War embargoes create interesting spikes and pukes in different historical cases that we will unpack. There are eerie similarities between the embargo war spike-and-puke episode of cotton during the Civil War and other embargo spikes and pukes in the 1970s and today’s oil and gas spike (and later puke).
The similarities are in speculation, trade routes, floating capital conversion into fixed capital and liquidity traps, base curve blow-up due to embargo, demand destruction, speculation into new ventures, real income reduction for consumers (wages not following prices), cost-push inflation, and banks caught wrong-footed in the puke portion of the sequence (that we have not had yet). So without further ado, let’s review the sequence.
The historical sequence:
Secession declared by South Carolina, immediately Europe envisions problems for global trade payments for the U.S., as the imports from India and China of the U.S. via London would be impaired.
Perturbation in means of payment
Well, that happened with Russia and the Ukraine war. The war resulted in a problem of international ability to pay for foreign trade. RINSE / REPEAT
“As soon as it is realized that cotton will be in short supply, all commitments with the United States are quickly liquidated. Their enormous exports of cotton and wheat were nearly double the imports from England; they were therefore its creditors and charged it with paying their debts in China and India by means of drafts drawn on London; it is these drafts which, arriving all at once at the start of the war, upset the English market as can be seen on the Bank’s balance sheets.”
Demand Destruction
Demand destruction occurred naturally as the quantity of cotton imports went down from 11 million to 10 millions.
The level of imports from Europe to the South of the U.S. had declined a lot. And to that extent, we could say that the luxury market is probably badly impacted by the events in the GCC, similarly to the situation of the South of the U.S. with the Civil War.
“On December 17, 1860, South Carolina declared its break from the American Union. The news, which had already been anticipated, reached Europe at the end of December. The metallic reserve continued to fall; it was already reduced to 10 million pounds sterling when the discount rate was raised to 8 percent (February 14, 1861). The exchange rate with Paris, at 25 fr. 02, had risen to 25 fr. 50. Cotton imports, which were enormous in 1860, remained at almost the same level in 1861 (12 million and 11 million quintals), despite the blockade of the coasts of the Southern States. The declared war had brought the deepest disruption to the Union, and, while export sales of cotton to Europe still continued, purchases of European products had greatly decreased, with settlements having to be made primarily in metallic currency.”
From a base of 100 in 1847, the price of cotton reached a high of 464 in 1864.
“The year 1864 opened under these conditions: external and internal transactions were engaged on a scale unprecedented until now, prices were strained enough to make negotiations difficult, and the value of cotton imports rose to the enormous figure of 66,900,000 pounds, although the quantity did not exceed 7,600,000 quintals. By putting the four corners of the world and all markets under contribution, they had barely managed to return to the quantity imported in 1855, but the price had more than tripled. Fortunately, the cereal harvest was good and the value of cereal imports of 37 million pounds had fallen to 12,900,000 pounds: despite everything favorable on that side, the metallic reserve was still threatened, and if the discount rate had not been maintained at 7 percent, it would have been seen to disappear, so to speak, as in previous crises. Thanks to the vigor displayed in the face of unfavorable exchange rates, it was prevented from falling below 12 million pounds.”
But it crashed to 79 in 1868. We had the same with the Ukraine war in 2022, followed by a crash to a dangerously low level for the Permian around last summer at $53.
Solution for the Permian?
Start a new war!
Rising imported amounts of cotton but with lower volumes
Embargo spikes are just that: spikes that can crash a few years later, like the Ukraine war followed by the plunge in 2025, something similar to what happened to cotton between 1864 and 1868.
“From 1856 to 1860, the annual import of cotton into France (special trade, current value) varied from 146 to 153 million francs.
In 1860 and in 1861, at the start of the war, while an incomplete blockade allowed an enormous quantity of cotton to pass through, the figure for imports in metric quintals, which had never exceeded 84 million (1856), rose to 123 million metric quintals and, in value, to 202 and 270 million francs. In 1862, with the entire reserve of the Southern States being exhausted, imports fell to 38 million metric quintals and 126 million francs.
In 1863 and 1864, the figures rose again to 55 and 67 million metric quintals and, in value, to 261 and 315 million francs, exceeding the 1861 import figure by only 45 million francs, whereas the cotton import of 270 million francs coincided with another import of 390 million francs of cereals. The whole having passed unnoticed, so to speak, without causing any disruption in business, how, in 1864, with cereal imports being reduced to 29 million francs, could one want to attribute all the market’s troubles to a cotton import of 315 million?”
A short-term spike does not preclude a total disaster in the commodity later, which happened for cotton. It happened first in 1868 and continued with a total oblivion in the 1870s.
The Embargo spike creates an all-time high of the era
“RISE AND FALL OF PRICES.
In the comparison of high quoted prices, it must always be remembered that the crisis of 1864, which broke out at the most acute moment of the Civil War in the United States, gave for cotton, for fabrics, and for hemp, prices that had never been seen before and that we will not see again, we hope.”
Slowdown in manufacture due to Cotton Spike
Manufacturing input prices created problems for manufacturing products that are then re-exported to pay for soft commodities. You could say that a bit of the same is likely happening in China today at the margin.
“The crisis was aggravated by the lack of supply of raw materials, such as cotton and wool for the factories, which were supposed to provide the means to pay for cereal imports.”
Reduction of demand, but rise in price, but reduction of exports back to the U.S. As already discussed, the GCC will import less from the rest of the world. And they might need cash, and swaps would be preferable for the U.S.; otherwise, they are forced to sell UST, which would not be good for U.S. capital markets.
