Fifty years on, the 1973 energy crisis seems all too familiar

Addressing the nation in a broadcast on 13 December 1973, Edward Heath, the prime minister, warned: “We shall have a harder Christmas than we have known since the war.” The cause was a huge energy price shock. In the wake of the Yom Kippur war in October, when Israel barely survived a surprise attack from forces led by Egypt and Syria, Arab countries imposed an oil embargo on the United States and other western nations, and sharply curbed production. Members of the Organization of the Petroleum Exporting Countries (Opec), a cartel established in 1960, quadrupled the index price for their exports, from $3 a barrel to $12. 

These measures were more than disruptive. They were seismic. The oil price shock of 1973 caused not only a severe recession but a political crisis without counterpart in the post-war era. Shortages led to the distinctive 1970s conjunction of high inflation and stagnant growth, inelegantly dubbed “stagflation”. Assailed by Soviet geopolitical gains and the emerging power of oil-rich economies, the western democracies apparently faced remorseless decline. Sober commentators even pondered whether they had become ungovernable.

Half a century on, the more alarmist of these prognostications have been refuted by events. Opec countries have failed ever after to act as a cohesive whole. The temptation for one or more countries to break an embargo in order to sell more oil has been too great. Moreover, the notion, influential in the 1970s, that resource constraints imposed strict limits to economic growth lost plausibility as new oil reserves were continually discovered. The collapse of communism in Europe demonstrated, among much else, that command economies don’t work. Western power, buttressed by free markets, reasserted itself.

Yet the common wisdom that the malaise of the 1970s had been overcome ossified into complacency. The oil price shock did carry important lessons that the spike in energy prices of the past year has forced policymakers to absorb again. First, energy policy is not only about economics. It is also an issue of security and sustainability. Second, the environmental campaigners of the 1970s were wrong in their assessment of physical limits to growth; their successors did get right, however, the big issue of climate change due to human activities. And third, partly for these reasons, a free society cannot responsibly leave energy policy to the market. It requires state intervention and investment to manage access to energy and protect consumers and businesses from price shocks. 

The new leverage of the oil-exporting nations in the early 1970s signalled an immense shift in energy markets, international relations and western politics. It was, in its own way, as harrowing for the western democracies as the unexpected advance in Soviet space technologies had been in the 1950s. It demonstrated that the US had trusted in vain in its post-war global primacy and that the international order was now a hostile and forbidding place. 

The economic boom years of the 1950s and 1960s had been literally fuelled by access to energy. The market was dominated by a few corporate giants, principally but not solely Exxon, Mobil, Shell, Chevron and British Petroleum (BP). Oil supplies in the Middle East were under the titular ownership but not control of Arab governments. Some lamentable interventions by the United States and its allies demonstrated a determination to keep things that way. 

The pattern was established when Mohammad Mossadegh, a reforming prime minister of Iran, nationalised the Anglo-Iranian Oil Company in 1951. Britain imposed an embargo and appealed to the US government for help. The CIA (as it belatedly acknowledged in 2013) helped foment a military coup to overthrow Mossadegh in 1953 and restore the Shah of Iran to power. 

The British objection was that nationalisation was an act of aggression: the facilities had been developed by the big international companies, who leased the right to pump oil and transport it. Yet even in narrow economic terms the intervention was pointless, as the shortfall in oil imports from Iran could be (and was) replaced by increased production in Iraq, Kuwait and Saudi Arabia. And, more serious, the Iranian coup bolstered a corrosive narrative in developing countries about western perfidy. It was cited by Islamist radicals in their overthrow of the Shah in 1979 and the imposition of theocratic rule in Tehran that persists to this day. 

The oil industry in the early post-war era was in effect an oligopoly with administered prices. But with decolonisation and setbacks to western interests in the 1960s (notably America’s disastrous war in Vietnam), its hold was progressively broken. Algeria nationalised a majority stake in French oil company concessions in 1971, along with gas pipelines. Libya and Iraq then seized British and American concessions respectively. And, with no appetite any longer for military retaliation, there was little the western powers could do to restore control of energy sources. 

This background is necessary for grasping that the quadrupling of the oil price by Arab exporting nations in 1973 might have been foreseen, as it was not due purely to the Arab-Israeli conflict. Western governments did anticipate the risk of shortages due to the rise of the emerging economies. They merely failed to do much about it in advance. 

Britain is a sobering example. Heath hosted a private lunch at Chequers on Valentine’s Day 1971 for Sir Eric Drake, then chairman of BP. Drake had just returned from a bruising set of negotiations in Tehran between the member states of Opec in the Persian Gulf and the oil companies, who had agreed to a substantial rise in prices. He told Heath, according to the minutes of their meeting in the National Archives, that “the question of oil supplies and prices for Europe had now become a political problem for Governments, not a commercial problem for companies”, and that “Europe was in practice at the mercy of the whim of the oil producing states”. 

