AZnomicsThe Oil Shock
OPEC turns off the tap — and the West discovers how fragile its prosperity is
In October 1973, Arab oil-producing nations announced they would no longer sell oil to countries that had supported Israel in the Yom Kippur War. The US and Western Europe were on that list. Oil prices quadrupled in weeks. What followed revealed a vulnerability nobody had planned for.
Americans queued for hours at petrol stations. The government introduced odd-even rationing — you could buy fuel only on days matching your licence plate number. Speed limits were dropped to 55mph to conserve fuel. The New York Stock Exchange fell 45% over two years. The message was stark: the entire Western economy ran on cheap oil, and a handful of desert nations controlled the tap.
The oil shock created something economists thought couldn't exist: stagflation — high inflation AND high unemployment simultaneously. Keynesian economics had no answer. You fight inflation by slowing the economy (more unemployment). You fight recession by stimulating the economy (more inflation). The oil shock forced both at once, paralyzing policy for a decade.
By 1980, US inflation hit 14.8%. Fed Chair Paul Volcker did the unthinkable: raised interest rates to 20%. Credit froze. A brutal recession followed — unemployment hit 10.8%. But inflation was killed. Volcker's shock established the principle that central bank credibility on inflation is worth short-term economic pain. That principle still governs the Fed today.
The oil shock created modern energy policy, OPEC's permanent geopolitical power, and the Volcker Rule on inflation. When the Fed raises rates aggressively to fight inflation — as it did in 2022-23 — it's following the playbook written in 1973.