The 1973/74 Oil Crisis: How the Golden Age of Capitalism Ended

Growing Reliance on Foreign Oil

In the early 1900s, coal was the most important form of energy. By the middle of the century, oil had displaced coal as the world’s most important source of energy. The transition began with the introduction of the Ford Model T car in 1908 and was further driven by the boom in personal transportation after World War II (1938-1945). Oil was used to heat homes, generate electricity, and was also the only fuel that could be used for air transport.

Until the late 1950s, the US was able to produce enough oil domestically to meet demand. In 1920, the US accounted for ⅔ of global oil production. But by 1973, the market was flooded with oil from the Middle East, where production of oil was cheaper than in the US. The US now accounted for just 17% of global oil production and imported 6 million barrels of oil per day (36% of its oil). Europe also relied heavily on the Middle East for its oil supply.

Leverage

Arab countries soon realized that they could leverage their control of oil into political power. They first restricted the supply of oil during the Suez Crisis in 1956 and then a decade later during the third Arab-Israeli War in 1967.

Six years later, in October 1973, Arab states and Israel were once again fighting during the Yom Kippur War. After US president, Richard Nixon, announced a $2.2 billion dollar military aid package to Israel, Arab oil producers instituted an embargo against Israeli allies, including the US, the Netherlands, and Portugal, and cut production by 25%.

“Energy Pearl Harbor”

These restrictions caused the price of oil to quadruple over the next four months. Before the embargo, oil cost $2.90 per barrel. By January 1945, the price was $11.65. This spike in the price of oil led to widespread panic in Western countries: as gas prices soared, people feared they would not be able to fill their gas tanks, heat their homes, or run factories. One of President Nixon’s top advisors called the embargo an “Energy Pearl Harbor”.

Oil prices over time, with the 1973/74 embargo denoted in red

The crisis mentality led to panic purchases. Drivers filled up their tanks at every opportunity. Long lines formed at gas stations, leading to gas shortages. The crisis was exacerbated by the fact that nobody knew when the embargo would end.

The Aftershocks

While the embargo was ultimately lifted in March 1974, its effects reverberated for many years thereafter. The Oil Crisis contributed to a stock market crash and “stagflation” throughout the 1970s — an economic situation of high inflation combined with high unemployment. It also stoked tensions between the US and its European allies, who felt the embargo had been provoked by US financial aid.

Finally, the end of cheap oil forced industrialized nations to curb their energy usage and devote greater research to renewable energy, nuclear power, and other forms of fossil fuels. The 1973/74 Oil Crisis went on to be known as the “First Oil Crisis”, followed by the “Second Oil Crisis” in 1979, caused by a drop in the oil supply after the Iranian Revolution.

Did You Know?

In 1975, as a response to the 1973/74 Oil Crisis, Congress first enacted fuel economy standards for cars and light trucks to reduce US energy consumption.
The crisis also led oil producers to begin drilling in more remote and difficult places, such as Alaska, the North Sea, the Gulf of Mexico, and the Canadian oil sands.