1973 Energy Crisis

What Was the 1973 Energy Crisis? 

The 1973 energy crisis, also known as the Oil Shock of 1973–74, was a period of skyrocketing energy prices and fuel shortages resulting from an embargo by Arab oil-producing nations in response to U.S. support for Israel during the Yom Kippur War. During the time, the price of a barrel of oil rose by nearly four times in less than a year.

The embargo was lifted in early 1974, but the shock is largely regarded as a precursor for the rapid inflationary pressures and stagflation witnessed in the mid- to late 1970s. The oil embargo of 1973 was just one of many complicating factors that led to a decade of high inflation and stagflation in the United States during the ’70s.

A second energy crisis arose in 1979 following the Iranian Revolution and the overthrow of the Shah of Iran.

Key Takeaways

  • The 1973 energy crisis was an oil shock that caused energy prices to skyrocket and resulted in fuel shortages in the United States.
  • The crisis was the result of Arab oil-producing countries, known as the Organization of the Petroleum Exporting Countries (OPEC), refusing to sell crude to the U.S.
  • Arab oil-producing countries launched the embargo in response to U.S. support of Israel during the 1973 Yom Kippur War.
  • OPEC lifted its embargo in March 1974, but it left economic damage throughout the U.S. and around the world.
  • Economists now agree that the embargo was just one of several factors that led to high inflation and stagnation during the 1970s in the U.S. and elsewhere.

Understanding the 1973 Energy Crisis

On Oct. 19, 1973, following then-President Richard Nixon’s decision to provide Israel with $2.2 billion in emergency aid in support of the Yom Kippur War, the Arab Organization of the Petroleum Exporting Countries (OPEC) approved an oil embargo on the U.S. This effectively shut off the exports of Arab crude oil to the U.S., followed by a series of steep production cuts in output.

Before the embargo, a barrel of oil traded for around $2.90, quadrupling to $11.65 per barrel by January 1974 (from around $18 to $72.50 per barrel in 2022 dollars). This led to an increase in the price of regular gasoline in the U.S. from an average of 39 cents per gallon before the crisis to 53 cents in 1974, an increase of around 36% in less than a year. In addition to rising prices at the pump, shortages ensued, leading to rationing at gas stations and long queues of cars waiting to fill up. This also caused psychological panic among consumers, who sought to hoard gasoline and related products, making the situation even worse.

In terms of replacing Arab oil, the U.S. had little in the way of excess capacity to boost production. Even with rising oil prices, the time and capital needed to discover new deposits and bring new wells online can take years.

Ultimately, OPEC lifted its embargo in March 1974; however, higher oil prices persisted, leading to high inflation.

While OPEC’s embargo was, in part, a use of oil as a weapon in the 1973 Arab-Israeli conflict, it was much more so the outcome of a long-standing duel between the oil-exporting countries and the American oil companies, whose ultimate stake was control of the international oil market.

Special Considerations

As with most economic events, the 1973 energy crisis and ensuing inflation were the result of several factors, and not just U.S. support for Israel in the face of its enemies. For one, there had been a decades-long struggle between the governments of oil-producing nations and the large U.S. oil conglomerates for control over the global oil market. Until the 1970s, OPEC (which was only formed in 1960) had kept a relatively low profile, mainly negotiating with the international oil companies for better terms for its member countries. OPEC, however, saw the Yom Kippur War as a way to make its geopolitical power known and to strike a blow at the U.S. oil giants.

Inflation, too, was not caused only by high energy prices. The U.S. already was seeing commodity prices rise at a rate of around 10% per year starting in 1970, and inflation was on the Federal Reserve’s radar of things to keep a close eye on even before 1973. Of course, the oil embargo only made things worse and sped up the rate of overall inflation.

The Fed chairman at the time, Arthur Burns, argued in 1979 that this period of high inflation was the result of a confluence of several external forces in addition to the embargo, including “the loose financing of the war in Vietnam...the devaluations of the dollar in 1971 and 1973, the worldwide economic boom of 1972–73, the crop failures and resulting surge in world food prices in 1973–74, [and] the extraordinary increases in oil prices...[and] the sharp deceleration of productivity.”

1970s Stagflation

In addition to high inflation, caused in part by the 1973 energy crisis, the U.S. economy also stagnated. This led to an unusual condition of rising prices along with an economic recession, known as stagflation. Economists previously had predicted that when the economy turns sour, high unemployment should be met with lower prices, not rising ones (i.e., as modeled by the Phillips curve). The 1970s proved this theory and the Phillips curve wrong.

In the aftermath of the energy crisis, some began to argue that high oil prices led to higher transportation and manufacturing costs, even as people were being laid off in high numbers. However, critics of this hypothesis point out that other periods of inflation or recession that have occurred since have not been accompanied by an oil shock (although this may yet occur given the Russian invasion of Ukraine in 2022).

Why did Arab countries prohibit oil exports to the United States in 1973?

The oil-producing Arab countries viewed American political and economic support of Israel during the 1973 Yom Kippur War as siding with their enemy, and they sought to bring a punishing response. The Organization of the Petroleum Exporting Companies (OPEC) also saw this as a way to exert influence over Western oil companies.

What were some long-term consequences of the 1973 energy crisis?

Despite the embargo lasting only a few months, high oil and energy prices persisted throughout the 1970s. Knock-on effects of this included the start of a national speed limit of 55 mph, thought to be the most fuel-efficient speed for automobiles at the time, to reduce national oil consumption. One other unusual consequence was the two-year extension of daylight saving time in the U.S. from 1974 to 1975, which the Nixon administration claimed saved 150,000 barrels of oil in heating costs during the winter months.

Of course, higher energy prices contributed to the high inflation and subsequent stagflation of the 1970s, but they also helped move U.S. energy reliance away from OPEC somewhat. In fact, several laws were passed in the mid-1970s to bolster domestic oil production, and to establish the strategic petroleum reserves in 1975 to stockpile emergency supplies. The crisis also sparked early interest in environmentalism.

Which American job sector greatly increased since the oil crisis of 1973?

Service jobs have risen substantially following the energy crises of the 1970s, and the increase may be attributable to the 1973 crisis. Virtually all employment growth during the 1970s was outside of manufacturing. While total manufacturing employment in 1980 was almost identical to its 1973 level, the number of jobs for production workers fell by 5%. What did grow in this sector were jobs for managers, professionals, and supervisors. Moreover, most job growth in the 1970s came in sectors that paid low wages, mostly in service industries.

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  2. U.S. Bureau of Labor Statistics. “CPI Inflation Calculator.”

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