It’s been one of those weeks. 

A week where the usual supports in life to make it move more smoothly are missing. What was previously outsourced was insourced. But as we close it out today, I’m grateful to have the support I do. Somehow I managed to make all the things work—school drop off, work events, kids birthday presents, put out the trash, etc. Plus I now know how to replace the soap under the sink! 

But this concept of outsource and insource is top of mind. Access to energy sources, specifically oil and gas, has also been in the middle of conflicts on and off for decades. Some more than others. The most recent one is no exception.

Given the recent conflict with Iran, the Strait of Hormuz is blocked, where 20% of the world’s oil travels through, feeding places like Europe. So while production has continued, the fact oil can’t get out means the price of oil is rising, as storage and insurance costs rise. 

The US is a net exporter now. And since many other developed countries are dependent on importing oil, their stock markets are down much more than the US.

Now let’s connect that to petrodollars. The petrodollar system is an agreement established in the 1970s, where oil-exporting nations (primarily OPEC) price and sell oil exclusively in US dollars. This naturally created demand for the dollar. 

With higher oil prices, assuming consumption stays the same, this increases the US trade balance, which in turn should strengthen the dollar. A higher dollar may amplify the global supply shocks more, now that the US is a net exporter. This is because the dollar’s strength is another currency’s weakness. This tightens global financial conditions—meaning inflation rises around the world while growth potentially slows (aka stagflation-ish)—for countries that net import their oil.

Of course, if oil prices stay high for longer, growth should slow and, with it, consumption. The market is like a ping pong under the surface because it’s probability weighting the impact and length from the conflict, while the probabilities keep changing. 

Based on the last 25 conflicts going back to 1941, the median time for the market to bottom was 8 days. So we’ve got at least a few more market days.  I will say, Friday’s reaction was the most “typical” reaction to a conflict, which helps in the long run. 

It's been one of those weeks and we may have at least one more.