"Oil Shocks" Are Replaying the "1970s Script" - What Does It Mean When Countries' Responses Are All Similar?

Key Points

Recently, the conflict between the US, Israel, and Iran has escalated. In terms of warfare intensity and scope, it has surpassed all previous Middle Eastern geopolitical shifts since 1980; from the blockade of the Strait of Hormuz and its impact on global energy and shipping, it even exceeds the two oil crises of the 1970s. In the short term, the “shock reaction” of oil prices may not have fully subsided, but more importantly, the medium to long term sees challenges to Middle Eastern energy security. It can be said that the market will need to pay a significant “new risk premium” on long-term energy prices for a period (see “What if oil prices stay high…”, 2026/3/10). Fortunately, compared to the 1970s, the global industrial structure has shifted, and energy dependence has decreased, but facing the huge investment demands brought by global geopolitical shifts and structural industry changes, the decline in traditional energy security makes resource commodities even scarcer (see “What does a more ‘consumable’ global investment cycle mean?”, 2026/1/19). This conflict has only lasted 2-3 weeks so far, and many medium- and long-term effects have yet to emerge. This article reviews the policy responses of various countries after the 1970s oil crises and the long-term changes in economic structures; serving as a starting point for studying the long-term impacts of this current shock.

1. The Origins of the Two Oil Crises in the 1970s

The first oil crisis occurred from October 1973 to March 1974, mainly triggered by the outbreak of the Yom Kippur War, when OPEC announced an oil embargo against Israel and supporting countries like the US, sharply raising crude oil prices, with Brent crude rising 3.8 times. The second crisis lasted from October 1978 to November 1980, triggered by the Iranian Islamic Revolution and the Iran-Iraq War, causing a roughly 19% drop in global oil output and a 2.3-fold increase in Brent prices. These crises led to stagflation in major economies of the 1970s.

2. Review of Policy Responses and Effects in the 1970s

In the early 1970s, governments mainly relied on various forms of price controls, demand management (including monetary tightening), and export restrictions as emergency measures, though some export controls persisted longer. In the medium to long term, countries increased energy reserves and improved energy efficiency. The IEA and national disclosures show crude reserves increased to 1.8 billion barrels by 2026 (IEA members hold 1.2 billion barrels, with 600 million barrels as strategic reserves). Meanwhile, driven by industrial upgrades, service sector growth, and energy transition, global energy intensity has fallen by 60% from 1980 to 2024. Policies can be categorized into three types:

1) Price Controls: Administrative intervention to suppress energy prices, which dampens growth, distorts profit distribution, causes efficiency losses, and hampers market clearing. The US led this during the first crisis.

2) Demand Management Policies: Focused on directly reducing energy consumption through administrative measures—such as rationing, quotas, and restrictions in transportation and industry sectors. Monetary tightening also falls under this category. While short-term demand management can control prices effectively, it incurs high social costs and efficiency losses—similar measures were adopted by the US, Germany, Japan, UK, and France in 1973.

3) Energy Efficiency Policies: Promoting technological adoption, standards, and structural adjustments to improve energy utilization and transform energy structures in the medium to long term, reducing dependence. Japan and Germany are notable successes. Years later, breakthroughs in US shale oil also owe part of their success to energy strategic shifts. These policies are highly beneficial for long-term economic acceleration and efficiency.

Differences in responses directly led to varied recovery speeds, economic growth momentum, and resilience in energy security. Economies emphasizing market reforms, technological innovation, and structural transformation (e.g., Japan, Germany) recovered faster and cultivated new growth advantages; those relying heavily on administrative controls and neglecting long-term transformation (e.g., early UK, US) faced recurring inflation and sluggish growth.

3. History Can’t Be Repeated Exactly, But It Rhymes

Recently, many countries have begun implementing price interventions and demand controls, with social costs and growth impacts of high oil prices already emerging. If oil-exporting countries (like the US) repeat export restrictions for their own interests, it could further widen demand gaps elsewhere and depress US corporate profits. In the medium to long term, this conflict may accelerate policy adjustments: 1) diversifying energy import sources, 2) increasing strategic reserves, 3) speeding up transition to renewables like solar and wind. China leads globally in energy transition; future cost advantages are expected to expand, turning crises into opportunities.