Continued bifurcation between value in currency and volumes in 1864
So at the peak of the crisis in 1864, the prices had risen enormously, so the imports in value increased and the world had to find imports from elsewhere, which is exactly what happened.
“The year 1864 opened under these conditions: external and internal transactions were engaged on a scale unprecedented until now, prices were strained enough to make negotiations difficult, and the value of cotton imports rose to the enormous figure of 66,900,000 pounds, although the quantity did not exceed 7,600,000 quintals. By putting the four corners of the world and all markets under contribution, they had barely managed to return to the quantity imported in 1855, but the price had more than tripled.”
Rising speculation and new ventures during the inflationary period of the U.S. civil war
“In 1863, 263 newly formed companies had already requested 78 million to be constituted. In 1864, 282 new companies made a call for funds of 126 million; including the old companies, the public was invited to subscribe for 141 million. The recently created enterprises represented, in the two years 1863–1864, a sum equal to that paid for all the businesses launched from 1856 to 1862.
There was there an expansion of business which could not last; it recalled the period of railroad construction from 1846 to 1850. Issues [of stock] followed one another incessantly with a premium; it was hoped that this would last forever, and no thought was given to future payments which far exceeded available resources. Every day gave birth to a new railway project. Suspending their construction was impossible; only the banking, finance, commerce, and mining enterprises—in a word, all the speculations—could stop at the first signal and liquidate in the shortest possible time. The credulous shareholder was caught; all that remained for him was to swear that he would not be caught again.”
Market Operators on Margin
“As in the time of the railway mania, thousands of people, both in and out of business, had subscribed to securities well beyond their resources. Now, as soon as the transmission of securities with a premium is no longer done so easily, everything stops; not only is nothing more subscribed to, but one cannot even make the payments. The last securities issued became unsellable; credit failing, recourse was had to finance bills; here is what is meant by these words.”
Difference between now and then
Cotton had to be sourced from elsewhere post Civil War. The embargo spike was followed by a massive puke; this would probably be a much bigger puke because the factor at the margin is that ground transportation is getting massive competition while a new polymer-based, true solid-state solution is coming into production right now. It is inherently cheap and has few manufacturability issues while providing 450 Wh/kg.
In other words, what’s coming is not an imperfect substitution followed by restoration of demand post-spike. What we will see is a permanent hysteresis in demand (demand that does not come back post-spike).
This to some extent dampens oil price speculation. The introduction of a substitute typically results in a cartel break-up. In that context, the UAE, seeing what’s coming, is leaving the cartel for all the right reasons
Diverting imports to India and to Egypt
Paying a lot with your own products. Guyana and Brazil are net exporters. EU opening free trade with those regions.
“In any case, to meet the immense imports of cotton from Egypt and India, the export of precious metals to the Levant [the Middle East] took on great developments: from 13 million pounds sterling from 1857 to 1861, it rose to 23 million. This small sum, in the presence of the quantities of cotton imported, proves well that even in the most primitive civilizations, needs are soon satisfied when one has the means to pay for products; one thus returns to the general conditions of exchange, and relations once established will not cease, even with the disappearance of the cause that originated them.”
Table Translation: Production of Precious Metals from 1849 to 1863
The table tracks the production of Gold (Or) from “Old Sources” (Anciennes) and “New Sources” (Nouvelles), and Silver (Argent) from all origins. Figures are in millions of pounds sterling (l. st.).
The UK develops trade with India as a result of the war in the US.
“The development of trade with British India manifested itself following the American war, as it supplied the largest part of the cotton demanded by European factories. The immense metallic stock poured into its markets immediately gave trade a speed and extension previously unknown; moreover, it created new [trades] which were impossible in kind and which, with metal, were immediately settled.”
Imperfect substitution versus superior substitution
The other commodities rise in sync, but why?
“The observation of what happened during the crisis of 1864 already pointed to this. Although the price variations at that time mainly affected cotton, nevertheless other products—even besides wool, silk, and hemp—reached their highest prices at the same moment, which clearly proves that we were then in an upward trend [inflationary current]. If the Civil War in the United States hastened the explosion of the crisis, we were already marching toward it with great strides.”
Imperfect substitution effects, with smaller variations.
“The price variations for wool were less significant.
From 100 in 1845–1850, the price rose to 146 in 1857, then fell back to 105 in 1858–1859 during the liquidation of the crisis. The high cost of cotton pushed it back up to 159 in 1865, then it lowered to 88 in 1870–1871, and finally, after having reached a price of 157 again during the crisis of 1873, it descended to 106 in 1879. The gaps were less wide than for cotton, although the oscillations moved in the same direction.”
Silk, being a poorer substitute than wool, resulted in a smaller increase in price.
“Silk, during the same period, doubled in price, from 100 to 204 (1845–50–1857), but at the height of the cotton crisis it had already fallen back to 139, which indicates clearly enough that it could not satisfy the needs of consumers. Once the Civil War was over, it rose again to 200, then, except for a slight price recovery in 1870–1871, it declined steadily until reaching 87 in 1876.
In summary, of the three main textiles, only two, wool and silk, despite a large drop in price, are above the prices of 1845–1850.”
Push-cost inflation in manufactured products using Cotton
With the raw material spike, the manufactured products using cotton as input rise but to a lower extent, and Juglar explains that labor had to absorb a lower increase in wages. Post-war embargo spike and during the puke, the fall in manufactured products using cotton as an input was lower too. Once again, we see the same situation today with consumer sentiment very low for the same reason: they are the ones paying for those war-induced price spikes.