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5 October 2021

Why this decade will prove more challenging than the 1970s

Politics is becoming a ruthless contest over who can access energy and at what price.

By Helen Thompson

In the 1970s, energy crises and inflation stalked Western democracies. For 25 years, the US had presided over an age of cheap oil and rising living standards. Largely self-sufficient in oil, it was able to control oil prices. But as national output declined and the US became an oil importer, the Organisation of the Petroleum Exporting Countries (OPEC), the Saudi-led cartel of oil producers, became the decisive force in oil markets. During the Yom Kippur war in October 1973, it slashed production and its Arab members prohibited the export of oil to any state that supported Israel. Oil became scarce and expensive. In November that year, the British Conservative government asked motorists to eschew weekend driving. By the end of the month, it was issuing petrol ration books. Meanwhile, the National Union of Mineworkers had begun an overtime ban, curtailing the supply of coal to power stations.

In an age of high energy costs and constricted supply, inflation and unemployment rose together. Forced to choose, governments and central banks decided to prioritise controlling inflation. Western governments made it harder for trade unions to strike, curtailing the ability of workers to demand higher wages. The US Federal Reserve then administered a severe monetary shock to the world economy. In driving interest rates up to exceptionally high levels, Paul Volcker, the chair of the Federal Reserve, accelerated the de-industrialisation of most Western economies.

The decade’s energy shocks produced considerable geopolitical turbulence. Oil-producing countries in the Middle East acquired a divisive political weapon. Western governments had to decide whether to run from the embargo or ask industries and consumers to bear severe shortages. Edward Heath’s government upended Britain’s longstanding support for Israel to avoid the 1973 embargo. The Nixon administration and the Dutch government decided to forfeit OPEC imports. When Henry Kissinger, the national security adviser, tried to organise an oil-consumer collective to counter OPEC – what became the International Energy Agency – France, not wanting to subordinate French policy to Washington, refused to join.

Energy shortages and the spectre of inflation have now returned. The parallels appear obvious. Western economies are experiencing simultaneously rising energy prices and upward pressure on wages. Higher prices and scarce supply in one energy sector are impacting others, with the shortage of gas in Europe and Asia driving up coal prices. Russia may not be wielding gas as a weapon in the aggressive way OPEC did with oil in 1973, but it is not exporting enough to allow European economies to build up winter reserves.

There are, however, significant differences between the 1970s and now. In Britain, the National Union of Miners used the oil crisis to pursue higher wages. It was striking miners who caused Britain’s national energy emergency during the first three months of 1974 – which saw a three-day working week and household blackouts – not a global shortage of coal. Now, trade unions have much less wage-bargaining power. The present inflationary pressure from wages is the result of the labour shortage wrought by the pandemic, and in Britain’s case amplified by Brexit. This has spilled over into the country’s energy crisis because labour shortages have disrupted the transportation of fuel.

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The energy crises of the 1970s were supply side shocks with geopolitical origins. Today, supply constraints around gas and oil are evident once more. These are in part geopolitical – for example, Russia’s influence in European gas markets. They also reflect the reality that the world’s largest oil fields, not least in Saudi Arabia, are ageing.’ But, crucially, these constraints are happening at a time when energy markets are still absorbing what is already a 20-year Asian demand shock. Per capita energy consumption in China was more than 700 per cent higher in 2019 than in 1973. However unseemly the scramble for oil between the Western countries in 1973, there was no equivalent to the most recent situation of the Chinese government demanding that energy companies procure supply of all energy sources at any cost.

In the 1970s, faced with shortages and high prices, governments hoped to develop alternative energies. In 1979, US president Jimmy Carter, set a target that 20 per cent of the US’s energy consumption would come from renewable sources by 2000. But he did not want to curtail radically the use of fossil fuel energy. In a bid to end foreign energy dependency, he committed the US to achieving higher domestic oil production. Today, since the energy policies of Western governments discourage investment in oil and gas, reduced supply of these two energy sources is a desired end. The problem is that demand cannot fall fast enough to avoid a supply crisis.  

This decade will prove more challenging than the 1970s. Although Volcker took the credit for both reducing inflation and the blame for the resulting unemployment, it was the fall in energy prices that decisively ended the 1970s inflationary crisis. The cost of oil came down because the high prices that prevailed in the 1970s encouraged investment in oil that was more expensive to extract. Conveniently, most of this new oil supply came from the Western hemisphere and the North Sea, ending OPEC’s oil weapon. Now governments cannot encourage new production anywhere without compromising their net zero commitments. Instead, they will have to preside over reduced energy consumption and discover that politics is becoming a contest over who can access energy and at what price.

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This article appears in the 06 Oct 2021 issue of the New Statesman, Unsafe Places