October 6 1973, the Yom Kippur War – mainly involving Egypt, Syria and Israel –triggered one of the biggest energy crises of the 20th century.
Eleven days later, several Arab members of the Organization of the Petroleum Exporting Countries (OPEC) announced they would stop selling oil to countries supporting Israel and would cut production.
The effect was immediate. Within a few months, global oil prices quadrupled.
After decades of price stability, the world faced a severe shortage. Petrol stations ran dry, with some displaying a red flag to signal empty pumps; drivers queued for hours.
In parts of the US, fuel was rationed by licence plate number. By March 1974, time spent waiting in line had raised the cost of petrol by around 50%, because drivers were also “paying” through lost time — hours that could otherwise have been spent working.
Across Europe, governments imposed fuel-saving measures. The Netherlands and West Germany introduced car-free Sundays, while Britain cut speed limits to reduce petrol consumption.
Today, as the United States and Israel continue a widening war against Iran, energy markets have again reacted: disruptions in the Strait of Hormuz, a key artery for global oil, have pushed prices above US$100 per barrel, echoing the supply shocks of the 1970s.
When OPEC gained influence
The scale and persistence of the 1973 oil shock reflected not just the embargo itself, but how it interacted with the economic system at the time.
One important shift was that the US stopped being the world’s main “backup supplier” of oil. For decades, American production had been large enough that output could increase when global supply tightened, but production peaked around 1972.
Without this buffer, markets became far more sensitive to disruptions. At the same time, oil-producing countries in the Middle East gained political leverage by coordinating production through OPEC, strengthening their influence over prices.
Moreover, the international monetary system that had kept postwar inflation under control had collapsed in 1971. This agreement, known as Bretton Woods, had tied currencies to the US dollar. The result was that oil prices, like most commodity prices, were already rising before the embargo began.
Inflation surged, and so did wages
Higher oil prices pushed up the cost of almost everything. Transport became more expensive. Electricity bills increased. Businesses faced higher production costs and passed these costs onto consumers.
Inflation surged across many advanced economies. Workers tried to protect their living standards by asking for higher pay. In many countries, strong labour unions negotiated big wage increases to keep up with rising prices.
Expectations made the shock worse: fearing shortages, firms and households stocked up, reducing available supply and pushing prices even higher.
At the same time, economic growth slowed sharply. Factories produced less, unemployment rose and investments fell.
The economic consequence of this shock was a decade of stagflation: high inflation amid stagnating growth.
Governments tried several ways to respond. Some countries, such as the US, introduced price controls to limit how much petrol companies could charge. Others, such as the UK and France, imposed rationing rules to manage shortages.
A gas station in 1973, lets customers know he is out of gas.
Trouble for central banks
Central banks also faced difficult choices: raising interest rates could reduce inflation by slowing borrowing and spending. But higher rates also risked pushing the economy deeper into recession.
During the 1970s, many central banks including the US Federal Reserve struggled to strike the right balance. The Fed kept cutting interest rates to support the economy, but this only added to inflation.
The result was an “inflationary psychology” where expectations of higher prices become self-fulfilling.
The world today has stronger defences against an oil shock. Central banks now have clear mandates to keep inflation low and the credibility to act quickly. Research suggests the economic impact of oil price shocks has declined over time because wages adjust faster, central banks act decisively to keep inflation in check, and oil now makes up a smaller share of the economy.
Recent shocks confirm this transformation: the Russian invasion of Ukraine pushed up energy prices and inflation, but did not trigger a deep recession.
There is another difference as well. Today, high oil prices may encourage investment in renewable energy, and have the potential to accelerate the shift toward cleaner energy sources.
Modern economies are better prepared
The damage caused by an energy shock depends not only on the size of the disruption but also on the economic environment in which it occurs. In the 1970s, heavy dependence on oil, rigid wage systems and uncertain economic policy amplified the crisis.
Modern economies are better prepared. Constraints on energy supply, however, remain real and the disruption to the Strait of Hormuz highlights this uncertainty. The duration and objectives of the current conflict remain unclear, and uncertainty itself is costly to businesses and the economy.
History is therefore less useful for prediction than for perspective. The size of a supply shock is only one piece of the puzzle; what matters is the system it hits, how long the shock persists and how it affects expectations.
Written by Laura Panza, Associate Professor, Economic History, The University of Melbourne
