Last Updated on September 28, 2023
The 1970s were a pivotal time for the US economy and, by extension, the rest of the world. The decade was marked by significant changes, starting with the end of the Bretton Woods system, which dissolved between 1968 and 1973.
This milestone ushered in the era of flexible exchange rates and led to the adoption of fiat currencies. The system’s end also meant abandoning the gold standard and fixed exchange rates, leading to an environment rife with economic uncertainties. For crude oil, the consequence was a drop in its price due to the newly inflated currency values.
Faced with these unpredictable times, most countries, including the U.S., expanded their money supplies to protect against currency volatility. This article will examine the oil shock and its global impact and causes.
The Evolution of the Oil Shock
The shifts in the global economic landscape introduced numerous challenges, particularly for the crude oil industry. In response to the vulnerable oil price, OPEC decided to intervene.
This decision stemmed from the observation that while the oil price had risen by a small percentage each year post World War II — a pattern consistent with regular inflation — the now rampant inflation implied that the cost of crude had to be adjusted upwards.
Adjusting the prices was rational, but it ultimately led to damaging consequences. The 1971 Tehran Price Agreement was initiated to settle this price adjustment issue but proved ineffective. The last resulted from the absence of organized mechanisms for rapidly updating the price of crude oil to match market conditions, coupled with disputes among suppliers and producers over the new pricing.
The 1970s weren’t the last time the world experienced an oil shock. In 1979, the Iranian Revolution triggered another significant surge in oil prices, bringing additional economic uncertainty.
A decade later, in 1990, Iraq’s invasion of Kuwait led to another sharp price increase.
More recently, in 2008, a combination of rising demand, stagnant production, and geopolitical tensions caused another oil shock. These events unlocked economic disruption and had lasting effects on global energy policies and financial strategies.
Global Impact of Oil Shocks
Geopolitical issues intensified in tandem with the need for oil price adjustments. Tensions peaked when President Richard Nixon requested US funds to send a substantial aid package to Israel. Along with a shipment of supplies, this action incited the ire of Arab nations.
The OPEC countries retaliated by imposing an oil embargo on nations they perceived as Israel’s allies during the 1973 Arab-Israeli war, such as the United States, Canada, Japan, the UK, and others.
The global economy was plunged into chaos by this embargo and the subsequent hike in oil prices. The fallout included gas shortages in various regions in the US and a sharp increase in transportation and other product costs.
From 1973-1974, a barrel of crude oil surged from around $3 to $12. Although largely unsuccessful in influencing geopolitical policies, OPEC’s embargo was nonetheless a potent maneuver. Lasting for about five months, it contributed to a surge in gas prices of over 40%.
The tension finally eased when Henry Kissinger negotiated a Syrian disengagement in May 1974. While this event marked the beginning of a return to normalcy, the effects of the oil shock, such as the stock market crash and persistent inflation pressures, lingered until late 1974.
Further oil shocks in 1979, 1990, and 2008, triggered by the Iranian Revolution, the Gulf War, and the Great Recession, respectively, also had substantial global impacts. These included disruptions in the global supply chain, fluctuations in the stock market, increased consumer prices, and economic recessions in many countries.
The complex dynamics of oil shocks underscore their wide-ranging and enduring impacts globally.
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Takeaway: The Oil Shock Had a Profound Global Impact
The 1970s brought great economic uncertainty, geopolitical tensions, and lasting effect on global economies. The ramifications still reverberate throughout history despite the time. The energy crises in 1979, 1990, and 2008 brought unique challenges and left no doubt about their complexity and major importance. Lessons that resonate to this day.