The Heath government has long since become a byword for economic fecklessness but it did have the nous to heed this warning. It established a wide-ranging review of energy policy, with the aim of neutralising the bargaining power of the Arab oil-exporting nations. Yet little of substance or consequence emerged. The lack of administrative competence in Whitehall proved an impediment in acting on Drake’s counsel. BP and Shell (which was then a 40 per cent British-owned multinational) proposed a mercantilist strategy of building a bloc of oil-consuming nations, to counter the bargaining power of Opec, but this notion proved neither practical nor sensible. It resembled, much later, the airily implausible pro-Brexit argument that the European Union would plead with Britain to strike a generous trade deal rather than risk a valued export market. It took scant account of the realities of relative leverage. 

Again, in an augury of the industrial discontent of current times, Britain’s economic weakness due to energy dependency was compounded by trade union militancy, as miners and railway workers went on strike for higher wages. The powerful National Union of Mineworkers demanded a 43 per cent pay increase. Heath pleaded with the people to heat only one room in their homes. Patrick Jenkin, then a Treasury minister and later environment secretary under Margaret Thatcher, earned derision by urging that people brush their teeth in the dark rather than waste energy. And one policy announcement by Heath in December 1973 became as emblematic of Conservative failure as the dole queues did for Labour later in the decade. 

This was known as the three-day week. Intended as a measure to conserve stocks of coal, it restricted commercial enterprises to using electricity only on three consecutive working days. Though hospitals and some essential businesses such as food retailers were exempt, it was a huge blow to the broader economy. Many smaller enterprises, squeezed by fixed costs while their revenues collapsed, were unable to survive. To this day (I speak from the recollection of being a young child at the time), folk memory endures of power cuts, homes lit by candlelight and torches, television broadcasting ending peremptorily every evening, and futile attempts to keep warm with swathes of blankets. It was a policy that could not survive for long, and indeed didn’t persist beyond a couple of months. Heath tried to resolve the impasse with the miners by calling a general election under the slogan “Who governs Britain?”; the dusty and unanticipated answer he thereby elicited was “not you”. 

But draconian measures and desperate pleas were far from unique to Britain. Richard Nixon, whose predilection for statist economic policies belied his conservative reputation, sought US congressional approval to control all fuel shipments and was granted it. He urged petrol stations to sell fuel only at certain times, a presidential exhortation that in the main they patriotically complied with, thereby ensuring long queues of a kind more associated with command economies. European nations including Switzerland, West Germany and Norway implemented similarly drastic restrictions on usage. 

No western democracy was more stringently targeted by oil exporters than the Netherlands, however. The Labour-led coalition government of Joop den Uyl had given strong support to Israel in the Yom Kippur war, and even – though deniably – ensured that an extensive quantity of military aid reached Israel’s defence forces. Sheikh Ahmed Zaki Yamani, the long-serving Saudi oil minister, made clear that it was for the Netherlands’ diplomatic stance towards Israel that it would now suffer economic retribution. A rationing law was already on the books in the Netherlands, dating from 1939 and intended to be invoked only in emergencies such as wartime. Under it, the government now introduced draconian measures such as a ban on Sunday driving. 

The economic pain of this crisis was intense, triggering a steep recession in the US and other advanced industrial economies in 1974 and 1975. Developing economies were still harder hit, lacking either their own domestic energy supplies or financial resources. Global energy markets remained highly volatile for the rest of the decade, culminating in a further oil price shock in 1979. This was driven in large part by the overthrow of the Shah of Iran and then bolstered by the Iran-Iraq war of 1980-88, launched in the first place by Saddam Hussein. But nothing like these shocks happened again till 2022. 

Certainly, oil prices were subject to sharp rises and falls. Saddam’s invasion and annexation of Kuwait in 1990 drove prices from $15 to $35 a barrel and precipitated a brief recession. But periodic negative price shocks also damaged the trading position of oil exporters. These reflected a lack of cohesion on the part of Opec members. Saudi Arabia, technically a western ally, proved ready to break the cartel’s ranks and increase production. This happened in 1985-86, as well as in the Gulf war to liberate Kuwait in 1991, and again when Muammar al-Gaddafi launched a pitiless assault on Libyan protesters in 2011. Though Libya was not a huge part of global production (around 4 per cent by volume), it specialised in light sweet crude oil, which is highly prized given the ease with which it can be refined into petrol sold at the pump. Saudi crude is typically heavier and not a direct substitute, but the Saudi government stepped into the breach and increased production for export. 

The general picture of energy markets between the price shocks of the 1970s and of 2022 was hence this. Prices were generally buoyant from the late 1980s at least through to the financial crisis of 2007-09. They were supported by the rapid industrialisation of China, a heavy and inefficient user of energy. And as well as this support on the demand side, there were bottlenecks on the supply side. Sanctions against Iran, war in Iraq and political instability in Nigeria, among important oil-producing states, also supported prices. Yet only very briefly did prices reach in real terms their 1973 peak. Generally, the lack of pricing power by the cartel kept price spikes in check. 

