Oil price spurs new '70 s-style stagflation

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Oil price spurs new '70 s-style stagflation

In recent years, when oil prices moved, it was generally signaling good things about the U.S. and global economy.

However, with oil nearing $83 - per-barrel level Monday, the winds have shifted to inflation woes and supply chain disruptions.

When oil joined the so-called risk-on trade and rallied it would at times carry the stock market higher. Increased oil demand was a sign of economic activity and because of the U.S. shale revolution, rising prices for oil became a net negative as opposed to a net positive in the U.S. economy. America was not only a consumer of oil, but a major producer; it helped boost our gross domestic product and allowed U.S. producers to produce more oil and keep inflation in check.

However, those days might be over as inflation fears increase as energy supplies are held back around the globe. On New York Federal Reserve level, we got a fresh warning last week about the prospect of growth and inflation from International Monetary Fund IMF and the International Monetary Fund.

The situation is getting so worrisome that it is changing the complexion of the way oil price is viewed. Now the market is dreading higher oil prices and rather of basking in risk-on trade, it is even bringing back talk about new 1970 s-style stagflation.

Back in the '70 s, oil was never good news. The rising cost of oil would kill our economy and help create a new syndrome called stagflation defined by higher costs and slower economic growth.

The reason for stagflation was in large part due to high oil prices and our dependence on foreign oil. The U.S. was held hostage to energy prices, which were in large part dictated by the OPEC cartel. Oil price spikes in the '70 s were the major factor in inflation and inflation expectations. Price spikes continued and again drove us into recession.

Yet the economic oil risk was solved by the U.S. shale producer in large part. Oil was more panicky when geopolitical risk threatened supply of oil. It helped to thwart prices spikes that would starve the economy. Shale oil may be the reason that despite strong economic growth, inflation stayed lower, allowing more sustained economic growth.

Yet with the increase in renewable investment and the Biden administration imposing tighter restrictions on U.S. energy, global production of oil and global production is not moving with the global demand. Insufficient capital expenditure and an OPEC cartel that is stingy with output in conjunction with rash decisions by Europe to get off fossil fuels are creating an oil price shock risk that could stagnate growth and cause inflation.

When oil price increases, it can hurt stock prices and become a risk-off situation? A sharp drop in stocks could hurt confidence and slow growth while oil prices remain high due to tight supply. That is the type of situation that could give inflation stagnation with stagnated growth.

If governments around the globe don't reconfigure their carbon policies, the oil price threat will weigh on economies. Aside from that, we all know that central banks can t print more oil like they do money.

Phil Flynn is senior energy analyst at The PRICE Futures Group and a FOX Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. Phone Phil (866) 264-5665 or email Phil [1945].