1970s lessons leave global economies less exposed to oil shocks

1970s lessons are being tested again as oil prices surge

The world economy is again confronting an oil-shock flashback after attacks linked to the Middle East war disrupted energy supplies, pushing up the costs of gasoline, diesel and jet fuel and raising fears of a stagflation-like mix of higher prices and slower growth. The immediate strain is showing up for drivers paying more at pumps, for farmers facing higher fertilizer bills, and for street vendors that say they cannot reliably obtain enough gas to cook food.

Still, economists and energy analysts said the current threat is not identical to the 1973 episode, when Saudi Arabia and other Middle East petroleum producers withheld oil supplies to punish countries that supported Israel during the Yom Kippur War. In the aftermath of that embargo—and another oil shock triggered later by the Iranian revolution—countries pursued changes intended to make future disruptions less economically destabilizing.

“We have decades of experience now dealing with these kinds of oil shocks,’’ said Amy Myers Jaffe, a research professor at New York University’s Center for Global Affairs. In her view, the scale of disruption today may feel alarming, but the policies and preparedness built over decades are meant to cushion the overall economy.

One measure of the risk comes from how much oil transit depends on the Strait of Hormuz. In the cluster’s reporting, Lutz Kilian, director of the Federal Reserve Bank of Dallas’ Center for Energy and the Economy, estimated that 5 million barrels a day can be rerouted from the Persian Gulf to the Red Sea; the remainder, he said, effectively means about 15 million barrels a day—about 15% of daily global production—are missing when Hormuz is effectively shut. The piece also describes that the U.S. and its allies launched attacks involving the United States and Israel beginning Feb. 28, and that Iran “effectively shut off the Strait of Hormuz.”

Why today’s impact may be smaller than in 1970s oil crises

A key difference from the 1970s is how central oil remains in the overall energy system. In 1973, the article said, oil accounted for almost half—46%—of world energy supplies, and by 2023, its share had fallen to 30%, citing the International Energy Agency. Even so, global oil consumption is still at a high level, with consumption topped at more than 100 million barrels a day last year, compared with fewer than 60 million barrels a day in 1973.

The report says this matters because a bigger share of the world’s energy today comes from other sources such as natural gas, nuclear power and solar. For the United States in particular, it argues that the country has “weaned itself away” from reliance on foreign oil since the early 1970s, aided by changes both on the supply side and through rules affecting how energy is used.

The cluster credits fracking with rejuvenating U.S. energy production in the 21st century. It says that by 2019, the United States had become a net petroleum exporter, and it points to the decline of oil use in electricity generation after a law enacted in 1978 prohibited petroleum in power plants. According to the report, the U.S. now gets no electricity from oil aside from a few generators in places like Alaska.

“In the ‘73 oil shock hit, America’s domestic energy production was in decline and its reliance on oil imports was growing alarmingly,” the piece recounts. It then cites Sam Ori, executive director of the University of Chicago’s Energy Policy Institute, saying, “The U.S. economy is much better positioned than it was in the 1970s,” when it was “particularly vulnerable to an oil price shock.”

What countries changed after the 1970s shortages

The cluster describes the 1973 oil embargo as a wake-up call that produced shortages and long lines at U.S. gasoline stations. It also recounts steps taken during that era, including President Richard Nixon’s televised appeal on Nov. 25, 1973, asking Americans to conserve fuel. The report says Nixon urged gasoline stations to shut pumps from Saturday night through Sunday, pushed for a lower maximum speed limit (settling at 55 miles an hour after Congress), and sought limits on ornamental and most commercial lighting.

The article argues that while those memories linger, the likelihood of repeating the same scale of fuel rationing and outright shortages is low. Jaffe said that “a repeat of long gasoline lines, fuel rationing, and outright fuel shortages in the U.S seems highly unlikely.”

It also notes that other countries responded aggressively after the embargo. The cluster says the United Kingdom cut the work week to three days amid a coal strike and energy crisis, and that France ordered offices to turn off lights at night. Japan, which it describes as almost entirely dependent on imported oil, passed a series of “sho-ene’’ laws—mandating energy efficiency in areas ranging from shipping and buildings to cars and homes—and it expanded policies encouraging liquefied natural gas and nuclear power.

In addition to efficiency rules, the article says governments looked for oil outside the Middle East, citing Prudhoe Bay in Alaska, North Sea fields off the coasts of the United Kingdom and Norway, and Canada’s oil sands. It also says countries began stockpiling oil and created the International Energy Agency in 1975 to coordinate responses, and that last month the IEA’s 32 member countries agreed to release 400 million barrels of oil to calm markets—an effort the report says included 172 million barrels from the U.S. Strategic Petroleum Reserve, also established in 1975.

Central bank lessons and the risk of policy reversal

The cluster adds that central banks also learned from the 1970s oil shock era, but it frames that learning as incomplete. It says that in the 1970s, central banks reduced interest rates to protect economies from oil shocks, but “in so doing,” they overlooked the threat posed by higher energy costs—along with inflation already elevated.

In a Feb. 17 commentary cited by the report—dated 11 days before the United States and Israel attacked Iran—the Dallas Fed’s Kilian wrote that the Fed erred by cutting rates to boost the economy during the 1970s oil shocks, warning that “a well-intentioned policy of stimulating the economy by lowering interest rates has the potential of inadvertently reigniting inflation.”

Despite those lessons, the article cautions that oil’s role in the economy is still large enough to make disruptions costly. Ori is quoted saying, “Oil is still king, the No. 1 fuel in the U.S. economy,” and that cars, planes, trucks and ships get about 90% of their delivered energy from petroleum. He added that “the lifeblood of the economy—the transportation sector—is still overwhelmingly reliant on petroleum fuel,” with the price set in a global market, meaning a disruption “anywhere affects the price everywhere.”

The report then says Ori warned that President Donald Trump is undoing some efforts aimed at reducing U.S. dependence on petroleum and promoting electric vehicles. It says Trump’s sweeping tax bill ended consumer credits of up to $7,500 for EV purchases, and that he has announced a proposal to weaken U.S. fuel economy standards and repealed fines on automakers that do not meet those standards. Ori said that “you take all that together,” and “the fact is,” the U.S. is moving “in the opposite direction of making big changes to further insulate the economy from oil shocks and oil price volatility.”

The piece ends by noting that Kageyama reported from Tokyo.