The conflict in Iran is unlikely to lead to fuel rationing like in the 1970s, but policymakers should use price mechanisms and encourage household energy investment to insure against unexpected surges, says Andy Meyer.
In 1979, the Iranian Revolution created a second oil crisis as the price of crude oil doubled to $40 per barrel. Although global production fell by only four percent, then seven percent the following year during the Iran-Iraq war, it took time for policy and global supply chains to adjust. The price shock continued until the mid-1980s.
The then US President Jimmy Carter installed symbolic solar panels on the roof of the White House, which were later removed. But more importantly, Nixon’s price controls from the first oil crisis (1973) allowed consumers and producers to respond dynamically to higher prices by rationing and investing in new resources.
The recession pushed energy efficiency and the Japanese auto industry behind smaller, cheaper models than those produced in Detroit. It created an oil boom in Texas, Alaska and the North Sea and invested in fracking technologies that will be crucial to keeping US oil and gas prices low this century.
Related: Why Trump Wants Magnets More Than Gold
The progress and outcome of the current war is uncertain. The immediate concern stems from drone strikes that forced the shutdown of Qatar’s Ras Laffan complex, which is responsible for shipping about 20% of the world’s LNG, mostly to European and Asian customers. It has to travel through the Strait of Hormuz, and is exposed to possible missile and drone attacks for the 1,000 km journey.
Oil supplies have also been disrupted but there are alternative pipelines through Saudi Arabia and the United Arab Emirates that could provide relief in replacing lost shipments. Markets reacted accordingly, with Asian and EU natural gas prices rising by 55-70 percent, while global oil prices rose by only 15-20 percent. Nigerian LNG shipments have been diverted from the Atlantic to Asia and the current stability of US regional prices suggests there is some capacity to fill the gap. Indeed, this victory may have been one of the war aims of the United States.
The UK does not face this conflict as much as the rest of Europe, hampered by high prices, as most of our imported natural gas comes via pipelines from Norway. We also still have domestic products from the North Sea despite the best efforts of the government.
That the conflict has begun to heat up in the spring will also provide relief to depleted European reserves, with plenty of time for policy responses and recovery. Then we shouldn’t expect to see queues at the pumps like in the 1970s, or a winter of discontent, unless the crisis unfolds in unexpected ways, for example the Norwegian nationalism push.
(translating tags) Jimmy Carter