Main Text

1. The Origins of the Two Oil Crises in the 1970s

This US-Israel-Iran conflict may have a greater impact on global energy and shipping than the two oil crises of the 1970s. Since the US and Israel launched military actions against Iran on February 28, oil prices have risen 43%, surpassing the 32% increase during the initial outbreak of the Russia-Ukraine conflict (see Chart 1). Considering the Strait of Hormuz remains physically blocked, and with the conflict escalating, market expectations for prolonged warfare and continued blockade have extended, causing long-term oil futures curves to rise sharply (see Chart 2). Oil prices may stay high for some time (see “What if oil prices stay high…”, 2026/3/10). Although global dependence on fossil fuels has decreased significantly since 50 years ago (from 1980 to 2020, global per-unit GDP CO₂ emissions fell 52%), the current shock to global energy and other commodities could be as severe or worse than the 1970s, making historical experience still valuable—and relevant beyond short-term fluctuations. During the two crises in the 1970s, supply disruptions caused international oil prices to multiply several times. Specifically:

• The first oil crisis (October 1973–March 1974) was mainly triggered by sharp oil price increases. Following the October 1973 Yom Kippur War, OPEC announced an oil embargo against Israel and supporting countries like the US, sharply raising crude prices. Brent crude rose from $2.7 per barrel in September 1973 to $13 in March 1974, a 3.8-fold increase (see Chart 3).

• The second oil crisis (October 1978–November 1980) stemmed from the Iranian Revolution and Iran-Iraq War, leading to a significant drop in supply. The Iranian revolution in early 1978 caused political turmoil, reducing Iran’s oil output from 6.093 million barrels/day in September 1978 to 729,000 barrels/day in February 1979—a decline of 5.36 million barrels/day, about 8% of global consumption (see Chart 4). Although Iran’s output recovered somewhat, it remained below 70% of previous highs. As supply shrank, Brent prices rose from $12.8 in September 1978 to a peak of $42 in November 1979. The Iran-Iraq war in September 1980 further cut Iran and Iraq’s combined output by 88% and 96%, respectively, with total reductions of 7.242 million barrels/day. Global oil output fell sharply by about 19% in Q4 1980, pushing Brent prices from a low of $33.4 in September 1980 to $40.9 in November 1980—a 22% increase.

Using these crises as catalysts, major economies in the 1970s experienced stagflation, characterized by soaring inflation, shrinking industrial output, and slowing growth. Post-WWII, most economies adopted Keynesian policies of fiscal and monetary easing, but by the late 1960s, unemployment and inflation rose simultaneously. The two crises intensified stagflation:

• Oil price hikes significantly boosted inflation. In October 1973, CPI inflation in the US, Japan, and UK surged to 12.3%, 24.9%, and 24.5%, respectively, with strong stickiness (see Chart 5). By 1978, inflation remained high but somewhat lower than during 1973–75, reaching 14.8%, 8.7%, and 17.8% in the US, Japan, and UK.

• Industrial production contracted sharply. The first crisis caused a larger impact, with US, Japan, and Germany experiencing cumulative declines of 13.2%, 18.3%, and 10.6% over a year and a half (see Charts 6–8). The second crisis had a smaller but more prolonged impact, with US, Germany, and Japan experiencing recessions in 1980–82, partly due to accumulated policy responses.

• The impact on growth varied across countries. Japan and Germany, with stronger industrial competitiveness, suffered less in growth terms than the US. Post-crisis, US, Japan, and Germany’s real GDP growth slowed significantly, but Japan and Germany’s resilience was higher due to energy efficiency improvements and structural shifts. For example, US GDP growth declined by two recessions in 1980 and 1981, while Japan’s slowed only by 4.4 percentage points, less than the 9.3-point decline during the first crisis. Germany’s growth also showed relative resilience, with a low point of -1% compared to -2.3% in the first crisis.

2. Review of Policy Responses in the 1970s

In the 1970s, governments primarily relied on various emergency measures—price controls, demand management (including monetary tightening), and export restrictions. Some export controls persisted longer. Over time, countries increased energy reserves and improved energy efficiency. By 2026, the disclosed crude reserves reached 1.8 billion barrels (IEA members hold 1.2 billion barrels, with 600 million as strategic reserves). Driven by industry upgrades, service sector growth, and energy transition, global energy intensity decreased by 58% from 1980 to 2024. Policies can be grouped into three categories (see Chart 12):

1) Price Controls: Direct administrative intervention to suppress energy prices, which generally reduces growth, distorts profits, causes efficiency losses, and hampers market clearing. The US led this during the first crisis.

