What Was the 1979 Energy Crisis?
The 1979 energy crisis, the second of two oil price shocks in the '70s, resulted in a widespread panic about potential gasoline shortages, and far higher prices for both crude oil and refined products. Oil output declined by only 7% or less, but the short-term supply disruption led to a spike in prices, panic buying, and long lines at gas stations.
- The energy crisis of 1979 was one of two oil price shocks during the 1970s—the other was in 1973.
- Higher prices and concerns about supplies led to panic buying in the gasoline market.
- Crude oil prices nearly doubled to almost $40 per barrel in twelve months.
- The energy crisis of 1979 led to the development of smaller, more fuel-efficient vehicles.
- OPEC's market share fell sharply and utility companies moved toward alternative energy sources.
Understanding the 1979 Energy Crisis
The 1979 energy crisis occurred in the aftermath of the Iranian Revolution, which started in early 1978 and ended in early 1979 with the fall of Shah Mohammad Reza Pahlavi, the state’s monarch. Turmoil in Iran, a major petroleum exporting country, caused the global supply of crude oil to decline significantly, triggering noteworthy shortages, and a surge in panic buying—within 12 months, the price per barrel of this widely used resource almost doubled to $39.50.
Short-run disruptions in the global supply of gasoline and diesel fuel were particularly acute in the spring and early summer of 1979. Several states responded by rationing gasoline, including California, New York, Pennsylvania, Texas, and New Jersey. In these populous states, consumers could only purchase gas every other day, based on whether the last digit of their license plate numbers was even or odd.
The gasoline shortage also led to fears that heating oil might be in short supply through the 1979-1980 winter. This prospect was especially concerning for New England states, where demand for home heating oil was the highest.
It would be erroneous to blame the crisis solely on the fall of the Shah. Notably, the U.S. faced more-acute pain from the crisis than other developed countries in Europe, which also depended on oil from Iran and other Middle East countries. Part of the reason behind the crisis had to do with fiscal policy decisions in the U.S.
U.S. Fiscal Policy Also to Blame
In early 1979, the U.S. government regulated oil prices. Regulators ordered refiners to restrict the supply of gasoline in the early days of the crisis to build inventories, directly contributing to higher prices at the pump.
Another factor was unintended supply restriction after the Department of Energy (DOE) decided to make a handful of large U.S. refiners sell crude to smaller refiners who could not find a ready supply of oil. Because smaller refiners had limited production capabilities, the decision further delayed gasoline supply.
Monetary policy leading up to the crisis also seemingly played a role to a degree. The Federal Open Market Committee (FOMC) was reluctant to raise target interest rates too quickly and this hesitation contributed to rising inflation late in the decade. The jump in inflation was accompanied by higher prices for energy and a range of other consumer products and services.
Benefits of the 1979 Energy Crisis
Amid the crisis, politicians actively encouraged consumers to conserve energy and limit unnecessary travel. In subsequent years, the 1979 crisis led to the sale of more compact and subcompact vehicles in the U.S. These smaller vehicles had smaller engines and provided better fuel economy.
In addition, the crisis prompted utility companies worldwide to seek out alternatives to crude oil generators, including nuclear power plants, and governments to spend billions on the research and development (R&D) of other fuel sources.
Combined, these efforts resulted in daily worldwide oil consumption declining in the six years following the crisis. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) global market share fell to 29% in 1985, down from 50% in 1979.