Middle East Wars, Oil Spikes and Inflation - Then and Now!

By Victor Sperandeo with the Curmudgeon

Gulf War #1 and #2 vs. The Current U.S. War in Iran:

Let’s start with Gulf War #1, After Iraq’s invasion of Kuwait in August 1990, “Operation Desert Storm” began January 17, 1991, with a U.S. air attack on Iraq. That was followed by a ground troop invasion on February 24^th, which was known as “Operation Desert Sabre.” It lasted only 100 hours at which time Iraq agreed to a cease fire on February 28^th and to withdraw from Kuwait while recognizing its sovereignty.

In the first gulf war, 697,000 U.S. troops were deployed in Iraq, Saudia Arabia and Kuwait. They were joined by a broad coalition from 40 other nations which contributed an additional 250,000 -to-300,000 troops. There were only 298 U.S. deaths and 467 wounded in action in that war (Source: Defense Casualty Analysis System). That low number of casualties was largely due to Iraq’s flat terrain and the dominance of U.S. air power.

Gulf War #2 has a close parallel with the current conflict with Iran. President George W. Bush (son of 41^st U.S. President George H.W. Bush) went to war with Iraq based on the assumption that Saddam Hussein had acquired “Weapons of Mass Destruction.” That was later proved to be 100% false, which greatly embarrassed U.S. Secretary of State Colin Powell after his February 5, 2003 speech to the U.N. Security Council.

Fast forward to today and we hear a similar mantra from U.S. President Donald Trump and his cohorts that “Iran cannot have a nuclear weapon.”

War With Iran Fraught with Problems:

Today, the war with Iran, is unwinnable without massive casualties, largely due to the Iran’s terrain and topography of the Strait of Hormuz, which would require combat troops to invade a mountainous fortress. Air power would be of extremely limited use. Also, there is no coalition as there was in the first gulf war as no other country (other than Israel) has expressed a willingness to use offensive air strikes or put boots on the ground in Iran.

The catastrophe was getting into this war with Iran, which was singularly decided by one man- President Trump - who did not consult with Congress (which has the sole power to declare war as per the U.S. Constitution- Article 1, section 8, clause 11). Congress was granted that authority to enable the people’s representatives to deliberate all aspects of a potential war before proceeding with an armed conflict.

Decisions by one person are error prone. Many leaders of nations are flawed, due to their egos and therefore men die because of their leaders' megalomania. One of the greatest war blunders in history was Napoleon’s invasion of Russia in June 1812. He went into Russia during the coming winter with 600,000 men and came back with 100,000 resulting in an 83.3% death rate.

According to Art Berman, a highly respected oil analyst/petroleum geologist, today’s war is the greatest blunder since Napoleon.

Oil Price Spikes During Gulf War #1:

On August 2, 1990, Iraq invaded Kuwait. The immediate loss of both nations' production, coupled with fear that Iraq would invade neighboring Saudi Arabia, triggered an intense oil supply shock. WTI prices jumped 90.2% in just over two months. WTI crude oil hit an initial multi-year peak of $39.53 to $40.00 per barrel in September and October 1990.

At that time, there was a concern of that Iraq might invade other Gulf nations. That did not happen. Followed by the U.S. air attack on Iraq in January 1991, fears of additional oil supply disruptions were quickly relieved, and the price of oil fell sharply. Inflation also trended lower. The CPI ended 1991 at + 3.06% YoY, and it dropped to the mid 2% level in the next few years.

Victor: Oil’s Impact on Future Inflation:

Today, the sharp spike in oil prices due to shortages suggests that inflation will remain high. Victor says that might only be temporary! His monetarist view is that as the price of oil/gasoline/diesel fuel increase due to shortages, other prices will move lower -- as long as “MONEY IS NOT PRINTED TO MONETIZE THE PRICE INCREASE.”

The result will be deflation, as the U.S. economy goes into recession due to “demand destruction” from high energy prices which most people can’t afford.

That script was last seen in the second half of 2008, after oil prices went from $98 TO $147 in July 2008. Those unaffordable energy prices, combined with the global financial crisis/mortgage meltdown, caused “demand destruction” that resulted in deflation.

For the 12-month period ending in December 2008, the CPI-U rose by only 0.1%- the lowest YoY reading since a -0.7% decline in 1954. Victor believes this pattern is likely to repeat by the end of 2026.

Any price increase without printing money is like a Yo-Yo. It is the fundamental price of a shortage, versus when it ends.

As of the latest data released by the U.S. Energy Information Administration (EIA), the wholesale spot petroleum price for WTI crude oil is $104.66 per barrel and Brent crude oil is $110.91 per barrel.

Fortunately, you cannot put a spot oil price or a July WTI Oil Futures contract in your gas tank!

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An Old Wall Street Joke:

The “trading versus eating sardines" joke is a classic Wall Street parable that mocks pure speculation. It highlights the folly of buying assets solely to flip them to a "greater fool" at a higher price, completely ignoring the item's actual utility or value.