2) Demand Management: Focused on directly reducing energy consumption via administrative measures—rationing, quotas, and restrictions in transportation and industry sectors. Monetary tightening also falls here. While effective short-term, demand management incurs high social costs and efficiency losses—similar measures were adopted by the US, Germany, Japan, UK, and France in 1973.

3) Energy Efficiency Policies: Promoting technological adoption, standards, and structural adjustments to improve energy utilization and transform energy structures in the long term. Japan and Germany are notable successes. Later, breakthroughs in US shale oil also owe to energy strategy shifts. These policies are highly beneficial for sustained economic growth.

(A) The US: From Emergency Controls to Market-Oriented Energy Security

As the largest oil consumer and importer at the time, the US responded swiftly after the first crisis:

1) Price controls: In November 1973, the Emergency Petroleum Allocation Act was enacted, classifying oil into “old oil” (produced before 1972, price capped at $5.25/barrel, half the international market price) and “new oil” (market-priced). This aimed to ensure supply while maintaining some market incentives.

2) Quotas and export restrictions: Prioritized domestic heating, public transit, and industrial needs; high-energy industries faced “stepwise reductions.” In 1975, the US passed the Energy Policy and Conservation Act, restricting oil exports.

3) Demand-side measures: Implemented nationwide 55 mph speed limits, reducing fuel consumption by about 15%; cut airline fuel allocations by 10%; reduced home and commercial heating oil supplies by 15%; introduced odd-even license plate rationing; and mandated gas station closures on Sundays. Monetary tightening was also used, with the Federal Reserve raising interest rates from 5% in 1973 to 13% in 1974, but inflation still surged, leading to stagflation.

Public opinion was strongly against these controls: in early 1974, 25% of Americans cited energy shortages and controls as the top national problem, second only to inflation (32%). Many viewed the measures negatively.

In the second crisis, US policy shifted toward market reforms and energy transition: price controls were gradually relaxed—by 1980, all controls were lifted—and supply-side strategies accelerated, including the Alaska pipeline (started operation in 1977), which added 1 million barrels/day of domestic supply, and import quotas (not exceeding 1977 levels). Demand-side initiatives included tax incentives for energy-saving appliances and legislation to cut oil use by 50% over ten years, shifting toward coal and natural gas. Monetary policy under Volcker from 1979 tightened money supply, raising interest rates to 20%, causing a recession but successfully curbing inflation and creating a stable environment for market-oriented reforms.

(B) Europe: Demand Management and Regional Cooperation Accelerate Energy Independence

European countries, heavily dependent on oil imports (over 90% in Germany and France, 75% in the UK in 1973), and with high economic integration, adopted strict demand controls in the short term, then accelerated nuclear power and regional cooperation:

Germany: Implemented demand restrictions such as “Car-Free Sundays” (November–December 1973), limiting private vehicle use; enforced indoor heating limits (max 18°C); and allocated energy quotas to high-consuming industries, with penalties for excess. Established “oil sharing mechanisms” with France and the Netherlands for regional resilience.

During the second crisis, Germany focused on energy independence: launched the “Energy Self-Sufficiency Plan,” aiming to increase nuclear power from 11% in 1973 to 30% by 1985, with government subsidies and streamlined approvals. The first nuclear plant started in 1975; by 1980, nuclear capacity reached 12 GW, reducing oil’s share from 40% to 32%. Also promoted energy-saving regulations and taxes on gasoline and diesel.

UK: Initially faced coal shortages and oil supply disruptions, implementing extreme measures like a three-day workweek, limiting energy use; price controls; and reducing military oil consumption. After developing the North Sea oil fields (first well in 1975), domestic production soared, reaching 1.5 million barrels/day by 1980, reducing reliance on imports.