After the financial crisis, a prolonged sluggish pace of global economic recovery was paralleled by relative stability in the price of oil. This equilibrium was broken in 2014-15 when prices fell precipitously and seemingly for structural rather than cyclical reasons. China’s breakneck pace of expansion, driven by a drive for exports, stuttered. The US was well on the way to self-sufficiency in energy, aided by advanced technological developments. Hydraulic fracturing, known as fracking, allowed oil and gas to be recovered cheaply and efficiently from shale rock – though not without political controversy over safety concerns. And then there was climate change.

It is established scientific fact that the planet has warmed by around 1.2C since the Industrial Revolution and that the increase is due to human activity. Under the Paris climate accord of 2015, governments pledged to limit the rise in average temperatures to 1.5C. Even that requires a curb in carbon emissions that governments seem to have little appetite for in practice. However, it has ensured that, in the advanced industrial economies, public and private sectors, along with the investment industry, have placed a premium on developing renewable sources of energy. This depressed the price of fossil fuels and itself thereby helped economic growth in the second half of the last decade. 

Yet the global economy remains acutely sensitive to the supply and price of traditional sources of energy. Remedial measures to stop the spread of Covid-19 in 2020, with lockdowns and the deliberate suppression of commerce, caused an immediate fall in oil prices from around $70 to $15 a barrel. But as might have been predicted, the damage to the supply side of the economy caused by these necessary policies to protect public health has been substantial. As global growth began to recover, the disruption of supply chains meant that commodities were scarce. Inflation began to accelerate. And then, in 2022, Russia invaded Ukraine. 

The Kremlin’s brutal act of imperial aggression has forced a reassessment of western energy policy as momentous as the price shock of 1973. The difference is that Vladimir Putin miscalculated the economic impact on Russia as radically as he did Ukraine’s determination to resist his forces. The west proved unexpectedly resolute in drawing up sanctions against the Putin regime and maintaining them, despite the inevitable boost this would give to revenues accruing to Russia from its energy exports, hence bolstering its ability to wage war. Oil prices rose rapidly from around $90 to more than $120 a barrel, and this in turn fuelled inflation further. 

Central banks in the US, Britain and Europe have attracted the ire of populist politicians for supposedly being slow in countering inflation. Yet there is nothing monetary policymakers could have done to prevent cost-push inflation due to a surge in commodity prices, and they might have choked off post-pandemic recovery had they raised interest rates earlier than they did. 

The western policy response to the Ukraine war has been broadly creditable and effective, in imposing tough sanctions on the Kremlin and giving military and economic aid to Kyiv. But the contours of a proper response to the oil price shock itself is still in doubt. It is almost universally understood (barring the outlier of the rogue Orbán government in Hungary) among both Nato and EU member states that they need to wean themselves off Russian energy supplies. Successive German governments, in particular, have much to atone for in placing reliance on the Kremlin. Gerhard Schröder, federal chancellor from 1998 to 2005, is literally on the payroll of Russian energy companies. The suspension of the Nord Stream 2 gas pipeline by Olaf Scholz’s new administration immediately after the Russian invasion was a belated acknowledgement of realism and ethics. 

There is no consensus, however, on whether western governments should slow their exit from fossil fuels in order to better manage the current crisis, or instead hasten their transition to renewable energy. And it really has to be the latter. Ukraine’s liberty, western diplomatic strength and planetary sustainability all demand it. That will be a huge commitment, requiring big investment in renewable technologies such as solar panels, wind turbines, electric vehicles and lithium batteries. It also means, contrary to a misguided policy tilt in Germany a decade ago, an expansion of nuclear energy. No one expects the market on its own to provide new nuclear plants: the lead times are too long and the investment too great. And the same is true of renewables. 

After the 1973 shock, governments left it to the vagaries of the market whether energy prices would aid or hinder economic expansion. There is much to be said for this stance. Shifts in relative prices serve as a signalling mechanism. Higher prices of energy relative to other inputs are a sign to industry and households to use it more efficiently, not least by better insulation. 

But the 2022 price shock takes the debate well beyond this truism. It points to the urgency of energy security, to ensure that autocratic states cannot advance their aggressive designs by exploiting economic vulnerability. And it demands that the western democracies focus on the needs of younger generations. Climate change is a pre-eminent issue of intergenerational inequality. People of working age today will not bear the full brunt of a failure to curb carbon emissions. The price will be paid by their children, grandchildren and descendants. 

As things stand, investment in fossil fuels has fallen much faster than investment in alternative sources of energy has risen. The problem of intermittency, or shortages of energy in the absence of effective storage, may cause consumers in the wealthier nations to continue to rely on fossil fuels. That would be short-sighted. And subsidies to households for energy consumption must persist, with transfers through the tax system to help poorer households. If the recollection of the ructions in energy markets in the 1970s can serve any constructive purpose, it is to remind policymakers and voters of the risks of merely hoping for the best, against a mountain of countervailing evidence.

Oliver Kamm, is a journalist and author. His latest book is Mending the Mind: The Art and Science of Overcoming Clinical Depression.

This piece originally appeared in Anniversary, the 11th edition of Tortoise Quarterly. Faith, and all other editions, are available in to order in glorious, old-fashioned print, at a special members’ discount.