Will oil prices always rise before financial crises?

Author: ChainThink

The situation in the Middle East continues to escalate, causing international oil prices to re-emerge as one of the most sensitive variables in global markets. In its latest research report, UBS presented a highly impactful "red line": if international oil prices rise above $150 per barrel and remain there, the United States and global markets will face significant systemic risks, with the likelihood of recession and sharp market adjustments substantially increasing.

Brent crude has now crept back toward $110 per barrel, reigniting an old question at the heart of the market: Does oil always surge before every financial crisis?

UBS's core assessment is not that "every small rise in oil prices worsens the economy by the same amount," but rather that the current risks exhibit clear nonlinearity. In other words, the destructive power of oil prices depends on the macroeconomic environment they encounter. Today’s global economy is already in a state of high interest rates, weak recovery, tight credit, and insufficient market safety margins, meaning that the same oil price shock would be more dangerous now than it would have been during a low-interest-rate, strong-growth cycle.

UBS’s calculation logic is clear: if the probability of a recession is already high, further oil price increases could trigger a full negative feedback loop—not just “a bit more inflation and a bit more pressure,” but rather: higher oil prices push up inflation, inflation constrains policy easing, financial conditions tighten further, demand weakens, risk assets come under pressure, and ultimately lead to synchronized downturns in both markets and the real economy. Within this framework, $150 per barrel is not just a number; it’s more like a threshold that could escalate sectoral pressures into systemic financial risk.

During the first oil crisis from 1973 to 1975, the Arab oil embargo caused international oil prices to surge from approximately $3 per barrel before 1973 to nearly $12 per barrel, roughly quadrupling and plunging the world’s major economies into high inflation, stagflation, and severe recession.

During the second oil shock of 1979–1980, the Iranian Revolution and the Iran-Iraq War pushed oil prices from around $10 to over $30, nearly doubling them. The combination of high oil prices and tight monetary policy ultimately led the United States into recession in 1980 and again from 1981 to 1982.

The 1990 Gulf War is another clearer case. After Iraq invaded Kuwait, oil prices surged from around $17 per barrel to approximately $36 per barrel in a short time, followed by a mild recession in the U.S. economy from 1990 to 1991. Although this recession cannot be simply attributed to oil prices, the oil price shock was undoubtedly one of the key contributing factors.

Around the 2007–2008 global financial crisis, oil prices rose from approximately $70 per barrel in mid-2007 to nearly $147 per barrel in July 2008, the peak for WTI. Following the deepening of the financial crisis, prices quickly fell back to more than $30 per barrel.

During this round, the sharp rise in oil prices preceded the broader collapse of global markets and was widely seen as exacerbating consumer burdens, squeezing corporate profits, and amplifying economic vulnerability. However, the true root cause of the financial crisis remained the subprime mortgage bubble, housing market imbalances, and excessive leverage in the financial system—not oil prices themselves.

If you extend your perspective further, you’ll find that “oil prices surge first” is not a hard rule—the Great Depression of 1929 is a classic counterexample.

Before and after the crisis, oil prices did not spiral out of control; instead, they continued to decline due to oversupply and collapsing demand amid economic deterioration, with U.S. crude oil prices dropping as low as approximately 13 cents per barrel by 1931.

During the 1997–1998 Asian financial crisis, a similar situation occurred: weakening demand in Asia dragged down international oil prices; oil prices were not a leading indicator of the crisis, but rather a consequence that followed its outbreak.

Around and after the dot-com bubble burst in 2001, oil prices fluctuated but did not experience the sharp and sustained spikes seen in 1973, 1979, or 2008; what truly overwhelmed the market was the collapse of the tech stock bubble and the contraction in corporate investment.

The 2020 COVID-19 crisis was even more striking. Before the pandemic, oil prices did not exhibit a typical surge; the extreme volatility occurred only after the crisis erupted. As global travel came to a halt, demand plummeted, and inventory pressures surged, the WTI front-month futures contract briefly dropped to around negative $37 in April 2020. This illustrates that, in many cases, it is not “prices rise first, then crisis follows,” but rather that the crisis shatters demand first, followed by a collapse in oil prices.

This impression persists primarily because the two oil crises of the 1970s and the 2008 financial crisis are so emblematic. These events were highly impactful, visually striking, and widely disseminated, making them easy to cite repeatedly as templates—and over time, they have been generalized as "historical patterns."

Second, the market often mistakes the amplifier for the root cause. While rising oil prices can indeed fuel inflation, increase costs for businesses and households, suppress demand, and at times become the final straw that breaks the economy, what ultimately determines whether a crisis erupts is usually deeper financial imbalances, policy errors, asset bubbles, or unforeseen events.

Looking at the current situation, the real cause for concern is not the simplistic notion that “rising oil prices always mean crisis,” but whether high oil prices could trigger broader systemic ripple effects in a world already characterized by high interest rates, low elasticity, and fragile economic recovery. From this perspective, UBS treating $150 per barrel as a critical threshold for systemic risk is not merely repeating historical patterns, but warning the market: today’s danger lies not in oil prices themselves, but in their potential to collide with a global economy that has little remaining buffer. Oil price surges are not always precursors to financial crises—but when they are sustained, elevated, and coincide with a fragile macroeconomic environment, they can indeed act as accelerators of crisis.