(The views expressed here are those of the CEO and co-CIO of

Eurizon SLJ asset management.)

By Stephen Jen

LONDON, April 30 (Reuters) - Why have global equity

markets been so resilient to the Iran oil shock? Because $100 a

barrel oil doesn't mean what it used to.

Brent crude has risen around 70% since the Iran war

began on February 28 to over $120 per barrel, as of early

Thursday. Yet global equity markets, though volatile, are still

substantially back above pre-war levels. While there are many

explanations, the key one is rooted in math.

The head of the International Energy Agency, Fatih Birol, has

described the current oil shock as the worst-ever - more serious

than the ones in 1973, 1979 or 2022.

He points out that the war and closure of the Strait of Hormuz

have disrupted some 12 million barrels per day (bpd) of crude

oil supply. Other energy shipments have been hampered too. This

compares with 5 million bpd of losses related to the OPEC

embargo in 1973, making this "the most severe oil shock ever,"

Birol says.

However, if we adjust for inflation and energy consumption as a

percentage of gross domestic product, then the oil shock - both

in terms of supply destruction and price increases - does not

look nearly as severe - and equity markets' resilience appears a

lot more reasonable.

THE DENOMINATOR MATTERS

To begin, the size of the supply destruction ought to be

assessed with the correct denominator and not be compared across

time in absolute terms. Back in the early 1970s, global

consumption of oil was around 50 million bpd, compared with

double that before the Iran war, according to the IEA. So 5

million bpd meant a lot more back then.

Next, the global economy has become less oil intensive. While

global oil consumption, measured in millions of barrels, has

risen over time, it has collapsed as a percentage of GDP - a

measure known as the "oil intensity." This ratio is currently

about a third of what it was in 1973, according to the U.S.

Bureau of Labor Statistics.

Also, to compare oil shocks across decades, one needs to account

for inflation itself, which in the U.S. has risen some 650%

since the early 1970s.

Adjusting for inflation and the use of oil as a percentage

of GDP, our econometric estimates suggest that $100 a barrel

today is equivalent to around $50 before the Global Financial

Crisis or roughly $5 in 1973.

U.S. EXCEPTIONALISM

The U.S. economy, in particular, appears to have become much

less vulnerable to an oil shock of this size.

Our analysis, based on the assumptions above, indicates that

while a 50% crude oil price shock in the 1970s had a negative

1.0% impact on U.S. GDP over eight quarters, it would likely

only have a negative 0.2% impact at present.

Similarly, our analysis implies that the impact of big oil price

shocks on U.S. inflation may have declined to a quarter of the

level seen five decades ago.

The U.S. also now appears better positioned than other

regions. Oil price increases have negative multiplier effects on

real - inflation-adjusted - economies, but these multipliers

vary across countries.

Strikingly, the U.S. is now half as sensitive to oil price

increases as Europe or Asia, based on our econometric estimates.

This gap has risen over time as the U.S. has become broadly

self-sufficient in hydrocarbon fuels, as a result of the shale

boom.

Energy prices are no doubt still crucial to the U.S.

economy, but the sectors that are most sensitive to energy

prices, like manufacturing, have become a smaller portion of the

overall U.S. economy as the services sector has grown.

STRONG FUNDAMENTALS

It's good to remember that the global economy - and the U.S.

economy in particular - was pretty robust prior to the start of

the Iran war.

That's partly thanks to the massive transfers from the

public sector to the private sector during the COVID-19

pandemic. This government largesse significantly improved the

financial standing of households and companies in many major

economies.

Next, the tech race and the gargantuan associated capital

expenditures - mostly in the U.S. and China - continue to propel

the global economy forward. A world with greater competition

between global powers - far from weighing on activity - is apt

to generate more economic growth than a world driven by

cooperation - at least if history is any guide.

I am, of course, not arguing that high oil prices have zero

effect on economic growth, inflation or asset prices. If crude

prices were to spike much higher - say, closer to $200 - then we

could see U.S. and global recession risk overwhelm inflation

concerns, leading to lower equity prices, a stronger dollar and

lower bond yields.

But, overall, the tolerance of the global economy to oil shocks

may be substantially higher than some think. As long as oil

prices remain broadly range-bound, there is little reason to

expect current market trends to reverse.

(The views expressed here are those of Stephen Jen, the CEO

and co-CIO of Eurizon SLJ asset management.)

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(Writing by Stephen Jen; Editing by Anna Szymanski and

Marguerita Choy)