The story goes that during a shortage, a highly sought after can of sardines was passed from trader to trader. The price skyrocketed from a few dollars to an exorbitant sum. Eventually, a hungry buyer bought the can, took it home, opened it up, and tried to eat the fish. He immediately got sick from the rancid food and angrily confronted the seller. The seller looked at him with pity and replied:

"You fool; those weren't eating sardines... those were trading sardines!"

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Macro-Economic Analysis:

The current oil market dislocation reflects a widening divergence between physical crude oil fundamentals and futures market pricing. Oil futures, by design, are financial derivatives that incorporate expectations, liquidity conditions, and policy signals—not just spot supply-demand dynamics. As a result, futures pricing may understate near-term physical tightness.

Recent oil price behavior suggests that government policy intervention is playing a material role. The ongoing release of crude from the U.S. Strategic Petroleum Reserve (SPR), reportedly at levels below prevailing global market prices, along with coordinated inventory draw downs in other regions, has effectively acted as a temporary price suppression mechanism.

However, this strategy is inherently time limited. Based on current depletion rates, the capacity to sustain such interventions appears constrained to the very near term. From a fundamental’s perspective, the market has already demonstrated its sensitivity to supply shocks.

Brent spot prices surged to $138/barrel in early April, averaging $117/barrel for the month which is approximately $46 above February levels. That’s primarily due to disruptions associated with severely constrained transit through the Strait of Hormuz.

Here's a 6-month chart of Brent oil prices:

Source: Financial Times

The above chart underscores the degree to which geopolitical choke points continue to anchor global oil risk premiums.

The latest U.S. Energy Information Administration (EIA) projections (as of May 12^th), imply moderation of oil prices: Brent oil is expected to average around $106/barrel through June due to supply disruptions. Then it will decline to $89 / barrel by Q4 2026 and average $94.85/barrel for all of 2026, before dropping to $79/barrel in 2027. That’s contingent on Middle East supply normalization.

Iran War Scenarios:

The EIA projections embed assumptions of geopolitical stabilization that may prove optimistic. From a macroeconomic standpoint, three broad scenarios emerge:

1. De-escalation: A reduction in geopolitical tensions would likely validate current forward pricing, easing inflationary pressures and stabilizing global growth.

2. Status quo: Continued reliance on inventory draw downs and managed supply could suppress prices temporarily but risk a sharper correction once intervention capacity is exhausted, potentially by mid-year. This would introduce stagflationary pressures, particularly in import-dependent economies.

3. Escalation: Any direct military conflict affecting key transit routes or production zones would likely reprice oil materially higher, with plausible ranges exceeding $175 - to -$225/ barrel. Such a shock would have severe global macro implications, including recessionary or depression-level outcomes in vulnerable economies.

Bottom Line: There is no quick fix to the effective closure of the Strait of Hormuz, which has caused the worst oil supply shock in history.

Source: Islamic Revolutionary Guard Corps Navy

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Conclusions:

The geopolitical balance of risk remains asymmetric. Iran retains the ability to disrupt the oil supply at relatively low cost, while external military intervention carries high uncertainty, extended timelines, and significant economic consequences.

For markets, the key takeaway is that current oil pricing may underrepresent tail risk. The combination of finite policy tools (e.g., SPR releases), structurally tight supply channels, and elevated geopolitical uncertainty suggests that volatility—and upside price risk—remains materially underpriced in current futures curves.

End Quote- Nazi Psychopath Hermann Goring on War:

Perhaps his most famous statement reveals how he viewed the ease with which leaders can convince everyday people to support war:

"Why, of course, the people don't want war... But, after all, it is the leaders of the country who determine the policy, and it is always a simple matter to drag the people along... All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism... It works the same way in any country."

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Victor’s Addendum:

U.S. Presidents George W. Bush and Donald Trump have advanced the claim that Iraq and Iran, respectively must be prevented from acquiring weapons of mass destruction—even in cases where the existence of such programs was unproven or intelligence was contested. This raises a fundamental strategic issue: deterrence policy cannot rest on conjecture alone. Even if such capabilities existed, the relevant question is not merely possession, but intent and constraints imposed by retaliation.

Nine nations currently possess nuclear weapons, including North Korea, an authoritarian regime with opaque decision-making structures. Absolute certainty about future use is unattainable in any nuclear context. However, uncertainty is not, in itself, a sufficient basis for preemptive war.

Strategic doctrine since the Cold War has rested on deterrence, second-strike capability, and rational cost imposition—not speculative worst-case assumptions divorced from empirical evidence.

Committing military force, and by extension American lives, on the basis of hypothetical or weakly substantiated threats represents a failure of strategic discipline. It substitutes scenario-driven fear for rigorous risk assessment and undermines both credibility and long-term stability.

The U.S. Congress is not absolved of responsibility in this process. Its Constitutional mandate is clear: to exercise independent judgment in matters of war, grounded in evidence and in service to the Constitution and the American people—not partisan alignment. When that obligation is subordinated to political expediency, the result is not only flawed policy, but a systemic erosion of accountability in decisions of war and peace.

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Stay healthy. Wishing you success and good luck. Till next time…

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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