The closure of the Strait of Hormuz, almost the only route for oil exports from the Persian Gulf, more than a month ago has raised concerns that the world is heading for an energy crisis worse than the one in the 1970s, writes the BBC.
Former Maersk director and shipping expert Lars Jensen told the BBC that the impact of the US-Israeli war on Iran could be significantly greater than the economic chaos experienced in the 1970s. Jensen’s comments follow a warning from the head of the International Energy Agency, Fatih Birol, who said in March that the world was facing its biggest ever energy security threat. He told the BBC that the threat is much greater than in the last century, and is greater than the shock to international markets caused by the sharp rise in natural gas prices after Russia’s full-scale invasion of Ukraine in 2022.
While the closure of the Strait of Hormuz has disrupted international energy supply chains, some experts say the world is now more resilient. Carol Nakhle, an economist and CEO of Crystol Energy, told the BBC that the oil crisis of the 1970s was fundamentally different because the first price shock was the result of a deliberate political decision. In October 1973, Arab oil producers imposed an export embargo on a US-led group of countries that supported Israel during the Yom Kippur War. The embargo was accompanied by a coordinated halt to oil refining. Nahle said the result was a quadrupling of oil prices in a matter of months. As a result, fuel restrictions were imposed in oil-dependent countries, which led to an international economic and financial crisis with lasting consequences.
Dr Tiarnán Heaney, a researcher at Queen’s University Belfast, explained that high oil prices fuelled inflation, which meant that businesses cut back even more and unemployment rose sharply. This in turn undermined the fabric of society in many places, and there were widespread strikes, riots and increased poverty as many households were unable to make ends meet. Both the US and the UK experienced recessions between 1973 and 1975, and the crisis also led to the fall of Ted Heath’s Conservative government.
The next oil crisis followed the Iranian revolution in 1979.
Since the US and Israel launched attacks on Iran on February 28, the Strait of Hormuz has been virtually closed to traffic. US President Donald Trump has tried various tactics to get oil flowing through the Persian Gulf again, including calling on allies to send warships to the strait and threatening to launch more strikes against Iran if it does not allow ships to pass through.
Jensen told the BBC that tankers that left the Gulf more than a month ago were still arriving at refineries, but the flow would soon taper off. He said the oil shortages seen now would remain even worse even if the Strait of Hormuz magically opened tomorrow. The world is facing huge energy costs, not just during the crisis but for six to 12 months after the strait is resolved.
Nahle said oil markets are now more diverse than they were in the 1970s, while the total volume used relative to the size of the international economy has also fallen significantly. The economist believes that while prices are currently high, today’s crisis is not as severe as in the 20th century, and stressed that the volume disruptions are significant and probably the highest in recent history, and the market is also much more resilient than in the 1970s. It is more diverse, better equipped with reserves and contingency mechanisms.
Heaney noted that some market differences today work in favor of a more successful transition from the crisis,
including better economic understanding and a larger number of countries with oil reserves. He added that the best case scenario would be to end the conflict as soon as possible and restore some semblance of stability.
Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis CIB, said that in the 1970s, despite huge price increases, international oil supplies fell by only 5-7%, while around 20% of supplies are currently affected. She said that the crisis caused by the Iran war could cause a bigger shock to the market if the situation does not improve soon, and that this also applies to natural gas and other resources. The crisis could lead to sharper price jumps, a wider inflation burden and the risk of a deeper recession, especially in Asia: “Reserves and efficiency offer some buffer which the episodes in the 1970s lacked, but the raw scale of lost supply makes this nastier, with no fast fix in sight.”
Read also: Fuel prices in Latvia: some decrease, others increase