Supply disruptions, high prices, unstable markets. The conflict in Iran brings back memories of the crises of the 1970s, when many economies plunged into stagflation. How serious is the current crisis?
Since the start of the war in Iran, the rise in oil prices has awakened memories of the dramatic oil shocks of 1973 and 1979.
In 1973, oil-producing Arab countries imposed an embargo against several Western nations as punishment for supporting Israel during the Guerra do Yom Kippur. Oil prices have soared, forcing many Western governments to implement energy-saving measures such as gasoline rationing.
Is the world on the brink of a similar crisis again?
Fatih Birol, director of the International Energy Agency (IEA), issued a blunt warning last Monday, stating that war with Iran “is already over”. Considers the current crisis worse than the oil shocks of the 1970s, as well as the consequences of Russia’s invasion of Ukraine.
In the 1970s, there was talk of “a deficit of around five million barrels of oil per day”, said Birol. “Today, there are 11 million barrels per day, more than during the two great oil shocks combined.”
The expert paints an equally gloomy scenario in relation to the gas market. Compared to the situation after Russia’s invasion of Ukraine in 2022, Birol said, the global gas supply deficit has doubled.
In the 1970s, the reduction in the supply of crude oil caused a sharp rise in oil prices, which in turn boosted the prices of other goods, causing a inflationary shock. At the same time, industrial production and economic growth plummeted. The devastating combination of runaway inflation and economic recession has plunged many industrialized nations into stagflation.
Prices have not risen as much as in the 1970s
The ongoing conflict with Iran and the near-total closure of the Strait of Hormuz – a crucial shipping strait in the Persian Gulf through which a fifth of global oil and gas shipments pass – have reduced global oil supply by about 8%.
“At that time [década de 1970]global oil supply fell by only about 5%. In this respect, the shock is actually more pronounced now than in 1973 and 1974,” says Klaus-Jürgen Gern, an economist at the Institute for World Economics in Kiel. Still, he stressed that oil prices rose much more sharply in the 1970s than they do now.
“From 1973 to 1974, oil prices quadrupled. In 1979, they tripled again,” Gern told DW.
Although Arab countries lifted the embargo in early 1974 and oil supplies increased, they kept prices high throughout the rest of the decade, acting as a persistent drag on the global economy.
Today, the scenario is different. “We have seen oil prices exceed $100 on a few occasions, most recently after Russia’s invasion of Ukraine,” Gern noted, adding that oil prices also reached these levels in 2007, 2008 and 2011.
“In that sense, this is not completely unprecedented,” he noted. “It was different in the 1970s. At that time, oil-importing countries were facing prices they had never seen before.” Furthermore, no one knew how long oil prices would remain high, he added.
This time, Gern explained, the high prices are the result of a drop in global supply due to the blockage of the Strait of Hormuz and the subsequent shutdown of fuel production facilities across the Gulf, rather than lasting damage to the region’s energy infrastructure. He believes that both supply and prices will stabilize and return to pre-war levels once the conflict ends. A report from Deutsche Bank Research also concluded that markets do not yet foresee a prolonged oil shock.
Damaged or paralyzed energy infrastructure
The conflict caused damage to more than 40 energy facilities in nine Middle Eastern countries, Birol said, adding that even if the war ended immediately, it would take “a long time” for the damaged facilities to return to operation. “Some will take six months to return to operation, others much longer”he told the Financial Times newspaper.
Qatar, for example, has indicated that Iranian attacks on the Ras Laffan complex – the world’s largest liquefied natural gas (LNG) production facility – could reduce supplies by around 17% over three to five years.
But Christoph Rühl, from Columbia University in New York, believes that a true energy crisis would only occur if the Strait of Hormuz remained closed for a long time and other fuel installations were damaged.
He highlighted that Qatar supplies around 20% of the world’s natural gas and that, even with interruptions in production at the Ras Laffan plant, only around 4% of global natural gas supply would be affected.
Emergency measures to contain demand
The oil market is also more diversified today than during previous price shocks. While member countries of the Organization of the Petroleum Exporting Countries (OPEC) supplied more than half of the world’s crude oil in 1973, their share has since fallen to just over 36%.
The USA was already the largest oil producer at that time and continues to be so today. Over the last decade, the country has seen a sharp increase in production, providing up to 90% of the additional oil on the global market. Despite the crises of the 1970s, which made the West painfully aware of its dependence on Middle Eastern oil, demand for this fossil fuel continued to grow.
Global supply, which was less than 60 million barrels per day in 1973, had already reached almost 94 million barrels per day by 2022.
To avoid supply disruptions, many countries have accumulated significant oil reserves. According to the International Energy Agency (IEA), these reserves reached 8.2 billion barrels at the beginning of this year, the highest level since February 2021.
The reserves help to mitigate the current supply shortage, with the IEA announcing earlier this month that its Member States have agreed to release 400 million barrels of oil from their emergency reserves to face the challenges arising from the conflict in the Middle East.
The release of these reserves is estimated to have reduced the global crude oil deficit from 11 million barrels per day to 8 million barrels. To alleviate supply shortages, the US also temporarily lifted sanctions on Russian and Iranian oil already on board oil tankers.
These reserves have so far prevented oil prices from rising sharply, according to Commerzbank Research. Over the past decade, IEA member countries have also accumulated large gas reserves to mitigate supply shortages.
It all depends on the duration of the war
“The Organization for Economic Co-operation and Development’s (OECD) current reserves – both commercial and strategic – could compensate for the loss of oil shipments through the Strait of Hormuz for around nine months,” Carsten Fritsch, raw materials analyst at Commerzbank, told DW. China has also accumulated strategic and commercial reserves that could cover its import needs from the Middle East for about seven months, he added.
It is not known for sure how long the military conflict will last. US President Donald Trump recently stated that his country and Iran were in “productive” negotiations to end the war, but Tehran denied this claim, making the impact on Middle East oil and gas supplies in the coming months uncertain.
However, the world economy is already feeling the effects of the war.
“We will see two things happen: inflation will increase in the short term and industrial production will decreasebecause oil consumption will be reduced whenever possible,” said Gern.
Although Western nations like Germany have not yet introduced measures to reduce energy consumption, countries in other parts of the world have already started taking steps to save fuel.
Pakistan, for example, ordered fans of its main cricket tournament – a very popular sport in South Asia – to stay at home and watch the games on television, transforming the Pakistan Super League into a remote broadcast model.
