Inside today’s Daily Journal…

Editor’s note: Today, Porter turns the Daily Journal over to Andrew Lipman, an analyst on Porter & Co.’s Distressed Investing. Andy details how the U.S.’s increasing energy independence has helped buffer it from great energy price shocks resulting from the war in Iran.

Andy takes it from here.

The U.S. is becoming more energy efficient…

Domestic production of oil and gas has increased significantly over the last two decades, and because of this, oil-price increases attributable to the war in Iran have been much lower than in conflicts past.

Since the U.S. government’s war against Iran began on February 28, the price of benchmark West Texas Intermediate crude has risen about 50% – from roughly $65 to $98 per barrel this morning.

And the consumer felt it almost immediately at the pump… with the price of a gallon of gasoline shooting up by around $1, to $3.95 on average nationally. The cost of diesel fuel shot up even more – affecting truckers now and the price of food in the grocery store in a few months.

The consensus in the financial press and in the financial markets is that higher energy costs will reduce economic growth in the near term, but they are unlikely to trigger a recession. Just 20 years ago, that was not the case – an economic shock of this magnitude might very well have been enough to do more damage to the economy that it has today. By historical standards, today’s oil-price rise, though painful at the gas pump, is relatively modest.

For example, in October 1973, OPEC – the consortium of Arab and African countries that manages that region’s oil market – declared a total embargo on oil sales to the U.S. Six months later, by March 1974 when the embargo ended, the price of a barrel of oil had risen 400% – from $3 to $12 per barrel. This price increase led to 9% unemployment, a 48% decline in the stock market, and a recession that extended into 1975.

After Iraq invaded Kuwait in 1990, the Gulf War that followed caused the price of oil to more than double – from $17 to $36 per barrel. This increase in energy costs, which had eventual effects on goods and services, led to 7.8% unemployment and a recession through April 1992. It is widely believed these events lost President George H.W. Bush re-election to the White House in 1992.

In 2008, oil production was declining while worldwide demand was increasing. The Chinese economy was growing rapidly – more than 13% in 2007 – and global economic growth was a solid 4.5%. This supply-and-demand imbalance caused the price of oil to more than double, rising from $60 per barrel in early 2008 to $143 per barrel in July 2008. This sharp increase in energy costs was one of the many factors responsible for the great recession of 2008-2009.