What will the impact of the recent hostilities between Israel and Iran be for the global economy? As yet, markets have been pretty stable – but many are worried that oil prices could spike, sending inflation across the globe. Given these concerns, this week we look at four cases—from ancient to modern—that give an insight on the relationship between war and inflation.
(1) Ancient Rome
Start with the fact that wars and inflation have a long history. Jump back almost 1800 years to the third century: the Roman Empire was facing geopolitical and economic breakdown. The Crisis of the Third Century has elements that chime today: war, supply chains rupturing, and policies to cap prices.
Invasions were a root cause. Rome faced attacks across multiple frontiers: Germanic tribes from across the Rhine, and the Sassanid Persians from the East. Supply chains broke down: the flow of incense and spices were blocked due to disruption to a key trade route via the Red Sea. Politics fractured too: between 235 and 284, Rome saw 22 emperors. In 238 alone there were six of them.
The crisis demanded troops, and troops demanded pay. Central banks hadn’t been invented yet, so emperors turned to the mint. More coins were created—their silver content plummeted from 90% to 2% (Chart 1). Despite this, imperial authority and public trust meant that coins still circulated. That trust broke in the year 274, with prices soaring—purchasing power collapsed by 85–90% in a single year.
Chart 1. Silver content in coins.
Source: Pense (timeseries, 1992), Walker (1976-78) via Velatrix (individual observations)
The policy solution was price controls. An Edict on Maximum Prices fixed the cost of over 1,000 goods. A pint of beer could be no higher than 2 denarii. Spiced wine was capped at 24. Merchants often sidestepped them—when caught, enforcement was brutal and “much blood was shed” (Lactantius, 301).
Some of the prices are set out below. A bottle of wine was more than a day’s wages for a carpenter (Chart 2). A figure painter’s wage—one of the highest listed—was only worth around 2 litres of olive oil. It is a reminder of how much, over the long run, living standards improve when economies grow.
Chart 2. The Edict on Maximum Prices.
Source: Kropff’s (2016) English translation
(2) The 1973 oil embargo
The oil crisis of 1973 saw the largest jump in oil prices in over 100 years. On 17th October 1973, one fortnight into the Yom Kippur War, the Arab members of OPEC cut supplies to the United States, the UK, the Netherlands, Japan, and Canada. Production was simultaneously cut by 5% and ratcheted down each month until 1974. The oil prices faced by the UK more than quadrupled from $2.48 before the crises to nearly $12 a barrel in 1974 (Chart 3).
Two factors allowed oil to be used as a weapon in this way. First, oil dominated the energy mix. In 1973, crude supplied around 48% of global energy – a post-war peak. Second, OPEC had market power. The cartel supplied over half of world output in the early-1970s.
Chart 3. UK oil prices, 1960-1990
Source: Bank of England via FRED (series OLPRUKA)
In the UK, queues snaked around petrol stations; the government printed petrol-ration books (though these were never issued) and introduced emergency measures in Parliament (including speed controls to save petrol). In the US speeds were capped (at 55mph), rations were applied (10 gallons per customer). President Nixon froze prices, just as the Roman emperors had done.
A new economic term— “stagflation”—was born, capturing the stagnant growth and rampant inflation. Growth across the OECD slowed from around 5% in 1973 to –0.4% in 1975, the first synchronised post-war recession.
(3) 1979 – the second oil shock
Damage in Iran’s oil fields during the 1978-79 revolution slashed output by almost 5 million barrels a day (about 7% of world supply). Saudi Arabia and other producers stepped in, but the shortfall was still around 5%. Oil buyers panicked, building up their inventories, and the price rocketed from about $13/barrel in mid-1979 to $34/barrel by mid-1980.
Iraq, led by Saddam Hussein, invaded Iran in September 1980. In the first week of fighting, both sides halted oil exports pulling a further 3 million barrels per day off the market.
This second shock saw UK prices rise to nearly $37 per barrel in 1980, up from $14 two years prior. The pass through to prices was quick: inflation rose from 8% to 18%.
Chart 4. Inflation, 1965-1990
Source: World Bank
The inflation surge (and the inability to deal with it) would define politics, and central banking, in the G7 economies for the next 20 years.
(4) 2022 - Russia and Ukraine, Gas and Grain
Gas, rather than oil, was the energy source in question in 2022. Over previous decades Europe had become reliant on Russian gas: by 2019, around half of the EU’s natural gas imports came Russia, much of it via thousands of kilometres of pipelines spanning Siberia to Germany’s Baltic coast.
After the invasion, the EU cut its usage of Russian gas back. Moscow, in turn ordered its firms, including Gazprom, to cut supplies. The impact on natural gas costs was huge (Chart 5).
Chart 5. Natural gas prices
Source: World Bank Commodity Price Data (The Pink Sheet). Notes: Prices are measured in MMBtu (Million British Thermal Units)
Alternatives were quickly found: Germany built a new liquefied natural gas (LNG) port at Wilhelmshaven by December 2022. Overall, Europe increased LNG usage by 60% in 2022, replacing Russia’s gas with imports from the US and Qatar.
The strategy has largely worked. Gas prices stood at $13.2 per MMBtu by March this year, far below the crisis peaks. Russian gas imports have fallen by more than half. (Though they still account for a fifth of the EU’s imports – France and Hungary are the main buyers).
Grain prices also soared as a result of the Russian invasion. Ukraine supplied roughly 10% of global wheat exports. The trade routes went through Europe, and through its Black Sea ports to Africa and Asia. Wheat prices peaked at $450 per tonne in March 2022, more than double pre-war levels, as Ukrainian ports were blockaded.
New trade routes offered some relief. Brokered by Turkey and the UN in July 2022, the Black Sea Grain Initiative allowed Ukrainian exports to resume through safe corridors. Prices have since fallen.
Chart 6. Global wheat prices.
Source: International Monetary Fund, Global price of Wheat via FRED (PWHEAMTUSDM)
Lessons for today
Today Iran provides 4% of the world’s oil. But fully 20% of global oil and gas supply travels via tankers that pass through the Strait of Hormuz, a 50km wide channel that Iran may be able to block. If a shock of this type does occur, history offers two big lessons.
First, flexible supply is hugely valuable. Rigid, concentrated supply, and the existence of market power, makes price shocks a risk. Diversification of supply (whether food or energy) is a good idea, as is a degree of reliance on domestic production.
Second, policies need to take account of this. Steps that may seem sensible in a crisis, but which fail to boost supply (e.g., price controls), don’t work. Policies that make markets more supple (opening new trade routes, building new transport hubs) are often what is needed.
REFERENCES
Rome
Did the debasement of the denarius leave Rome with something like a modern fiat currency? Imperial Monetary Policy and Social Reaction in Third Century Rome. Kalmes (2018)
The decline and fall of the roman denarius. Pense (1992)
An English translation of Diocletian’s Edict on Maximum Prices. Kropff (2016)
Oil shocks
Three Centuries of Macroeconomic Data for the UK – downloaded from here. Bank of England.
Statistical Review of World Energy – downloaded from here. Energy Institute.
Ukraine
How Europe solved its Russian gas problem. Financial Times (2024)
Where does the EU’s gas come from? Consilium
How is the war in Ukraine affecting global food prices? Economics Observatory
Nice post team! Do we think Ukraine wheat export risks will resurface?