17.2 Oil shocks and energy crisis

The 1970s saw major oil shocks that rocked the U.S. economy. OPEC's embargo and the Iranian Revolution caused oil prices to skyrocket, leading to inflation, unemployment, and economic stagnation. These events exposed America's vulnerability to foreign oil dependence.

In response, the government implemented price controls, fuel efficiency standards, and created new agencies like the Department of Energy. Long-term effects included a push for energy independence, diversification of energy sources, and increased focus on conservation and efficiency measures.

Oil Shocks and Energy Crisis of the 1970s

Oil shocks of the 1970s

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• OPEC Oil Embargo (1973-1974) triggered by Arab-Israeli War (Yom Kippur War) led OPEC nations to cut oil production and impose embargo on oil exports to U.S. and allies, quadrupling oil prices from $3 to$12 per barrel
• Iranian Revolution (1978-1979) overthrew Shah Mohammad Reza Pahlavi disrupting Iranian oil production, reducing global oil supply by 4%, and doubling crude oil prices from $15 to$30 per barrel

Economic impact of oil shocks

• Inflation skyrocketed as energy costs surged, causing ripple effect on prices of goods and services, leading to stagflation with 13.5% inflation rate by 1980
• Economic growth stalled with GDP growth rates dropping from 5.6% in 1973 to -0.5% in 1974, unemployment rising to 9% by 1975, and industrial production declining by 13% between 1973-1975
• Consumer behavior shifted towards fuel-efficient vehicles (Honda Civic, Toyota Corolla) energy conservation measures in homes and businesses (thermostat adjustments, improved insulation) and changes in consumption patterns (carpooling, public transit use)

Government response to energy crisis

• Price controls implemented through Nixon's Economic Stabilization Act of 1970 froze wages and prices, created Cost of Living Council to oversee economic stabilization
• Fuel efficiency standards established Corporate Average Fuel Economy (CAFE) standards mandating improvements in vehicle fuel efficiency from 13 mpg in 1975 to 27.5 mpg by 1985
• Energy Policy and Conservation Act of 1975 established Strategic Petroleum Reserve, extended oil price controls, authorized creation of fuel economy standards
• Department of Energy created in 1977 under President Carter centralized energy policy and research, consolidated energy-related activities from various federal agencies

Long-term effects on energy policy

• Diversification of energy sources increased focus on domestic oil production (Alaska's North Slope) development of nuclear power (from 4% to 20% of electricity generation by 1990) research into renewable energy sources (solar, wind)
• Energy independence initiatives emphasized reducing foreign oil dependence from 36% in 1973 to 28% by 1982, exploration of new domestic oil reserves (Gulf of Mexico, shale oil)
• Alternative energy development accelerated solar power research and implementation (photovoltaic cells) wind energy expansion (from 0 to 6,000 MW capacity by 2000) biofuels development (ethanol production)
• Energy efficiency measures improved building codes (insulation requirements) appliance efficiency standards (Energy Star program) public awareness campaigns for energy conservation (Turn off the lights, Carpool)