Oil Crisis! How the 1970s Energy Shocks Changed the World

November 25, 1973. A Sunday morning in Germany. The autobahn is completely empty. No cars. No trucks. Nothing. The country that gave the world Mercedes, BMW, and Audi, the country that has no general speed limit on its highways because people love driving that much, just banned driving on Sundays.

This is where Chapter 11 of Torsten Dennin’s “From Tulips to Bitcoins” begins. And if you think a driving ban sounds like a small thing, wait until you see what caused it.

The War That Started It All

The roots go back to the Arab-Israeli conflict. In 1967, Israel won the Six-Day War and conquered the Golan Heights, the Sinai Peninsula, Gaza, the West Bank, and East Jerusalem. Arab nations were humiliated. Tensions kept building through the early 1970s.

On October 6, 1973, Egypt and Syria launched a surprise attack against Israel. It was Yom Kippur, the holiest day in the Jewish calendar. The timing was deliberate. Israel was caught off guard.

The United States stepped in and supported Israel with military aid. Israel turned the war around. But the Arab world had another weapon ready. Not tanks or planes. Oil.

OPEC Pulls the Trigger

On October 17, 1973, OPEC announced it would cut oil production by 5% from September levels. That was just the beginning. They imposed a complete embargo against the United States and the Netherlands, both seen as key allies of Israel. And they pledged to keep restricting supply until the occupied territories were “liberated.”

The numbers tell the story better than anything else. At the end of 1972, oil was about $3.50 per barrel. By the end of 1973, it was over $10. That is a tripling in one year. OPEC’s combined oil revenue went from 14 billion dollars in 1972 to 90 billion in 1974. Six times more money in two years.

For producing nations, this was the greatest wealth transfer in modern history. For consuming nations, it was a disaster.

Germany Gets Hit Hard

Dennin focuses on Germany to show what the oil shock actually looked like on the ground. And it was ugly.

Germany depended on imported oil for more than 50% of its energy. Of that imported oil, 75% came from the Middle East. The country’s strategic reserves would last about three months. After that, nothing.

The government reacted fast. The four-week Sunday driving ban was the most visible measure. Speed limits were imposed on the famously unlimited autobahn. Denmark, the Netherlands, Luxembourg, and Switzerland did the same. Across Europe, people suddenly had to think about something they had taken completely for granted: cheap energy.

The economic damage was severe. GDP growth went from a healthy 5.3% in 1972 to negative 1.8% in 1975. Construction activity dropped 16%. Automotive production fell 18%. The German stock market lost 40% of its value. Unemployment went from near zero to 4.8%.

This was stagflation. Prices going up while the economy was going down. The textbooks say that should not happen. Inflation and recession are supposed to be opposites. But oil made both happen at the same time.

Europe Fights Back

European countries did not just sit around waiting for OPEC to be nice. They started investing in energy-saving measures. They found alternative oil suppliers outside the Middle East. They pushed domestic oil development, especially in the North Sea. And they built strategic oil reserves so they would never again be three months away from running dry.

These investments took years to pay off. But they did pay off. And that matters for what came next.

The Second Oil Crisis: 1979

Just when the world was starting to recover, it happened again.

In 1979, the Iranian Revolution overthrew the Shah. Iran’s oil production collapsed. Then Iraq attacked Iran, disrupting supply even further. Oil prices shot from under $15 per barrel to nearly $40 in just twelve months.

OPEC members used the chaos to raise prices even more. Libya demanded $41 per barrel. Saudi Arabia set its price at $32. The organization that was supposed to coordinate production turned into a free-for-all where every member tried to squeeze as much money as possible out of the crisis.

The Aftermath: OPEC Loses Its Grip

Here is where the story gets interesting. All those European investments in alternatives and energy efficiency started working.

Global oil consumption between 1978 and 1983 dropped by 11%. That is a massive decline. People bought smaller cars. Factories became more efficient. Governments invested in nuclear power and natural gas. The world learned, painfully, that depending on one energy source controlled by a small group of countries was a terrible idea.

OPEC’s share of the global oil market fell to 40%, then to 30%. The cartel was losing its grip.

Then came the political countermove. The Reagan administration struck a deal with Saudi Arabia to increase production in the 1980s. The Saudis opened the taps. Oil prices started sliding. They kept sliding through the mid-1980s and briefly dropped below $10 per barrel by the late 1980s.

That cheap oil was great for Western consumers. But it pushed the Soviet Union, which depended heavily on oil exports, to the brink of insolvency. The empire that had seemed permanent started cracking. Cheap oil did not single-handedly bring down the USSR, but it was one of the biggest nails in the coffin.

What Stays With Me From This Chapter

Reading Dennin’s account, a few things stand out.

First, the speed of the price moves. From $3.50 to $10 in months. From $15 to $40 in a year. Commodities do not move gradually when supply gets cut. They explode. And the damage is not just financial. It is factories closing, people losing jobs, entire economies restructuring.

Second, OPEC discovered that oil was a weapon, but weapons lose their power when the other side adapts. Europe and America spent a decade building alternatives and reducing consumption. By the mid-1980s, OPEC had less leverage than it did in 1973. The oil weapon worked once, maybe twice. But it also motivated its targets to never be vulnerable again.

Third, the connection between oil prices and geopolitics is wild. A war in the Middle East leads to empty highways in Germany. A revolution in Iran leads to inflation in America. An agreement between Reagan and the Saudis contributes to the collapse of the Soviet Union. Oil is not just a commodity. It is a thread that connects wars, economies, and the rise and fall of empires.

The 1970s oil crises were not just about gas prices. They reshaped the entire global order. And we are still living with the consequences.

Previous: Chapter 10: Gold Standard

Next: Chapter 12: Diamond Crash

This is part of my From Tulips to Bitcoins book retelling series.