Business impact of the energy crisis of 1979
The energy crisis of 1979 had significant business impacts stemming from geopolitical events and economic instability. Following the earlier Arab oil embargo of 1973, crude oil prices had been steadily rising, leading to government interventions aimed at controlling prices and imports. However, the situation escalated dramatically due to the Iranian Revolution and subsequent invasion of Iran by Iraq, which severely disrupted global crude oil supplies. As Iran had been a major supplier, its loss in production forced markets to rely on heavier, more costly crude oils, resulting in increased refining costs and diminished gasoline output.
This supply strain led to soaring prices for crude oil and petroleum products, contributing to rampant inflation exceeding 13% and rising unemployment rates that peaked at 6.1% in 1979. Consumers faced long lines for gasoline, while some industrial sectors experienced energy use restrictions. Although the eventual recovery in Iranian and Iraqi oil production offered some relief, the crisis was effectively mitigated by deregulation measures enacted by President Ronald Reagan in 1981, which allowed domestic oil production to increase and prices to stabilize. The economic landscape of the early 1980s was marked by a decline in energy prices, contributing to a broader recovery, underscoring the complex interplay between energy supply, government policy, and economic health during this turbulent period.
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Subject Terms
Business impact of the energy crisis of 1979
The Event Oil shortage during which prices soared, the government imposed price controls, and U.S. economic growth stagnated
Date December, 1977-January, 1981
Place United States
The sharp rise in prices after the Iranian Revolution, combined with the Iran-Iraq War and U.S. government actions that exacerbated the problem, produced gas lines, shortages, and dramatically higher energy prices for U.S. businesses and consumers.
World crude oil prices rose sharply after the Arab oil embargo of 1973 and continued a steady climb through the mid-1970’s, spurring government intervention in the form of price, allocation, and import controls. President Jimmy Carter attempted to increase U.S. crude production by scaling back the complex system of government regulation of the oil industry to allow domestic crude prices to rise.
President Carter’s efforts at reform were stalled by a series of events in the Middle East: In December, 1977, riots broke out in Iran; they were followed by the Iranian Revolution and the overthrow of the shah in January, 1978. In September, 1980, Iran was invaded by Iraq. Together, these events disrupted the world’s crude oil supply. Iran had provided approximately 15 percent of internationally traded crude oil and 9 percent of U.S. crude imports before the revolution. The loss of Iranian crude oil—which were particularly “light” (low in wax content) and “sweet” (low in sulfur content) and thus inexpensive to refine into gasoline—shifted the market toward heavier, more sour crude oils that were more expensive to refine. U.S. refineries were able to produce less gasoline per day from these crude oils, so the decrease in supply of gas was greater than the decrease in supply of crude oil.
The result of these events was soaring crude oil, gasoline, diesel, and home heating oil prices that led to a general economic decline in the United States. Inflation rose to a rate of more than 13 percent, and the U.S. unemployment rate reached 6.1 percent in 1979. As a result of the oil shortages, consumers were forced to wait in long lines to buy gasoline, and in some regions of the country, restrictions were placed on industrial energy use.
Iranian and Iraqi oil production gradually recovered and partly eased the world crude shortage. However, most economists date the end of the energy crisis to President Ronald Reagan’s issuance of Executive Order 12287 on January 28, 1981, terminating federal price and allocation controls and leading to a lengthy decline in real crude prices as domestic crude production increased. Declining energy prices helped spur the economic recovery of the early 1980’s. Although Reagan is given credit for this deregulation, the outgoing Carter administration had already begun the process, and the crisis would have probably abated regardless of which candidate won the 1980 election.
Bibliography
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