Energy Blog: Are the 1970s Coming Back?

The oil shocks of the 1970s left an indelible mark on a generation. In the United States, prices spiked. Supplies were so constrained that motorists on occasion would line up for miles at service stations that had fuel. For a time, motorists were split into two groups, each restricted to filling their tanks on every other day.

That crisis led to some long-term changes. Large, gas-guzzling cars went out of fashion for a time, replaced by efficient models often imported from Japan. A national speed limit was signed into law by President Nixon, work started on the Trans-Alaska Pipeline, and research into alternative energy sources began in earnest. Even after geopolitical forces and newly tapped oil fields combined to bring down international oil prices, the echoes of the oil crisis reverberated for decades.

Today, we may be on the cusp of a new oil supply crunch. The Russian invasion of Ukraine has led to sanctions by some nations, such as the United States, and an unwillingness from other countries to buy oil from Russia. “We estimate that from April, 3 mb/d (million barrels per day) of Russian oil output could be shut in as sanctions take hold and buyers shun exports,” according to a report from the International Energy Agency published in March 2022. “Only Saudi Arabia and the UAE hold substantial spare capacity that could immediately help to offset a Russian shortfall.”

Check out this infographic: How High is the Price of Gas?

This reduction in Russian supply comes on top of an ongoing mismatch between oil production and demand. In the immediate aftermath of the start of the COVID-19 pandemic in 2020, global petroleum production fell steeply. According to data from the U.S. Energy Information Administration, global production dropped from 101 million barrels a day in December 2019 to 88 mb/d in June 2020. In spite of steady increases since, production had only reached 98 mb/d by November 2021. That reduced supply was running up against a renewed demand as countries tried to return their economies to normal. This mismatch led to increased prices.

The decline in U.S. production was even steeper but the production had ramped up to all but match pre-pandemic levels. Because oil is sold on a global market, however, the slower increase internationally has led to higher American gasoline prices.

How long will the oil market remain roiled? And could it have the same impact as the 1970s crisis?

The buffer created by oil in storage and strategic petroleum reserves can have a cushioning effect on price increases, but the IEA has reported that even before the present crisis, petroleum inventories were at an eight-year low.

“Russia’s invasion of Ukraine has brought energy security back to the forefront of political agendas as commodity prices surge to new heights. While it is still too early to know how events will unfold, the crisis may result in lasting changes to energy markets,” the IEA reported. “The implications of a potential loss of Russian oil exports to global markets cannot be understated.”

Another energy perspective: Oil and Gas Acknowledge Carbon's Fade

The larger economic effects have yet to come into focus. While the oil crisis of the 1970s led to almost immediate recessions in the United States, some of that was due to hikes in interest rates to battle oil-related inflation. “This time, unfortunately, we're coming into this with inflation already elevated,” wrote economist and New York Times columnist Paul Krugman on Twitter on March 13, “But longer-term inflation expectations still seem anchored.”

The Washington Post quoted Neil Shearing, chief economist for Capital Economics in London, saying, “This is going to feel pretty grim. It’s not going to feel like the Roaring ‘20s.”

On the other hand, that same article mentioned research by Shearing’s firm suggesting that oil prices would have to exceed $200 a barrel to trigger a recession, which is nearly twice the price in mid-March 2022. And the connection between oil prices and economic health in the U.S. has been muddled due to the large domestic oil production industry. For instance, the 70 percent decline in crude oil prices between June 2014 and February 2016 hurt American industry more than it helped and triggered recession-like conditions in large parts of the country.

What’s more, the United States and the world are facing multiple issues, from possible demand growth as COVID restrictions are eased to potential supply chain disruptions as the war in Ukraine and the resulting sanctions disconnect trading partners. Looking back over the distance of more than 40 years, it’s easy to pin the economic problems of the 1970s on the price of gas. In the 2020s, oil prices may be just one drop in the bucket.

Jeffrey Winters is editor in chief of Mechanical Engineering magazine.