1973 Energy Crisis: Causes and Effects

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 this period, the price of a barrel of oil nearly quadrupled in less than a year.

The embargo was lifted in early 1974, but the economic shock it caused is regarded as a precursor to the rapid inflationary pressures and stagflation experienced later in the 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, resulting in fuel shortages in the United States.
The crisis was caused by the refusal of the Organization of the Petroleum Exporting Countries (OPEC) 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 globally.
Economists now agree that the embargo was one of several factors that led to high inflation and stagnation during the 1970s in the U.S. and abroad.

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 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. 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, there were shortages, leading to rationing at gas stations and long queues of cars waiting to fill up. Some consumers tried to hoard gasoline and related products, making the situation even worse.

To replace Arab oil, the U.S. had little 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 higher inflation overall.

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

Special Considerations

As with most economic events, the 1973 energy crisis and inflation that followed were caused by several factors, not just U.S. support for Israel.

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, formed in 1960, had kept a relatively low profile, mainly negotiating with international oil companies for better terms for its member countries. OPEC 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. saw 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. The oil embargo only made things worse and sped up 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...[as well as] the sharp deceleration of productivity.”

1970s Stagflation

In addition to inflation caused by the 1973 energy crisis, the U.S. economy stagnated. This led to an unusual condition of rising prices and 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. Critics of this hypothesis point out that other periods of inflation or recession have not been accompanied by an oil shock. This may yet occur, given the Russian invasion of Ukraine in 2022.

Why Did the Arab Nations Prohibit Oil Exports to the U.S. 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 wanted to punish the U.S. Their dominance over oil exports gave them the weapon they needed.

The Organization of the Petroleum Exporting Companies (OPEC) also saw this as a way to gain greater power in their relationship with Western oil companies.

What Were Some Long-Term Consequences of the 1973 Energy Crisis?

The embargo lasted only a few months but high oil and energy prices persisted throughout the 1970s.

One knock-on effect of this was the reduction of the national speed limit to 55 mph, then thought to be the most fuel-efficient speed for automobiles, in order to reduce oil consumption.

Another unusual consequence was the 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.

There were more substantive effects. 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.

In fact, several laws were passed in the mid-1970s to bolster domestic oil production and to establish the strategic petroleum reserves to stockpile emergency supplies.

The crisis also sparked an early interest in environmental issues.

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 in part 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%. There was growth only for managers, professionals, and supervisors.

Moreover, most job growth in the 1970s came in sectors that paid low wages, mostly in service industries.

The Bottom Line

Could we see a repeat of the 1973 energy crisis? Well, no. We might get hit with an energy crisis but it won't have much to do with Mideast tensions. Today, the U.S. gets about 11% of its total petroleum imports from OPEC, compared to about 70% at the time of the 1973 crisis. We get 51% of our petroleum imports from Canada. And the U.S. is a net exporter of petroleum products.