There is a useful discipline in thinking about economic shocks from first principles. Strip away the commentary, the politics, the noise, and ask a simple question: what is actually happening to the flow of wealth?

An oil price shock, at its core, is a wealth transfer. Money moves from countries, companies and consumers that need oil and gas to the countries and companies that produce it — but not, crucially, to those directly caught up in the disruption itself. The countries and companies at the epicentre of an oil shock are not winners. Their production is impaired, their infrastructure is at risk, their economies are destabilised. The wealth flows instead to other producers, outside the conflict zone, who can ramp up output to capture elevated prices. That much is mechanical.

The damage comes from what happens next. Oil and gas are not a discretionary input. They are woven into the cost structure of virtually every good and service in the modern economy. When the price of a fundamental input spikes, every supply chain, every margin and every household budget must adjust. That adjustment is frictional, slow and deeply unproductive. Output stagnates, unemployment rises, and prices stay elevated. The textbook calls this stagflation. The 1970s called it a decade.

Trained in the long grind

My instinct for thinking about these dynamics was not acquired from textbooks. It was trained into me. I began my career as a fund manager in the late 1980s, at BT Funds Management in Sydney, during what turned out to be the early stages of a forty-year disinflationary trend. From the early 1980s through to the arrival of Covid, the dominant macro story was the grinding removal of inflation from the global economy. Interest rates fell. Bond yields fell. Asset prices rose. The entire financial system oriented itself around the assumption that inflation was a problem that had been solved.

At BT, I had the good fortune to work alongside some of the bankers who had been active during the 1970s oil crisis. They had worked out, in a capital market that was nowhere near as mature as today’s, how to recycle the vast quantities of petrodollars that flowed into oil-producing nations after the price shock. The mechanics were novel. Those who understood them made fortunes. I remember being struck by the ingenuity of it and by the recognition that the financial plumbing of the 1970s was, by any modern standard, primitive.

This matters for today. The world now knows how to recycle petrodollars. Capital markets are vastly deeper, more liquid, and more interconnected. The machinery for absorbing a wealth transfer into oil-producing nations such as sovereign wealth funds, derivatives markets, and global fixed-income pools exists at a scale unimaginable in the 1970s. The implication is important: the financial system may handle an oil shock more efficiently this time. Interest rates may not need to go as high. The capital-markets contagion may be more contained.

But — and this is the critical distinction — the physical economy will still be hit. The friction of adjustment in the real world felt in manufacturing, transport, agriculture, and energy-dependent services does not care how sophisticated your swap dealers are. Supply chains will strain, margins will compress, and employment will soften. Financial-market maturity dampens the monetary shock. It does not eliminate the real-economy friction.

The paradox at the intersection

Here is where the analysis becomes genuinely interesting. The potential return of stagflation is colliding with the most powerful deflationary force in a generation: artificial intelligence.

Consider the opposing forces. Stagflation inflates input costs, stagnates demand and destroys employment. AI, by contrast, is inherently deflationary. It drives down the cost of cognitive work. It replaces expensive labour. It compresses the cost of delivering services that previously required large, skilled teams. These two forces are now meeting head-on, and the collision creates a paradox that most market commentary has not yet absorbed.

In a stagflationary environment, companies face a brutal squeeze: rising input costs on one side, weakening demand on the other. The traditional responses are familiar and painful: cut headcount, defer investment, hunker down, hope for the cycle to turn. But AI changes the calculus. For the first time in an inflationary squeeze, companies have access to a technology that can structurally reduce their cost base, not by cutting corners but by genuinely replacing high-cost human labour with cheaper, faster, more scalable alternatives.

AI, in this environment, is not merely a growth play. It is a survival mechanism. Companies under margin pressure will not adopt AI because it is fashionable. They will adopt it because the alternative is margin collapse. The worse the stagflationary friction becomes, the stronger the incentive to reorganise around AI. This is a powerful feedback loop, and it will accelerate AI adoption in precisely the sectors that sceptics assumed would be slowest to change.

There is a harder edge to this too. AI will accelerate labour retrenchment. Companies that might have preserved headcount in a mild downturn will, in a stagflationary environment, discover that AI gives them permission to restructure more aggressively. The human cost of this is real and should not be minimised. But from an analytical standpoint, it means that the deflationary force of AI will partially offset the inflationary impulse of the oil shock, at least in those sectors where cognitive labour can be substituted. The net effect is a bifurcation: the physical economy suffers, while companies and sectors that can ride the AI wave may actually strengthen.

No safe harbour, but some interesting anchorages

In a stagflationary environment, no investment is truly safe. The friction impairs every asset class, every sector, every geography to some degree. But some areas are more interesting than others, and a first-principles approach helps sort them.

The direct beneficiaries are the oil and gas producers outside the disruption zone, that is, the countries and companies that can ramp up output to meet demand at elevated prices. This distinction matters. The producers caught up in the shock itself are not winners; their production is impaired and their infrastructure is at risk. The wealth transfer flows to those who can step into the gap. Service providers to the oil and gas industry, such as equipment manufacturers, engineering firms, and logistics operators, are second-order beneficiaries as producers scramble to bring forward production.

