The Rhyme: Oil's Double Chokepoint & Its 1973 Echo

"History doesn't repeat… but it rhymes." — Mark Twain

Brent crude rose toward $105 a barrel this morning, up nearly three percent overnight after Iran-aligned Houthi fighters captured the Yemeni coastal city of Mocha and pushed onto the Hanish Islands in the Red Sea — putting them within reach of full control over the Bab el-Mandeb Strait. That is the second of two chokepoints that funnel oil out of the Persian Gulf, the first being the Strait of Hormuz, which has been a live combat zone between the U.S. Navy and Iran's Revolutionary Guard for seven months. No tanker route out of the Gulf is safe today, and the August CPI print landing at 8:30 a.m. is the last number the Fed will see before it meets in four days.

Brent $104.41 (+2.78%)  |  WTI $100.04 (+4.2%)  |  S&P 500 ~7,600  |  10Y yield 4.92% (highest since Oct '23)  |  PPI 5.4% YoY  |  Fed rate 3.50–3.75%  |  FOMC Sep 15–16

The last time both exit routes for Gulf crude were shut simultaneously, it was October 1973.

Most of Israel's army was home. Synagogues were full. The radio stations were off the air. At exactly 2 p.m. local time on October 6, 1973, a hundred thousand Egyptian soldiers poured across the Suez Canal on rubber boats and pontoon bridges while Syrian armor rolled over the Golan Heights from the north. The Yom Kippur War had started, and the Israeli Defense Forces were caught in the worst position of their existence — outnumbered on two fronts, fighting on their holiest day of the year.

What mattered more to global markets was what came eleven days later. On October 16, with Egypt and Syria losing ground as American weapons poured into Israel, the Persian Gulf states — including Iran — unilaterally raised the posted price of crude oil by 70 percent. The next day, the Organization of Arab Petroleum Exporting Countries announced production cuts of five percent per month against any country supporting Israel. On October 19, the full embargo hit. The United States, the Netherlands, Portugal, South Africa — cut off entirely. Oil that had been trading at $2.90 a barrel before the war would reach $11.65 by January 1974. A quadrupling in ninety days.

The chokepoints were already gone before the embargo was announced. The Suez Canal had been closed since the 1967 war, forcing tankers around the Cape of Good Hope. The Trans-Arabian Pipeline carrying Saudi crude through Syria to the Mediterranean had its flow cut by half. The embargo slammed the last door. There was no route left, no workaround, no spare capacity to call on. The developed world had to burn through stockpiles and pray for a political resolution it could not control.

Arthur Burns, the Fed chairman, had been watching inflation accelerate all year. CPI in January 1973 was running at 3.6 percent year-over-year. By August it had jumped to 7.4 percent — a number that shocked even the pessimists. Wholesale prices were climbing at an annualized rate above 10 percent. The Fed funds rate had already been pushed above 10 percent by the end of the third quarter. Burns knew the economy was overheating. But he also believed — wrongly — that oil-driven inflation was a "special factor" the Fed couldn't fight with interest rates. So when the embargo hit and recession arrived in November 1973, Burns blinked. He eased. Inflation didn't slow down. It hit 11 percent in 1974, and the S&P 500, which had peaked at 120.24 in January 1973, didn't stop falling until it hit 62.28 in October 1974 — a 48 percent wipeout that took until 1980 to recover.

Both crises share the same core problem: oil has no alternate route, inflation is already running, and the central bank cannot fight the supply shock without causing the recession it's trying to avoid.

Here is what happened after the embargo hit in October 1973, told in the sequence that mattered. On October 19, the day the embargo was announced, the Dow Jones was around 960. It actually rallied. By the end of October the Dow was back near 997. Investors treated the embargo as a geopolitical event that would be resolved through diplomacy. They were wrong, but they didn't know it yet.

The real damage came from what the oil shock did to the economy over the next twelve months. Gasoline prices at the pump went from about 39 cents a gallon to about 53 cents. The cost of heating oil doubled. Factories that ran on cheap energy started laying off workers. The recession that began in November 1973 would last until March 1975 — sixteen months, one of the longest in the postwar era. The Dow fell from 997 in late October 1973 all the way to 577 by December 1974, a gut-wrenching slide that felt slow and relentless rather than sudden.

Burns made his mistake not on the day of the embargo but in the months after. He saw inflation climbing past 8 percent, then 10 percent, then 11 percent, and he convinced himself that oil-driven inflation was "transitory" — a special factor outside the Fed's control. He cut the funds rate from above 10 percent to around 5.5 percent by early 1975. The easing gave markets a brief sugar high. It also embedded inflation expectations that took Paul Volcker eight years and a savage recession to finally kill.

The traders who got it right in 1974 did two things. They watched the inflation data for signs that the oil shock was spreading from energy into food, rent, and wages — the so-called "second-round effects." And they waited for the Fed to flinch. The day Burns started easing was the day the trade flipped from "inflation hedges" to "long-duration disaster." Treasury bonds issued in 1974 at seemingly attractive yields turned out to be terrible investments because inflation ate the coupons alive.

In 1973, the first instinct was to buy the dip. The market rallied for two weeks after the embargo. The people who sold into that rally had 48 percent of downside protection that the dip-buyers did not. Watch whether Warsh hikes next week — and then watch whether he keeps hiking. The moment the Fed treats $105 oil as someone else's problem is the moment the 1973 playbook locks in.

The CPI number that prints at 8:30 a.m. today will tell us whether oil has already bled into August's core reading. If core comes in above 0.3 percent month-over-month, the September 16 hike becomes a near certainty — and the 10-year yield, already at 4.92 percent, starts looking at 5 percent. The parallel to watch: in November 1973, one month after the embargo, the effective federal funds rate hit 10.03 percent — and the recession started anyway.