Off the Run

This Time It’s Different

• The oil shock was absorbed because we spent 50 years preparing for it
• Now, geopolitics, AI, and reshoring are forcing us to rebuild resilience across the rest of the economy
• Who wins when capital is scarce, rates are real and patience has value again?

I’ve spent the last few months thinking the market has it all wrong. The market was not appreciating the implications of this energy disruption. The S&P keeps making new highs. GDP numbers look surprisingly good. AI is not taking all the jobs. I was firmly in that “let me explain something to you” camp, beside myself asking, “why isn’t crude higher?” Fake peace headlines don’t fill tankers. So, what gives? And then there it was, staring me in the face. It is not 1973. For fifty years we actually paid to insure ourselves against an oil shock, and in April the policy paid out. What we didn’t pay for was everything else. We spent thirty years calling it efficiency and let the interest compound.

The oil shocks of the 1970s forced the West to figure out how to make sure it would never happen again. The response was enormous: refocus of national labs, building strategic inventories, improving energy efficiency, and eventually an energy system far less dependent on the marginal barrel than it was fifty years ago. In a recent Foreign Affairs piece, The Long Shadow of the Iran Shock, Jason Bordoff and Meghan O’Sullivan make the case that those investments are a big reason the latest shock has been so remarkably manageable. We spent fifty years making sure a disruption in oil flows would not derail the global economy and in April we finally got to see if it worked. It did. The energy transition worked. We should be pleased. The problem is, today, our shortage isn’t oil.

In the 1970s, we had inflation, stagflation, energy dependence, and high interest rates to battle, the federal balance sheet was in good shape, and the U.S. still had leading technology, defense, and industrial sectors capable of building things. As we were getting those issues under control, the Cold War ended and the economy took off. The U.S. Navy was patrolling the seas. Globalization accelerated. Toyota showed us the magic of just-in-time inventory and FedEx helped make the whole thing possible. Cheap money encouraged the optimization of balance sheets, and consultants squeezed out every inefficiency. I’m not sure anyone expected the end state to be the influencer economy and a total lack of appreciation for the fact that you can tap the screen on your phone and pretty much anything shows up at your house. But here we are. The problem is, humans have a habit of treating the recent past as prologue, especially when it has been profitable.

Then Covid. The first wake-up call to just how fragile the supply chains we had built really were. Then reshoring. Then Russia and Ukraine, and the first glimpse of a new kind of energy crisis. Then AI, and an explosion in real asset capex. And then the closure of the Strait of Hormuz and war with Iran. Geopolitical tension reshaping the economy, technology suddenly demanding enormous amounts of physical capacity, and war. All in less than five years. Globalization and optimization had taken almost all the slack out of the system.

Except, ironically, oil.

That is what I had backwards. I kept waiting for this shock to look like the last one. But it wasn’t. Everywhere else, we are trying to reverse decades of optimization at exactly the moment the world is asking the physical economy to do more. So maybe the shock is not missing at all. It is just spread out. You see it in sticky inflation, government deficits, construction costs and higher borrowing costs. There is no gas line to photograph. Even in oil, the strain isn’t crude. It’s diesel, the refined product we actually burn. Everything just gets a little more expensive to run while more capital competes to rebuild the physical world.

Which is why I think this concern that we might be “higher for longer” is wrong. We are exiting a time of lower for much longer. A 40-year tail wind for bonds. Consumers got used to it. Companies got used to it. Governments really got used to it. Now national security spending is a government priority, social spending is an electoral priority, and AI is a corporate priority. The spending cannot simply stop, but the money is no longer free.

The good news is we have seen this story before. We know how to build around physical scarcity, because we spent fifty years doing exactly that with oil. The world needs more power, more redundancy, more manufacturing capacity, and more infrastructure. For thirty years we got very good at optimizing for the cost of today. Now we have to pay for the resilience of tomorrow. The only question is whether we pay as we go or keep PIKing the interest.