Lines of cars stretching for blocks around gas stations. Desperate drivers waiting hours to fill up before pumps run out.
Transportation costs soaring, driving up prices of everyday items – from clothes to food.
Jobs lost. Families hurt. The American dream slipping out of reach.
That was the reality of America in the 70s, as the country was hit by successive oil price spikes: the first in 1973, as Middle Eastern oil exporters slashed production to punish the US for supporting Israel in the Yom Kippur War; the second in 1979, in the aftermath of an Islamic fundamentalist revolution in Iran.
As a hedge fund manager at the time, I watched the oil markets with trepidation for I knew that a prolonged fuel crisis would devastate the economy – and Americans – for decades. And it do.
Now, many are asking if the US faces the same fate as President Donald Trump wages war on those same radical mullahs in Tehran who upset the global economy five decades ago.
I can say with confidence, ‘no’.
Even as war has disrupted about 20 percent of global energy supply and cut nearly seven million barrels of production per day, the US is not headed for a repeat of the oil crisis of the 1970s.
That’s not to say American consumers will not feel the pain and wild gas price swings are likely to continue. Indeed, the harm has already been felt – and there is a human (and political) toll to pay for that. But this ‘crisis’ will likely be short-lived and, in my opinion, well worth the cost.
Lines of cars stretching for blocks around gas stations. Desperate drivers waiting hours to fill up before pumps run out. (Pictured: Drivers and a man pushing a lawnmower line up at gas station in San Jose, California in March 15, 1974)
Lines of cars stretching for blocks around gas stations. Desperate drivers waiting hours to fill up before pumps run out. (Pictured: Drivers and a man pushing a lawnmower line up at gas station in San Jose, California in March 15, 1974)
Trump in the driver’s seat
When the Shah of Iran was overthrown on February 11, 1979, his country fell under the control of a regime hostile to the West and they held all the cards. America then was largely an observer of history. Today, the US has more control over the extent and duration of the conflict.
To be sure, the US and Israel are winning on the battlefield but the greatest threat to the global supply of oil are Iranian attempts to shut the Strait of Hormuz – the narrow shipping lane through which 20 to 30 percent of the seaborne oil trade flows.
On Wednesday, Iran reportedly attacked commercial ships – and transit through the waterway is effectively halted. There are also reports of Iran mining the strait. But the regime’s capacity to keep the channel closed is in question.
Iran’s navy, such as it was, has been largely reduced to scrap at the bottom of the Gulf, which makes it much harder to choke off seaborne flows. The Pentagon announced Tuesday that 16 Iranian mine-laying ships near the strait had been destroyed.
The US and Israel will need to cripple the regime’s military more thoroughly to give shipowners and the insurance markets the confidence to reopen traffic across the Strait of Hormuz but judging by the rapid decline in the scale of Iran’s offensive attacks that moment could come in a matter of weeks.
TACO time
Critics of the president have taken to using the acronym TACO, which stands for ‘Trump Always Chickens Out,’ except they utterly misunderstand the concept. President Trump’s ability to pivot is a strength, not a weakness.
This current conflict, Gulf War III, is a war of choice. President Trump can effectively end it when and how he chooses. This is where politics—like it or not—really matters.
No recent president has understood the psychology of markets as this one does. When the market forces are powerful enough that they truly risk economic stability – as they did in the weeks after the president announced his ‘Liberation Day’ tariffs – he has shown the savvy to pivot and declare victory (no matter the score on the board).
President Trump’s line on gas prices during the Iran operation has been spot-on: if prices go up, they go up, but they will come down. This may horrify professional hand-wringers, but it denies panic merchants the one thing they crave: official validation.
Markets are made by mood as much as by math. Whatever his flaws, President Trump instinctively gets the mood and his swagger is well-founded. It rests on the foundation of a very different American position in the global economy than the one occupied in 1979.
Not the 1970s anymore
Back then, OPEC countries produced 50 percent of global oil, meaning a small cartel of nations could hold the global economy hostage.
Now, OPEC pumps closer to a fourth of the world’s oil supply and non-OPEC producers, like Canada, Brazil and, of course, the US, respond to market prices, not political directives. They can pump more if prices stay high enough for long enough.
Thanks to the shale oil revolution (modern techniques that access previously unreachable energy deposits), the US is now a net exporter of oil, meaning that while a spike in oil prices still hurts consumers, it does not create the same seismic shock that America experienced in the 70s.
Make no mistake: it still hurts. Truckers, utilities, and commuters feel it first—but it doesn’t automatically tip the entire developed world into stagflationary ruin. And, without a doubt, the world is better prepared for a supply squeeze.
Bring in the reserves
The US Strategic Petroleum Reserve (SPR) and its equivalents built up by US allies were constructed and expanded precisely to mitigate supply disruption and avoid a repeat of the 1973 and 1979 crises.
Notwithstanding Joe Biden’s cynically political decision to release 180 million barrels in 2022 to suppress gas prices ahead of a midterm election, the US SPR holds over 400 million barrels of oil.
Together, major developed economies friendly to the US hold over 1.2 billion barrels, and China holds about the same. Those reserves shouldn’t be used to fine-tune the price of a gallon of gas, but they provide a robust backstop against genuine, lasting shortages and price spikes.
Notwithstanding Joe Biden’s cynically political decision to release 180 million barrels in 2022 to suppress gas prices ahead of a midterm election, the US SPR holds over 400 million barrels of oil
Notwithstanding Joe Biden’s cynically political decision to release 180 million barrels in 2022 to suppress gas prices ahead of a midterm election, the US SPR holds over 400 million barrels of oil
When things threaten to spiral out of control, governments have barrels on tap they can release to smooth the shock, instead of simply watching gas station queues form.
Then there is the risk of inflation, and the role of central banks: actors that can actually determine whether a shock becomes a decade-long disaster.
Bankers to the rescue
In the late 1970s, inflation was already high and rising when the oil shock hit. Policymakers were behind the curve, and nobody believed they had the stomach to crush price growth.
Today, the inflation rate is down significantly from it’s post-COVID pandemic peak and, for all the central bank’s missteps, the Federal Reserve has spent 47 years convincing markets that they will slam on the brakes if it needs to.
Market expectations are anchored in this confidence in a way they simply were not in 1979. Again, that doesn’t mean an oil price spike will be painless, but it does mean it is unlikely to spiral into the sort of entrenched, wage-price spiral that readers alive during the Carter administration remember.
Put all this together and you get something very different from the apocalyptic picture being painted by naysayers.
An oil price spike will not be painless, but it is unlikely to spiral into the sort of entrenched, wage-price spiral that readers alive during the Carter administration remember
An oil price spike will not be painless, but it is unlikely to spiral into the sort of entrenched, wage-price spiral that readers alive during the Carter administration remember
Yes: oil prices have surged.
Yes: gas will cost more, and, yes, at least for a time, some people will struggle.
But the global economy won’t implode, because the world economy is less dependent on oil, central banks are far more credible, the US is effectively energy independent, Iran’s capacity to menace shipping has been crippled and there is a sizable buffer of strategic reserves.
Here’s the thing: freedom is not free.
A momentary spike in gas prices is not a civilization-ending crisis: failure to rid the world evil regimes intent on obtaining nuclear weapons could be.
Jay Newman is a former hedge fund manager for Elliott Management Corporation