Lexicon Financial Group Weekly Update — June 18, 2025

Jun 18

“We aren’t addicted to oil, but our cars are.”

— James Woolsey, former head of U.S. Central Intelligence Agency

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

ISSUE 185

Looking Around

Did you know that it would have taken our prehistoric ancestors 58 hours of foraging for wood to generate the same amount of light that comes from a standard light bulb? In the late 1700s, when candles became the chief light source, the average worker would have had to devote five hours to producing candles that emitted as much light as a household light bulb emits in one hour.

The invention of the electric light bulb made producing light cheaper. Today, less than one second of work will generate enough money to run a modern household lightbulb for one hour. (1)

Technological advances have made producing everything from light to tables to computers faster and cheaper. What underpins all of this, though, is the access to energy. Energy production and storage is central to our modern economy, sure, but it’s also central to how our civilisation advances.

Yet, despite advances in renewable energies, fossil fuels still make the world go round. According to the Energy Institute, 84 per cent of the energy used in the world in 2024 came from burning fossil fuels. Obviously, a major contributor to this number is gasoline, derived from oil, which is still the dominant way to power vehicles for transportation. In fact, global demand for oiI continues to grow - consumption of oil exceeded 100 million barrels of oil per day (mbpd) for the first time ever in 2023. (2)

Disruption in the supply of oil will, obviously, have an impact on its price. Disruption means shocks to the supply system: low supply equates to a higher cost. But, disruption also means that costs of shipping goods may be higher (given that almost everything we buy is transported) and those higher costs are passed on to consumers. Tarrifs, for example, would be an external cost added to a system.

So, it should come as no surprise that the current conflict between Israel and Iran has caused the price of oil per barrel to rise. While nobody knows for certain where things go from here, Capital Economics, a provider of independent economic insight and data, has presented a few different scenarios:

Scenario 1: Conflict dies down within a few weeks, as Israeli officials could decide that the threat from Iran has been sufficiently reduced and dial back the attacks.
Scenario 2: Conflict escalates, as Iran seeks an end to hostilities by intensifying its attacks. There’s a question about whether the U.S. directly attacks Iran, but at the very least, it would be seen by Iran as an accomplice. Iran responds via measures such as attacks on U.S. military in the region or blocking the Strait of Hormuz.
Scenario 3: Regime change in Iran where the destruction resulting from Israel’s attacks damage Iran’s military and its economy to the point where it further undermines domestic support for the regime and raises demands for a change in Iran’s leadership.
Scenario 4: The conflict is long-lasting with no off-ramp, as the Iranian regime withstands public pressure for change, perhaps by ramping up domestic repression. Shipping and energy transit in the Middle East become subject to more regular attacks from Iran and its proxies.

Capital Economics also suggests that the Organization of the Petroleum Exporting Countries (OPEC) currently has more than enough spare capacity to offset any loss of output due to this conflict, which will soften any impact to global oil prices. (3)

Importantly, history shows that investors and markets have become more resilient to conflict in the Middle East and that prices eventually bottom out.

Read and Watch

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Case in point is the September 1980 invasion of Iran by Iraq. Iraq, fearful that the Shia Muslim minority in Iraq might be influenced by Iran’s Shia revolution and wanting to take advantage of the ensuing chaos, invaded Iran with the idea of taking over its oil fields, which would drastically increase Iraq’s oil export revenue and make it the dominant power in the Middle East.

The war lasted eight years and caused oil prices to spike due to fears of both nations’ oil industries collapsing. Oil prices went from US$3.89 per barrel in 1973 to a peak of $31.77 in 1981.

Quickly, importers began looking for other sources of petroleum and invested greater amounts in both alternative energy sources and making their use of oil more efficient. Additionally, domestic oil production that had begun during the OPEC oil embargo of 1973 came on-line in the early 1980s. The West actually had more oil available by the autumn of 1983 than it did in 1973. Despite a 1982 attempt by OPEC to keep prices high by reducing output, the West reduced its demand for oil to a more reasonable level, keeping prices steady instead. In the autumn of 1983, oil prices began plummeting, bottoming out in 1986. (4)

Markets adjust to changing global economic conditions.

So far, the response to the latest conflict has been more muted. Yes, oil prices have risen but not by the amount witnessed in the past. Financial markets and investors seem to be shaking off the continued bad news in much the same way they have with the war in Ukraine and the U.S. tariffs. Speculation always causes stock markets to be more volatile over the short term. If you are anxious about this or have other concerns, please just contact us by phone or email.

Looking Back

Despite the ongoing trade and geopolitical uncertainty, economic data in Canada and the U.S. continues to be relatively good - economic growth has remained above trend, the labour market has held up despite recession concerns, and inflation has, for the large part, remained constrained so far. This good news has helped stock markets rebound from the lows of April. The chart below shows the level of the S&P 500 and S&P/TSX Composite Index (TSX) from 2023 to June 11, 2025. Since the 2025 low on April 8, the S&P 500 and TSX have gained roughly 20 per cent.

*Source: Bloomberg, S&P 500 Index, S&P/TSX Composite Index.*

The TSX continued this rebound by ending last week slightly up, despite being down last Friday, as investors became cautious following Israel’s attacks on Iran and Iran’s retaliatory missile attacks. This raised fears that the conflict could escalate further and lead to a significant spike in the price of oil. (5)

U.S. stock indexes closed down last week. This, despite being higher through Thursday, thanks to some better-than-expected economic data releases as well as reports that trade talks between the U.S. and China had led to a preliminary agreement to ease recent trade tensions. This positive sentiment quickly turned negative on Friday morning when news broke that Israel had launched a series of airstrikes targeting Iran’s nuclear facilities and military leaders. Iran responded with a retaliatory attack later on Friday, which sent oil prices surging, benefiting energy stocks, while the broader indexes fell sharply and gave back gains from earlier in the week.

The pan-European STOXX Europe 600 Index ended 1.57 per cent lower amid renewed uncertainty about U.S. trade policy and escalating geopolitical tensions in the Middle East. Other major European stock indexes also fell.

Japan’s stock market returns were mixed last week amid the escalation in geopolitical risk in the Middle East and an uptick in trade-related concerns with the U.S.

Chinese stock indexes fell last week as the latest inflation snapshot underscored the deflationary pressures weighing on China’s economy. Deflation is regarded as a major economic challenge for China, where a multiyear property crisis has sapped domestic demand. Economists’ outlook for prices in China remains weak despite a more bullish view of the broader economy in the near term after China and the U.S. agreed to a temporary tariff reprieve in May. (6)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.