japan increased the money supply, contributing to inflation. During the late-1970s crisis, however, the central bank held back and did not expand liquidity to the same extent. As a result, it significantly limited broader inflationary pressure.

Allowing Russian oil to enter the market could mitigate the shock

As a way to make the situation even more bearable, the economist suggested that governments could mitigate supply disruptions by allowing more sanctioned Russian oil to enter the market. He argued that large volumes of crude are currently sitting in storage within Russia’s so-called “shadow fleet,” and easing sanctions could quickly increase supply and ease price pressure.

He also said the U.S. government could tap the U.S. Strategic Petroleum Reserve if necessary. After all, the reserve holds hundreds of millions of barrels, all of which are intended for emergency supply disruptions.

Still, despite his view that a full-scale oil crisis is unlikely, Hanke warned that conflicts still carry significant economic consequences. What’s more, citing research into U.S. regime-change efforts since World War II, he argued that many such operations fail or leave countries in prolonged instability. This, naturally, complicates the economic outlook.

Finally, he added that prolonged conflict could carry high political costs in the United States and potentially reshape geopolitical alliances across the Muslim world. “War destroys value,” he said, suggesting that economic and political costs can ripple far beyond the battlefield.

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