The Unfolding of the 1979 Energy Crisis: Understanding Its Impact and Lessons
The 1979 energy crisis, the second major oil price shock of the 1970s, caused widespread panic and a dramatic spike in gasoline prices amid fears of potential shortages. Although oil output declined by a modest 7% or less, the supply disruption led to increased prices, panic buying, and long queues at gas stations.
Key Takeaways
- The energy crisis of 1979, following the 1973 shock, deeply affected global markets and consumer behavior.
- Increased prices and worries over supplies fueled panic buying in the gasoline market.
- Crude oil prices almost doubled to $40 per barrel within a year.
- The crisis spurred the shift to more fuel-efficient vehicles.
- OPEC’s market share significantly reduced as utility companies sought alternative energy sources.
Understanding the 1979 Energy Crisis
The crisis erupted in the aftermath of the Iranian Revolution, which culminated with the overthrow of Shah Mohammad Reza Pahlavi in early 1979. Iran, a significant oil exporter, saw a considerable dip in crude oil supply, leading to global shortages and panic buying, pushing the barrel price to nearly $40.
The immediate impact was especially felt during the spring and early summer of 1979, with gasoline and diesel shortages prompting states like California, New York, Pennsylvania, Texas, and New Jersey to ration fuel. In these states, gasoline was available only every other day, depending on the license plate numbers.
Heating oil shortages also raised alarms, especially in New England, heightening concerns about the 1979-1980 winter demands.
Insights Into the Causes
Blaming the crisis solely on the Shah’s fall would be inaccurate. The United States experienced more severe effects than European nations, which also relied on Middle East oil. This discrepancy highlights the influence of U.S. fiscal policy decisions on the crisis.
U.S. Fiscal Policy’s Role
In early 1979, the U.S. government regulated oil prices, forcing refiners to reduce gasoline supplies to build inventory, inadvertently raising pump prices.
Further complications arose when the Department of Energy directed large refiners to supply crude to smaller refiners with limited production capacities, thereby prolonging the gasoline supply delay.
Additionally, the Federal Open Market Committee’s hesitance to raise interest rates at the time contributed to rising inflation and consequently, increased energy and consumer product prices.
The Unexpected Silver Lining
Amid the crisis, political measures to conserve energy and restrict non-essential travel took center stage. The situation led to a market shift towards compact and subcompact vehicles equipped with fuel-efficient engines.
Moreover, the crisis steered utility companies worldwide toward alternatives like nuclear power, prompting governments to invest dramatically in research for alternative fuel sources.
As a result of these efforts, global oil consumption dropped over the six years following the crisis. Meanwhile, OPEC’s market share dwindled from 50% in 1979 to 29% by 1985.
Takeaway: The 1979 Energy Crisis not only highlighted vulnerabilities within global supply chains and national fiscal policies but also instigated significant advancements in energy efficiency and diversification away from conventional oil dependency.
Related Terms: Oil Price Shocks, Supply Chain, Crude Oil, Fiscal Policy, Monetary Policy, Utility Companies, OPEC.
