The oil shock rules of the game: How global economies built resilience after the crises of the 1970s; Why does it still matter? –

The global economy is once again facing a sharp rise in oil prices due to the conflict in the Middle East, bringing back memories of the energy crises of the 1970s that led to widespread economic turmoil and stagflation.However, economists say the United States and other major economies are much better positioned today to absorb such shocks, reflecting structural changes that have occurred over the past five decades in response to previous crises, the Associated Press reported. Oil prices have risen sharply in the wake of the conflict with Iran, driving up the cost of gasoline, diesel and jet fuel. This turmoil has raised concerns about the potential return of stagflation – a combination of high inflation and weak growth – similar to the economic turmoil seen in the 1970s.

The scale of the current disruption is significant. Following attacks by the United States and Israel that began on February 28, Iran effectively closed the Strait of Hormuz, a critical checkpoint through which some 20 million barrels of oil – nearly a fifth of global supplies – flow daily.According to Lutz Kilian, director of the Center for Energy and Economics at the Federal Reserve Bank of Dallas, while about 5 million barrels per day can be redirected or continue to flow, roughly 15 million barrels — or about 15% of global production — remain idle.

This is much higher than the turbulence of about 6% during the 1973 oil embargo and the 1990 Gulf Crisis.Despite the large size, the economic impact has been more contained. Analysts attribute this to structural changes in global energy consumption. Oil accounted for approximately 46% of global energy supplies in 1973, but this share has fallen to about 30% by 2023, according to the International Energy Agency.At the same time, the global energy mix has diversified significantly, with increasing reliance on natural gas, nuclear power and renewable energy sources. Although total oil consumption has risen to more than 100 million barrels per day from less than 60 million in 1973, economies are now less dependent on oil as the sole source of energy.The United States, in particular, has succeeded in reducing its vulnerabilities. During the 1970s, falling domestic production and rising imports made the country highly vulnerable to external shocks.

The advent of hydraulic fracturing in the 21st century has reversed this trend, increasing oil production from about 5 million barrels per day in 2008 to 13.6 million barrels last year and turning the United States into a net oil exporter by 2019.“The U.S. economy is in much better shape than it was in the 1970s,” when it was “particularly vulnerable to an oil price shock,” said Sam Urey, executive director of the Energy Policy Institute at the University of Chicago, quoted by the Associated Press.Energy use patterns have also changed. In the early 1970s, about 20% of electricity generation in the United States was based on oil. Following political interventions, including a 1978 law restricting the use of oil in power generation, oil now plays almost no role in electricity production.Governments around the world also introduced efficiency measures after the shocks of the 1970s. Fuel economy standards, first implemented in the United States in 1975, have dramatically improved vehicle efficiency, with average mileage rising from 13.1 miles per gallon in 1975 to 27.1 miles per gallon in 2023, according to the EPA.

Similar policies around the world have reduced the intensity of oil use in economic activity.Countries have also diversified sources of supply by developing new oil fields outside the Middle East, including Alaska’s Prudhoe Bay, the North Sea, and Canada’s oil sands. In parallel, they built strategic reserves and established institutional mechanisms such as the International Energy Agency in 1975 to coordinate responses to supply disruptions.Recently, coordinated work has continued. Last month, IEA member states agreed to release 400 million barrels of oil from strategic reserves, including 172 million barrels from the US Strategic Petroleum Reserve, to stabilize markets.Central banks have also adapted their response frameworks. During the 1970s, monetary authorities often lowered interest rates to support growth, which ultimately increased inflation.

Policymakers are now more cautious.Commenting before the current conflict escalated, Kilian noted that easing monetary policy during oil shocks could risk reigniting inflation, highlighting a key lesson from the past.Despite these improvements, weaknesses remain. Oil still dominates transportation, accounting for about 90% of the energy used by cars, trucks, ships, and airplanes.“Oil is still king, the No. 1 fuel in the American economy,” Urey said.

“The lifeblood of the economy – the transport sector – remains heavily dependent on petroleum fuels, the price of which is determined on the global market, and any interruption anywhere affects the price everywhere.”He also warned that recent policy shifts could increase exposure. Measures taken by President Donald Trump, including rolling back incentives for electric vehicles and weakening fuel economy standards, may slow the shift away from oil dependence.“Taken all together, the reality is that the United States is moving in the opposite direction of making major changes to further insulate the economy from oil shocks and oil price volatility,” Urey said.While the current crisis has not caused the kind of shortages seen in the 1970s – such as long lines at petrol stations or fuel rationing – experts warn that the global economy is still vulnerable to energy market disruptions.As Amy Myers Jaffe of New York University’s Center for Global Affairs puts it: “We now have decades of experience dealing with these kinds of oil shocks.”