One constant among industrialized, mass-consumption societies is high energy demand. Any threat of disruption in energy supply has immediate consequence.
Industrialized countries remained dependent upon oil as the lubricant for their economic engines. This became prickly as petroleum production peaked for the world’s top producers in the late 1960s and early 1970s.
There was no immediate supply problem, but, given the way that markets work, simply knowing that peak production had arrived put upward pressure on oil prices. Petroleum-rich regions, including Texas, Alaska, Norway, Mexico, Venezuela, and especially the Middle East, reaped a windfall.
Imports of oil began a steep ascent in the US beginning in 1970, when its production peaked. Europe had long been importing much of its petroleum.
1973 Oil Shock
On 6 October 1973, a coalition of Arab countries, led by Egypt and Syria, jointly launched a surprise attack on Israel. The Egyptians successfully invaded the Israeli-held Sinai Peninsula, while the Syrians made threatening gains with their attack on the Golan Heights.
Within 3 days, the Israelis had pushed their foes back. The war ended on 25 October with a cease-fire, and the Arabs worse off than before.
US and European support for the Israelis in their Yom Kippur War suffered an economic backlash when Middle Eastern oil producers declared an “embargo” against countries allied with Israel, particularly the United States.
The proclamation was more theatrical than real, in Arab rulers wanting to show their people that they were doing something for the beleaguered Palestinians, who had lost their nation-state to the Jews in 1948. Oil supply was not instantly affected, but the economic impact was immediate and severe, as suppliers capitalized on the situation.
The 1973 oil crisis that began in October only lasted until March 1974, but in that time the global price of oil quadrupled: from $3 per barrel to nearly $12. US prices were significantly higher, thanks to oil companies extracting price-gouging profits.
All major stock markets had been in bear territory since January 1973, on the heels of the collapse of the Bretton Woods monetary system and abandonment of the gold standard. Compounded by the 1973 oil crisis, the downturn lasted until the close of 1974.
(A bear market is a colloquialism for a general decline in stock prices. By contrast, a bull market is a period of rising stock prices. The terms came into common usage in 1720, at the bursting of the South Sea Bubble.)
The 1973–1975 recession signaled the end of the economic boom following the 2nd World War. It differed from previous recessions in sporting stagflation: high unemployment and high inflation simultaneously.
1979 Oil Shock
The repressive regime of the Shah of Iran ended in January 1979 with revolutionary rioting that led to the abdication and flight of the corrupt monarch who had been propped up by the US. The Iranian Revolution resulted in an Islamic theocracy at the end of 1979, led by Ayatollah Khomeini.
During that time, Iranian oil output dropped. Global oil supply dipped only 4%, but widespread panic commenced nonetheless.
During 1980, the world price of crude oil doubled, leading to a rerun of the 1973 oil crisis, with long lines at gas stations. There was plenty of oil to go around, but the companies that controlled it maximized their profits at the expense of the societies they served.
Many Americans thought the declared energy shortage was a hoax perpetrated by the oil companies – which is exactly what it was.
(Following the outbreak of the Iran–Iraq War (1980–1988), Iranian oil production practically stopped, and Iraq’s was severely curtailed as well. Despite that, there was no 3rd oil shock, as American oil companies by this time feared political repercussions for manipulating the market yet again.)
With the 1979 oil shock, the world fell again into a stagnation recession. The downturn lasted in the US only until November 1982. Japan pulled out of its tailspin quickly too. But stagflation lingered in the rest of the developed world until at least 1985.