France: Focused on nuclear power, implementing the “Messmer Plan” (1974), aiming to build 56 reactors in 15 years, making nuclear 15% of electricity by 1980. Also, rationed oil via coupons, mandated industrial energy savings, and signed long-term gas supply agreements with Algeria. By 1980, nuclear accounted for 24% of power, and dependence on oil decreased.

Regional cooperation: France promoted energy interconnections with Germany and others, and EU standards aimed at reducing dependence.

3. Effectiveness of Policies in the 1970s

The policy differences led to varied recovery speeds, growth momentum, and resilience:

• Japan and Germany, emphasizing market reforms and technological innovation, recovered faster and built new growth advantages. For example, Japan’s energy efficiency improved dramatically, with unit GDP oil consumption dropping 32% (1973–1980), driven by the “Moonlight Plan” and strict standards, and automotive fuel economy doubling. Germany’s energy intensity declined 28%, aided by nuclear and industrial reforms.

• The US, relying on administrative controls, saw slower efficiency gains (only 12% reduction in unit GDP oil consumption 1973–1978). After market reforms, efficiency improved more rapidly.

• Long-term dependence on domestic resources and structural shifts reduced vulnerability: US and UK developed domestic oil and gas, lowering dependence; Japan and Germany focused on energy efficiency and diversification.

• Energy efficiency improvements: Japan led globally, with policies like the “Energy Conservation Law” and “Moonlight Plan,” achieving the highest efficiency gains. US lagged initially but improved after 1979 with standards like CAFE. Germany’s dual approach of nuclear and industrial reforms yielded significant gains.

• Dependence reduction: US and UK increased domestic production (Alaska pipeline, North Sea oil), decreasing reliance on imports; Japan and Germany relied more on energy efficiency and diversification, reducing dependence risks.

Long-term impacts of the 1970s crises include:

• Establishment of global energy security governance: The 1974 creation of the International Energy Agency (IEA) aimed to coordinate policies, share reserves, and ensure supply security. The IEA’s emergency sharing mechanism and minimum strategic reserves (90 days of imports) remain core.

• Formation of strategic petroleum reserves: US established the SPR in 1975; Japan and Germany built diversified reserves. These measures provided buffer capacity during subsequent crises.

• Energy structural transformation: The crises spurred the first energy transition wave—reducing oil dependence and developing alternative sources:

  1. France’s nuclear program (Messmer Plan) aimed to reduce oil reliance, becoming a leader in nuclear power.

  2. UK’s North Sea oil increased domestic supply.

  3. US adopted fuel economy standards (CAFE) and promoted renewable energy R&D.

  4. Japan invested in solar and wind, laying foundations for renewable energy.

• Market liberalization and financialization: The 1983 launch of WTI crude futures on NYMEX and subsequent Brent futures established benchmark prices, increasing market efficiency and risk management tools.

• Petrodollar system: Post-1971 dollar devaluation, US and OPEC countries established a system where oil was priced in dollars, fueling US dollar dominance and global financial flows.

4. Rhymes of History

Recently, many countries have begun implementing price interventions and demand controls, with social costs and growth impacts of high oil prices already evident. As the conflict persists longer than expected, especially with the Strait of Hormuz’s shipping volume sharply declining, countries and international organizations are taking measures such as: (1) ensuring supply—releasing strategic reserves, restricting exports, diversifying import sources; (2) price interventions—direct controls, subsidies, taxes; (3) demand management—limiting household, industrial, and aviation energy use (see Chart 22).

In the medium to long term, this conflict may accelerate diversification of energy import sources, increase strategic reserves, and speed up renewable energy transition. The instability in the Middle East could push countries to seek more diversified supplies and build larger reserves. The blockade of Hormuz exposes vulnerabilities in traditional energy systems, while high oil prices improve the economics of solar, wind, and other renewables, which also enhance energy independence. With falling costs of renewables and energy storage, countries are likely to increase investments, promoting energy diversification (see Chart 23).

China, leading in energy transition, is expected to further expand its cost advantages. The “14th Five-Year Plan” emphasizes renewable energy development, with renewable capacity share rising from 40% to about 60%. The rapid growth of solar and wind power has reduced coal’s share from 72% in 2019 to 66% in 2025 (see Charts 24 and 25). Cost reductions driven by scale and technological progress will further strengthen China’s manufacturing competitiveness and energy security.

Source: Huatai Ruisi

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