Global Economy More Resilient to Oil Shocks Thanks to 1970s Lessons
The world economy is currently experiencing a disorienting flashback to the 1970s, as oil prices surge once again amid conflict in the Middle East. This spike is driving up costs for gasoline, diesel, and jet fuel, threatening a return to stagflation—the toxic combination of higher prices and slower growth that plagued economic life half a century ago.
Reduced Vulnerability Compared to the 1970s
However, the U.S. and global economies are significantly less vulnerable now than they were during the 1973 Yom Kippur War, when Saudi Arabia and other Middle Eastern petroleum producers withheld oil supplies to punish countries supporting Israel. In response to that shock and another triggered by the Iranian revolution in 1979, nations embarked on a new course to enhance energy efficiency, reduce dependence on Middle Eastern oil, stockpile fuel against future threats, and develop alternative energy sources.
Amy Myers Jaffe, a research professor at New York University’s Center for Global Affairs, noted, "We have decades of experience now dealing with these kinds of oil shocks." Despite this, the current Iran energy shock offers little comfort to frustrated American motorists paying over $4 per gallon, European farmers grappling with skyrocketing fertilizer prices, and street vendors in India struggling to secure enough gas for cooking.
Unprecedented Scale of the Current Crisis
The sheer scale of the disruption is unprecedented. Following attacks by the United States and Israel that began on February 28, Iran effectively shut off the Strait of Hormuz, which previously handled 20 million barrels of oil daily—one-fifth of global production. Lutz Kilian, director of the Federal Reserve Bank of Dallas’ Center for Energy and the Economy, estimates that 5 million daily barrels can be rerouted or continue through the strait, leaving roughly 15 million barrels, or 15% of daily global oil production, missing. This compares to just 6% during the 1973 embargo and after Iraq's invasion of Kuwait in 1990.
Cushioning the Blow Through Strategic Changes
Changes implemented over the past five decades have limited the economic fallout from the war. In 1973, oil accounted for 46% of world energy supplies, but by 2023, its share had fallen to 30%, according to the International Energy Agency. While global oil consumption has increased from fewer than 60 million barrels daily in 1973 to over 100 million barrels last year, a much larger share of energy now comes from sources like natural gas, nuclear, and solar power.
The United States, in particular, has weaned itself off foreign oil dependence. The rise of fracking in the 21st century rejuvenated U.S. energy production, transforming America into a net petroleum exporter by 2019. Sam Ori, executive director of the University of Chicago’s Energy Policy Institute, stated, "The U.S. economy is much better positioned than it was in the 1970s," when it was highly vulnerable to oil price shocks. For example, oil once provided 20% of U.S. electricity, but a 1978 law banned its use in power plants, eliminating this reliance except in remote areas like Alaska.
Historical Responses and Modern Resilience
The 1973 oil embargo served as a wake-up call, leading to gasoline shortages and long lines at U.S. stations. President Richard Nixon urged conservation measures, including reduced speed limits and dimmed lighting, but today, Jaffe asserts that "a repeat of long gasoline lines, fuel rationing, and outright fuel shortages in the U.S. seems highly unlikely."
Other countries also took aggressive action post-1973. The United Kingdom reduced the work week to three days to slash electricity consumption, France mandated lights-off policies at night, and Japan implemented "sho-ene" laws to boost energy efficiency across sectors. Japan's efforts have placed it 21st in per-capita energy consumption globally, compared to the U.S. at 9th.
Advancements in Fuel Efficiency and Oil Exploration
Fuel economy standards introduced in the U.S. in 1975 have improved from 13.1 miles per gallon to 27.1 mpg by 2023, with the World Bank attributing much of the reduced global oil dependence to such measures worldwide. The 1970s shocks also spurred oil exploration outside the Middle East, including in Alaska's Prudhoe Bay, the North Sea, and Canada's oil sands.
Countries established strategic oil stockpiles and formed the International Energy Agency in 1975 to coordinate responses to energy shocks. Last month, member countries agreed to release 400 million barrels, including 172 million from the U.S. Strategic Petroleum Reserve, to calm markets.
Lessons from Central Banks and Ongoing Challenges
Central banks, like the Federal Reserve, learned from past mistakes. In the 1970s, they cut interest rates to protect the economy but overlooked inflation risks, exacerbating the crisis. Kilian warned in a recent commentary that such policies could reignite inflation if repeated.
Despite progress, Ori cautions that "oil is still king," with transportation sectors relying on petroleum for about 90% of their energy. He also notes that President Donald Trump's policies, such as ending EV tax credits and weakening fuel economy standards, are reversing efforts to insulate the economy from oil shocks. "The U.S. is going in the opposite direction," he said, highlighting ongoing vulnerabilities in a globally interconnected market.
