The Yom Kippur War (also known as the Ramadan War or the October War) was a major armed conflict fought from October 6 to 25, 1973, between Israel and a coalition of Arab states led by Egypt and Syria. For investors, this geopolitical event is less about the battlefield and more about the economic bombshell it detonated: the 1973 oil crisis. In response to U.S. support for Israel, the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) proclaimed an oil embargo. This wasn't just turning off a tap; it was a weaponization of oil that sent shockwaves through the global economy. The price of oil quadrupled almost overnight, from around $3 per barrel to nearly $12. This sudden, violent price hike plunged the developed world into a severe economic crisis, ending decades of post-war prosperity and providing a brutal lesson on the intersection of geopolitics and portfolio management. For value investing practitioners, it remains a powerful case study on understanding external risks and finding opportunity in the midst of chaos.
The immediate consequence of the oil embargo was a full-blown energy crisis. Gas stations saw long lines, governments implemented rationing, and the sense of vulnerability was palpable. But the economic fallout ran much deeper, reshaping the financial landscape for a decade.
Before 1973, economists generally believed in the Phillips curve, which suggested a stable, inverse relationship between inflation and unemployment. You couldn't have high levels of both at the same time. The oil crisis shattered this idea by ushering in an era of stagflation—a toxic economic cocktail of stagnant growth, rising unemployment, and soaring inflation. The surge in oil prices drove up costs for everything from manufacturing to transportation, fueling inflation. Simultaneously, the shock to the system choked off economic activity, leading to recessions and job losses. This conundrum baffled policymakers and savaged financial markets, leading to one of the most brutal bear market periods in modern history, the 1973–74 stock market crash.
The crisis dramatically shifted wealth and power. Oil-exporting nations in the Middle East suddenly found themselves flush with cash, accumulating vast fortunes. This led to the rise of the petrodollar system, where oil revenues, priced in U.S. dollars, were recycled back into the global financial system, often by purchasing U.S. Treasury securities and other Western assets. This event cemented the U.S. dollar's role as the world's primary reserve currency but also highlighted the West's dependence on foreign energy, a dynamic that continues to shape international relations and market risks today.
For the thinking investor, the Yom Kippur War and the subsequent crisis are not just historical footnotes. They offer timeless lessons on risk, resilience, and the core principles championed by figures like Benjamin Graham and Warren Buffett.
The 1973 oil crisis was a classic black swan event—an unforeseen and unpredictable event with extreme consequences. It taught investors a painful lesson: you cannot ignore the world outside the stock market. Geopolitical tensions, resource dependency, and political decisions can upend even the most carefully crafted financial models.
The crisis brutally exposed the vulnerabilities of businesses dependent on cheap energy. Airlines, auto manufacturers, and heavy industries saw their profits evaporate. A savvy value investor must dig deep into a company's operations to understand its key dependencies.
While most investors were panicking during the 1973-74 crash, disciplined value investors were sharpening their pencils. The market was indiscriminately selling off excellent companies alongside the truly vulnerable ones, creating once-in-a-decade bargains. This was a period when Warren Buffett found incredible opportunities, famously investing in The Washington Post Company. The lesson is simple but powerful: widespread fear creates the best buying opportunities for the rational, prepared investor. As Buffett himself advises, it is wise to be “fearful when others are greedy, and greedy when others are fearful.”