Still Ignoring Iran War Oil Shock Markets Like Covid in 2020?

In the early weeks of the Covid pandemic, in those days when public spaces emptied and hospitals were full, I saw this magazine cover of 2017 be passed on through social media. The story was familiar to me because I was the one who wrote it:

The posts were all versions of the same thing: The warning signs were there, we knew something like this was coming, why weren’t we prepared? All of this was true, and all of what I was trying to get across in that story, which itself was the culmination of years of emerging disease reporting: SARS in Hong Kong in 2003, H5N1 avian influenza in Indonesia in 2007, H1N1 flu in 2009. I certainly saw Covid coming too.

Except I didn’t. Through January and into February 2020, as lockdowns and cases of what would soon be called Covid-19 piled up in China and then elsewhere, I remained surprisingly unchallenged. I assume it will flare up, much like bird flu itself or MERS or Ebola or any number of terrifying viruses that didn’t quite have the legs to cause global catastrophes. If you asked me for predictions, I probably would have said a (hopefully) more sophisticated version of what President Donald Trump said on February 25a day before the first suspected community transmission in the United States: Covid would “go away.”

I was wrong, of course. I couldn’t make myself see it—or maybe I couldn’t make myself believe it, believe that we were about to experience sudden, transformative change. And I wasn’t alone. On February 19, 2020, just before Italy reported its first batch of Covid cases, the S&P Index reached an all-time highwhich is not the behavior of markets anticipating what actually happened next: an unprecedented global economic shutdown.

I now believe a similar economic blindness is at work today, with a different crisis.

The crisis in which we do not praise

That crisis is the war with Iran, and specifically the ongoing closure of the Strait of Hormuz. The numbers are not subtle. The International Energy Agency calls it the largest disruption in the history of global oil marketswith global supply down by more than 10 million barrels per day in March. The Atlantic Council notes that the 1973 oil embargo — the shock that defined a decade of U.S. economic anxiety — pulled 7 percent of global supply from the market. Hormuz cut the same supply by 13 percent, and the infrastructure damage from the war and the shutdown will take months or years to repair.

The downstream effects are everywhere you look. In Como, Mississippi, a 73-year-old corn farmer told NPR he was buy diesel “hand-to-mouth”; fertilizer is up 60 percent, an increase so sharp that he may not fertilize his corn this spring. In Dhaka, vehicles line up around blocks for propane refills. The Philippines has declared a national energy emergency. South Korea, Thailand and Vietnam are rationing fuel. Lufthansa has already cancelled 20,000 summer flights.

And yet in the same week the New York Times put it all on its front pagethe S&P 500 hit another new all-time high. The disconnect is staggering. As one analyst quoted by David Dayen in the American Prospect put it: “The market valued peace. The oil system did not.”

How we miss what is before us

So why the gap? Why do markets, and many of us, treat the biggest energy disruption in history as just another potential bad thing that probably won’t actually happen?

The answer, I think, speaks to the same factors that kept me from believing a pandemic was coming in February 2020. People are systematically bad at recognizing the moment when a slow or theoretical threat becomes a clear and present one.

Wharton economists Robert Meyer and Howard Kunreuther call it the ostrich paradoxand they identify six biases that drive it: myopia, amnesia, optimism, inertia, simplification, and herd. Investors are betting on short-term political resolution (myopia), using the pattern that Trump has often reversed market-damaging policies such as tariffs (amnesia and optimism), failed to buy-the-dip behavior (inertia and sweeps) and earnings tracking while ignoring the effects of physical supply chain disruptions (simplification).

The deeper problem is that human cognition is built for sudden threats with a specific source—the punch you can see coming—and grossly miscalibrated for diffuse, distributed ones. Harvard psychologist Daniel Gilbert argued that gradual threats do not set off the brain’s alarm, leaving us “fast asleep in a burning bed”. By 2025 paper in Science by UCLA’s Rachit Dubey and colleagues have shown this formally: When information arrives in continuous form—fertilizer up 60 percent in Mississippi, propane queues in Dhaka, another flight canceled in Frankfurt—people fail to perceive a shift, even when the shift is real. A binary headline (“the strait has closed”) would register more sharply. But the closure of Hormuz, like the early spread of Covid, was not a headline. It was a process.

But you can only ignore reality for so long, and when transformative events occur, change comes quickly.

Five weeks after the market peaked on February 19, 2020, it was down 34 percent – the fastest correction from a high in market historyas Covid was finally priced in. The information that caused the accident was mostly available weeks earlier. What changed was not the data but the integration of the data: the moment when the abstract became concrete, when Wuhan and then Italy and then Seattle turned what was a story about There into a story about Right Here. Markets didn’t suddenly become smart. They just became unable to stay stupid.

While I can’t see the Iran crisis causing anywhere near the economic disruption of Covid, I think we are weeks away from a similar shift. In the spirit of Future perfect predicateI’ll express that thinking as a falsifiable prediction: If the Strait of Hormuz remains materially constrained through June, the S&P 500 will be at least 10 percent off its April 22 peak by Labor Day.

You shouldn’t take financial advice from me, but I’m no more alone in my pessimism today than I was in my carefree optimism as the pandemic spread. Princeton policy advisers made predictions a US recession starting in May; the IMF, which had forecast 3.3 percent global growth in January, has now cut its baseline to 3.1 percent and added an adverse scenario to 2.5 – the latter closer to what the world has not seen outside of the 2008 crisis and the pandemic. Mark Dowding, the chief investment officer at RBC BlueBay, told Bloomberg last week that the current market reminds him of February 2020: “Only when it really disrupted our lives did the market see bigger shocks.”

I missed the Covid pandemic, even with a magazine cover that predicted it sitting on my desk. The market missed it too, until the day it didn’t. I hope we don’t miss the next big disruption. There is still time, but probably not much.

A version of this story originally appeared in the Future perfect newsletter. Sign up here!