Commentary: The 1970s Oil Crises Hold the Key to Surviving the Current Middle East Shock

1. The recent escalation in hostilities among the U.S., Israel, and Iran has triggered a geopolitical shock more intense and far-reaching than any disruption in the Middle East since 1980. The effective blockades of the Strait of Hormuz and strained global shipping channels are exerting immense pressure on global energy markets, with current impacts possibly rivaling or surpassing those of the 1970s oil crises. [para. 1]

2. Since the launch of U.S.-Israeli military operations against Iran on February 28, crude oil prices have surged by 43%. This increase exceeds initial reactions to the Russia-Ukraine conflict and has resulted in markets pricing in a significant and lasting geopolitical risk premium. While the immediate jump in energy prices is striking, the deeper concern is the long-term threat posed to global energy security. [para. 2]

3. The global economy is less dependent on fossil fuels compared to 50 years ago, with carbon emissions per unit of global GDP falling by 52% from 1970 to 2020. Nonetheless, today’s world faces the twin challenges of fragmented geopolitics and overwhelming capital needs for industrial change. These conditions mean that any squeeze on traditional energy supplies will amplify resource scarcities elsewhere. Policymakers and investors are urged to learn from the experiences of the 1970s. [para. 3]

4. The 1970s era of stagflation was ignited by two oil shocks: the 1973-74 OPEC embargo after the Yom Kippur War, which quadrupled crude prices, and the 1978-80 Iranian Revolution and Iran-Iraq War, which slashed world oil supply by 8% and more than doubled prices again. These shocks, combined with loose economic policies, led to double-digit inflation, shrinking industrial output, and stagnating growth in key economies like the U.S., Japan, and Europe. [para. 4]

5. National responses to these crises diverged, falling into three main strategies: price controls, managing demand, and long-term efficiency mandates. The choice of strategy often dictated the subsequent decades’ economic fortunes. [para. 5]

6. Initially, the U.S. imposed price controls, fuel rationing, and other administrative measures, which distorted markets and discouraged domestic oil exploration. Long queues at gas stations became common. It was not until the second oil crisis that the U.S. lifted price controls and the Federal Reserve, led by Paul Volcker, raised interest rates to 20% to curb inflation, paving the way for future energy independence and the shale oil boom. [para. 6][para. 7]

7. European responses included immediate demand reduction and substantial shifts in energy sources: West Germany and France expanded nuclear capacity, with France raising nuclear-generated electricity from 8% to 24% between 1973 and 1980. The UK developed North Sea oil, becoming a net oil exporter by 1985 after early missteps. [para. 8]

8. Japan set a global benchmark for energy efficiency by investing in alternatives and making cars more fuel-efficient, giving Japanese automakers a competitive edge as U.S. manufacturers lagged behind. [para. 9]

9. The crises redefined global energy governance, resulting in the formation of institutions like the International Energy Agency and the Strategic Petroleum Reserve, as well as the financialization of oil markets and the petrodollar system, all of which still underpin global energy security efforts today. [para. 10]

10. As the 2026 conflict endures, governments have begun intervening with strategic reserve releases, export restrictions, and price caps. History cautions that excessive reliance on price controls has high social costs and hampers growth. [para. 11]

11. The most significant lasting change will likely be an acceleration in alternative energy infrastructure development, as vulnerabilities in traditional supply chains, such as at the Strait of Hormuz, underscore the geopolitical and national security urgency of an energy transition. [para. 12]

12. Elevated oil prices are making renewables like solar, wind, and battery storage more economically attractive. Following the precedent of Japan and Europe in the 1970s, the nations that lead the shift to renewables will secure stronger long-term economic positions. [para. 13]

13. China is currently leading in the renewable energy transition, expanding its share of renewables in installed power capacity from 40% to 60% during its 14th Five-Year Plan, which significantly lowers power generation and storage costs and reinforces its manufacturing competitiveness. [para. 14]

14. The ongoing energy crisis is a global wake-up call: markets, rather than administrative mandates, best navigate supply shocks, but true energy security and economic resilience require structural innovation and a commitment to learning from history’s mistakes. [para. 15]

15. The article is authored by Yi Huan, Chief Macroeconomist at Huatai Securities, and the views are the author’s own, not those of Caixin. [para. 16][para. 17]