The conflict in Iran is unlikely to lead to 1970s-style oil rationing, but policymakers should use pricing mechanisms and encourage domestic energy investment to protect against unpredictable escalations, says Andy Mayer.
In 1979, the Iranian revolution sparked the “second oil crisis,” when the price of crude oil doubled to $40 per barrel. Although global production only fell four percent, and then seven percent during the Iran-Iraq war the following year, it took time for global policies and supply chains to adjust. The price shock lasted until the mid-1980s.
Jimmy Carter, then president of the United States, placed symbolic solar panels on the roof of the White House, which were later removed. But more importantly, it began phasing out Nixon price controls since the first oil crisis (1973), allowing consumers and producers to dynamically respond to higher prices with rationing and investment in new resources.
The crisis encouraged energy efficiency and launched the Japanese car industry thanks to models smaller and cheaper than those produced in Detroit. It created an oil boom in Texas, Alaska and the North Sea, and spurred investment in fracking technologies that would be crucial to keeping U.S. oil and gas prices low this century.
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The progress and consequences of the current conflict are uncertain. The immediate concern arises from drone attacks that forced the closure of the Qatari Ras Laffan complex, responsible for around 20 percent of global LNG shipments, mainly to European and Asian buyers. These have to travel through the Strait of Hormuz and are exposed for 1,000 kilometers of the trip to possible attacks with missiles and drones.
Oil supplies are also disrupted, but there are pipeline alternatives through Saudi Arabia and the United Arab Emirates that can alleviate, if not replace, lost shipments. Markets have reacted accordingly: natural gas prices in Asia and the EU have increased by 55 to 70 percent, while global oil prices have only increased by 15 to 20 percent. A shipment of Nigerian LNG has been diverted from the Atlantic to Asia and the current stability of US regional prices suggests there is some capacity to close the gap. In fact, this blessing may be among America’s war goals.
The UK is not as exposed to this conflict as the rest of Europe, except for higher prices, as most of our imported natural gas comes from pipelines from Norway. We too, despite the best efforts of the government, still have domestic North Sea production.
The fact that the conflict began in a warm period until spring will also provide relief to Europe’s depleted reserves, with ample time for political responses and detours. So we should not expect to see queues at the pump like in the 1970s, or a winter of discontent, unless the crisis breaks out in unpredictable ways, fueling, for example, a rise in Norwegian nationalism.