Lessons from the 1970s help the US and other economies withstand oil shocks

The global economy is facing a shock reminiscent of the 1970s as conflict in the Middle East pushes oil prices higher, lifting gasoline, diesel and jet fuel costs and reviving fears of stagflation—weak growth alongside high inflation. While the current situation echoes the 1973 oil crisis, the U.S. and global economies today are less vulnerable to oil shocks than they were half a century ago.

How the current oil disruption compares with the 1970s

In 1973, Saudi Arabia and other Middle Eastern producers cut supplies to pressure countries supporting Israel during the Yom Kippur War. A later shock followed after the Iranian Revolution six years afterward. Since then, many countries have adjusted their energy strategies.

“We now have decades of experience in responding to oil shocks like this,” said Amy Myers Jaffe, a research fellow at the Center on Global Energy Policy at New York University, in an interview with AP.

Although the current energy shock linked to Iran is not described as the worst on record, its effects are already visible. Americans are paying more than $4 per gallon for gasoline, European farmers face pressure from soaring fertilizer prices, and street vendors in India still lack enough gas to cook for customers.

Hormuz Strait disruption and estimated scale

After the U.S. and Israel began strikes on Iran on February 28, oil flows through the Hormuz Strait were severely disrupted. The shipping lane carries about 20 million barrels of oil per day, roughly one-fifth of global oil traded.

Lutz Kilian, director of the Energy and Economics Research Center at the Dallas Fed, estimates that only about 5 million barrels per day could be rerouted via the Red Sea or continue through the Hormuz Strait. That implies about 15 million barrels per day would remain disrupted—equal to 15% of global oil output per day. The article notes this is far larger than the disruption during the 1973 shock and the 1990 invasion of Kuwait.

Why today’s economies are less exposed

Despite the scale of the disruption, changes implemented over the past five decades have helped dampen the economic impact of oil shocks.

According to the International Energy Agency (IEA), oil accounted for as much as 46% of global energy supply in 1973. By 2023, that share had fallen to 30%.

Oil demand is still extremely high. Last year, oil demand exceeded 100 million barrels per day, compared with just under 60 million bpd in 1973. The difference, the article says, is that the global energy mix is more diversified today, with natural gas, nuclear power and solar energy taking larger shares.

U.S. shift away from imported oil and oil-fired power

In the United States, dependence on imported oil has fallen significantly. In 1973, domestic energy production was declining while demand for imported oil rose rapidly. The shale revolution later helped U.S. energy production rebound, and by 2019 the U.S. became a net oil exporter.

“The US economy is in a much stronger position today than in the 1970s — a period when it was particularly vulnerable to oil-price shocks,” said Sam Ori, executive director of the Energy Policy Institute at the University of Chicago.

The article also highlights a change in electricity generation. In the early 1970s, about 20% of U.S. electricity was produced from oil. After a 1978 law banned the use of oil in power generation, that share declined sharply. Today, the U.S. nearly stops generating power from oil, except for a few generators in remote areas such as Alaska.

Energy-saving measures after 1973

The 1973 oil embargo prompted major conservation efforts. On November 25, 1973, President Richard Nixon urged Americans to sacrifice to save energy. He proposed that gas stations stop selling fuel from Saturday evening to Sunday to limit long weekend trips. Nixon also proposed lowering the top speed limit to 50 mph (about 80 km/h), though the enacted limit was 55 mph (about 89 km/h). He called for cutting decorative lighting and most commercial lighting, though that proposal did not pass; he also pledged to reduce Christmas lights at the White House.

Jaffe said: “While the memory of the 1973 crisis remains vivid, the likelihood of Americans lining up for gas again, rationing fuel, or facing widespread shortages today is very low.”

Responses in other countries

Other countries also introduced measures after the 1973 shock. In the UK, amid the energy crisis and coal strikes, the government shortened the workweek to three days to reduce electricity consumption. In France, offices were asked to turn off lights at night.

Japan—described as an economy almost entirely dependent on imported oil—enacted Sho-ene laws, a term combining ideas of “save” or “reduce” with “energy.” These measures required improving energy efficiency in shipping, buildings, machinery, cars and households. Japan also promoted LNG use and accelerated nuclear power development, though that process was disrupted after the 2011 earthquake and tsunami at the Fukushima nuclear plant.

The article says Japan’s per-capita energy consumption remains relatively low, supported by energy-conservation measures and widespread use of buses and trains. According to the IEA, Japan ranks 21st in the world on this measure, while the U.S. ranks 9th.