7 Significant Causes of the 1979 Energy Crisis

1979 Energy Crisis

Time and again, the world has been facing an energy crisis that has affected world leaders and developing countries.

One such crisis that the world faced in the past is the 1979 Energy Crisis. The 1979 energy crisis was recognized as the second of two oil price shocks that occurred in the 1970s.

It stimulated a widespread panic over possible gasoline supply shortages and much higher prices for crude oil and refined products.

The predecessor of the second energy crisis occurred in 1973. Oil production fell 7% or less but caused short-term supply disruption, panic buying, and long queues at gas stations. Crude oil prices nearly doubled to nearly $ 40 a barrel in just twelve months.

The short-term disruption to the world’s supply of petroleum-based fuel was particularly high in the spring and early summer of 1979.

Several states responded to the crisis by consuming less petroleum fuel, such as California, New York, Pennsylvania, Texas, and New Jersey.

In these states, consumers could only purchase fuel every other day, depending on the last digit of their license plate numbers.

Gasoline shortages were also feared, as heating oil could be in short supply during the winter of 1979-1980. This outlook has been of particular concern to the United States, where the demand for fuel for domestic heating was also the highest.

The 1979 energy crisis came shortly after the occurrence and conclusion of the Iranian revolution. The revolution began in early 1978 and ended in early 1979 with the fall of Shah Mohammad Reza Pahlavi, the state monarch.

The turmoil in Iran, a major oil-exporting country, led to a significant decline in the world’s supply of crude oil, leading to significant shortages and an increase in panic buying. In 12 months, the price of a barrel of crude widely used resource rose to $ 39.50.

It would be wrong to blame the crisis solely on the Iranian Revolution. In particular, the United States suffered severe pain from the crisis than any other developed country in Europe, which solely depended on the oil from Iran and other Middle Eastern countries. Therefore, the US is also partly blamed for the origin of the crisis.

Take a look at what causes the 1979 energy crisis and why the USA is to blame for:

1. US tax policy

In early 1979, the United States government regulated oil prices. Regulators ordered certain filters to restrict gasoline supplies in the early foresaw of the crisis to build inventory.

This measure directly contributed to higher prices at the pumps.

Another factor was the inadvertent restriction of supply after the Department of Energy (DOE) decided to sell a handful of large US crude filters to smaller filters that were unable to obtain a ready supply of oil. Because the smaller filters had limited production capacities, the decision further delayed the supply of gasoline.

2. Pre-crisis monetary policy

Pre-crisis monetary policy also appears to have played a role. The Federal Open Market Committee (FOMC) was hesitant to quickly raise target interest rates, and this reluctance contributed to rising inflation at the end of the decade.

The rise in inflation was accompanied by higher energy prices and a variety of other consumer products and services.

3. Revolution in Iran

In November 1978, 3thirty seven thousand workers of Iran’s nationalized oil refineries organized a strike that led to a decrease in oil production from 6 million barrels per day to about 1.5 million barrels. Foreign workers in the refineries left the country.

On January 16, 1979, Mohammad Reza Pahlavi, the Shah of Iran, and his wife, Farah Pahlavi, fled from Iran, leaving the responsibility of calming the nation at the behest of Prime Minister Shapour Bakhtiar.

After the Shah fled from the country, Ayatollah Khomeini returned to Iran and became the new leader.

Although the global oil supply only decreased by approximately four percent after the change of leadership.

The oil markets’ reaction, however, raised the price of crude oil drastically over the next 12 months period, more than doubling it to $39.50 per barrel. The high fluctuation in price caused fuel shortages and long lines of consumers at gas stations.

4. Weakness of US embassy staff in Tehran

William H. Sullivan, who served as ambassador from 1977-1979, confessed his complete innocence on Iran’s part.

He has never lived or worked in Iran or any other Islamic country. He received the post of ambassador only because he had experience in relations with authoritarian governments, working in Laos, the Philippines, etc.

Jimmy Carter, who came to power after the rhetoric of human rights and freedoms, was embarrassed by what was happening in Iran.

5. Violation of IEA Guidelines

The confusion, something normal for the crisis as a whole, was exacerbated by the fact that giving way to general panic, both private companies, and government agencies rushed to the market.

According to the IEA, Japan, the United States, and the Federal Republic of Germany has been active in this regard.

Wanting to supplement their strategic reserves, these states have created a high artificial demand for black gold.

This behavior was contrary to the IEA guidelines on the creation of strategic reserves exclusively in a peaceful, stable time.

In addition, the number of intergovernmental transactions, which were the traditional way of buying oil when the crisis occurs, has doubled.

6. Oil Producers took the advantage

Not only consumers but also producers have contributed to the increase in market tension.

In 1979, tempted to obtain premiums comparable to the spot market, many OPEC countries increased the prices of official direct sales. It was contrary to the level agreed in December 1978, thus launching a mechanism to increase prices in advance.

7. Lesser production Higher Demand

OECD and IEA documents show that in the first half of 1979, imports into the G7 countries remained close to the level of 1978.

According to company reports, the geography of oil distribution did not change significantly.

The only country that reduced imports was the United Kingdom. Since March 1979, the decline in global production has hardly reached 2%.

By the end of 1979, the oil reserves and consumption had risen from 71 to 84 days which in turn became an additional factor leading to rising already high prices.

Conclusion

In my opinion, panic and chaos, aggravated by the factor of terrible newspaper headlines, and not by the real lack of oil on the market, were at the center of the 1979-1980 crisis. We are not far from the third energy crisis amid Covid 19 Pandemic when the energy price has been rising every week in the international market. Some major measures have to be taken learning from the past.