Alternative energy becomes more interesting, not less. An oil price shock does not make renewables redundant; it makes them urgent. Countries that have been debating the pace of their energy transition will find the debate sharpened by the reminder that dependence on a single energy source is a strategic vulnerability. Solar and wind investment will likely accelerate. And do not be surprised if coal makes a pragmatic comeback in some countries forced to choose energy security over emissions ambition. The world is imperfect, and policy under pressure tends to be more practical than ideological.

A view from the Lucky Country

For an Australian observer, the dynamics are particularly vivid. Australia is one of the world’s largest seaborne gas producers. In a scenario where production from the Gulf is disrupted and the United States adopts a protective posture on its own gas exports, Australia’s position as a major, reliable, Western-aligned LNG supplier becomes extraordinarily valuable. The wealth-transfer arithmetic, applied to Australia, suggests the country could be a significant relative winner.

But Australia also carries vulnerabilities that an oil shock would expose ruthlessly. The country has leaned more heavily into the energy transition than most comparable economies, pursuing policies that are actively hostile to fossil fuel production. At the same time, Australia is dangerously dependent on imported refined oil products, such as fuels processed in countries that may well impose export restrictions at precisely the moment Australia most needs access. The combination of anti-production policy and import dependence is an uncomfortable one.

The policy challenges for the Australian government are clear, and wrestling with them is itself part of the stagflationary friction. But one outcome seems likely: a reversal, or at least a softening, of some of the anti-fossil fuel policies, particularly as they apply to export markets. The pragmatic case for allowing Australian gas producers to maximise production for export — capturing elevated prices, strengthening the current account, and reinforcing Australia’s strategic relevance — becomes very difficult to resist when the alternative is leaving billions of dollars of value on the table while the nation’s allies are scrambling for supply.

The angel lens: investing through the wreckage

The early-stage market will not be immune. It never is. When public markets weaken, capital retreats along the entire risk spectrum. Some of that capital will be needed to recapitalise overleveraged businesses that struggle in a higher-cost environment. Less will be available for angel and venture investing. Valuations in the early-stage market will soften.

For a disciplined angel investor, this is not a problem. It is the opportunity.

The angel lens is fundamentally different from the public-market lens. We do not invest for today’s environment. We invest for the market environment in five to ten years. The companies we back today will mature into an economy that has absorbed the shock, recycled the capital and, if the AI thesis is correct, restructured around dramatically cheaper intelligence. The vintage effect in angel investing is well documented: the best returns tend to come from investments made during periods of stress, when valuations are lower, founders are more disciplined, and the tourist capital has gone home.

The specific opportunity set, viewed through the stagflation-meets-AI paradox, is striking. The sweet spot is capital-light companies that avoid the friction of the physical economy and are positioned to benefit from the corporate reorganisation that stagflation will force.

AI agents that replace human labour are the immediate and most obvious play. When a company’s largest cost line is people and its margins are being squeezed by rising input costs, the value proposition of an AI agent that can do the work of a team is not theoretical. It is urgent.

But the opportunity extends beyond labour replacement. AI-powered procurement and spend management becomes compelling when every dollar of input cost matters. Energy management and efficiency platforms — the software that helps businesses optimise consumption when energy costs spike — are capital-light, counter-cyclical and immediately valuable. Cybersecurity intensifies as a theme; geopolitical instability drives both state-sponsored and opportunistic attacks, and every company’s threat surface expands. And the infrastructure for remote and distributed work accelerates as companies under cost pressure discover that distributed teams, managed with the right tools, are structurally cheaper than centralised ones.

Each of these categories shares the characteristics that matter most in a stagflationary environment: capital-light, digitally native, positioned on the right side of the AI deflationary wave, and serving customers whose need becomes more acute as the friction intensifies.

The exit: first principles on resolution

The stagflation risk is not permanent. From a first-principles perspective, it begins to fade the moment the supply disruption that triggered the oil price shock resolves. The speed of the return to normality, however, is not symmetric. A short disruption that leaves production infrastructure intact could see a relatively sharp snap-back in energy prices and a rapid unwinding of the friction. A prolonged disruption that damages wells, pipelines, and refining capacity will leave a longer tail of elevated prices, even after the geopolitical trigger has passed.

This is the variable that separates a difficult year from a difficult decade. It is also the variable that determines just how deep the angel opportunity becomes. The longer the friction persists, the more companies will be forced to reorganise. The more they reorganise, the more they will reach for AI. And the more they reach for AI, the larger the addressable market for the capital-light, AI-enabled companies that angel investors are uniquely positioned to back.

The vintage ahead

I learned to think about macro environments in the long disinflationary grind of the late 1980s. I watched the capital markets absorb and adapt to shocks that earlier generations had found existential. The lesson that stayed with me was not about any particular trade or sector. It was about the importance of first-principles thinking in an environment where the consensus is almost always wrong about what matters most.

The consensus today is that stagflation, if it arrives, will be uniformly bad. That is too simple. The collision of stagflation with the AI megatrend creates a paradox: the physical economy suffers, but the digital economy accelerates. The companies that navigate this paradox by remaining capital-light, ride the deflationary wave of AI, and serve customers desperate to reorganise will not merely survive. They will define the next era.

For an angel investor with a five-to-ten-year lens, softer valuations, disciplined founders and an exploding addressable market is not a threat. It is the setup for the best vintage in a generation.

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