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How the US-Iran oil spill could damage the economy



Investors would be wise to closely monitor the relationship between the United States and Iran, where tensions have risen after Iran suspended parts of the nuclear agreement, which shortly ended its economic and diplomatic isolation.

History shows that oil peaks – not economic panic – are the main cause of recessions in modern America.

"Oil cooks have killed more US economic expansions over the past 40 years than any other single cause," wrote Nicholas Colas, co-founder of DataTrek Research, in a note to clients.

In addition to long lines at gas stations, the Saudi oil embargo from 1973-1974 contributed to averting an oil price rise that weakened the economy. The Iranian revolution in 1

979 also led to a recession in the United States.

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Similarly, the US economy fell in a downturn after Iraq invaded Kuwait in 1990 and again after the United States overthrew the Iraqi dictator Saddam Hussein in 2003.

Historic seen, we have seen an increase in oil prices ahead of or coincide with a recession, says Mike Reynolds, investment strategy manager at Glenmede.

Colas noted that the last three examples emerged "late in a prolonged US economic cycle" – as in today's environment. America's economic growth, now nine years old, is about to become the longest in history in July.

$ 140 oil in 2008

The big recession was caused by an epic housing bubble and overleverage on Wall Street. But the fact that US oil prices skyrocketed over $ 140 a day In the summer of 2008, contributed to the depth of the decline. Shell-shocked US drivers struggled to pay $ 4 a-gallon gas prices.

"It was the straw that really broke the camel's back for consumer spending," said Troy Gayeski, investment manager at SkyBridge Capital.

Oil jack is scary because at the same time they give a blow to household consumption and consumer confidence.

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And higher oil prices can spread to other parts of the economy and increase the cost of everything from airfare to truck driving. It can put pressure on the profit margins as well as the Federal Reserve, which is responsible for ensuring that inflation does not get out of hand.

The oil cook in 2008 led to the European Central Bank raising interest rates in July – just months before what would morph into the worst financial crisis since the Great Depression.

"The hiked bets in the worst possible time. It was a bad call," Gayeski said. "It would be very doubtful that the Fed would overreact."

Risk rises in the Middle East

The recovery from the great recession has proved to be resilient and overcome countless scary enemies such as Brexit, slowdown in the Chinese economy and the European debt crisis. Now the economy is under pressure from the trade war between the US and China.

Meanwhile, the tensions have risen in the Middle East, with the sign of Saudi Arabia's accusations that oil tankers were sabotaged and oil facilities were attacked by armed drones.

"The risk of a military confrontation in the Middle East is rising sharply," wrote Helima Croft, worldwide trading strategy at RBC Capital Markets, in a note to clients on Wednesday. "There is growing concern that the region's prolonged cold war may be ready to become a hot one."

Slate to rescue

US oil prices have risen nearly 50% since coinciding with $ 42.53 per. Barrel late last year. But most of these gains took place before standoff over Iran. Prices have been stable in recent days as concerns about the Middle East were offset by the trade war.

A conflict in the Middle East must not have such a dramatic impact on prices as before. This is because the United States today is the world's leading oil producer thanks to the skyrocketing slate production in West Texas.
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"The United States is much more independent of energy than before" , Glenmedes Reynolds said.

Still, it is a global market, and slate alone cannot compensate for production losses in Venezuela and Iran, let alone a potential military conflict in the Middle East.

SkyBridges Gayeski said he believes that the US economy could withstand Brent oil prices climbing over $ 100 to $ 110 a day. barrel.

"It's not the end of the world. We can't see it as a recession causing," he said.

However, above this level would be much more problematic.


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