Geopolitics and Crude Oil Through History – The Second Oil Shock - TradeHouses

In the 1970’s the world went through intense upheavals in the oil markets. 1973 was the first oil shock due to the embargo by Middle-East countries. History repeated itself in 1979.

World oil supplies were slashed during the Iranian Revolution. Coming so soon after the first oil shock, the second oil shock caused worldwide panic. The oil supply fell by around seven percent and animal spirits took over. Oil prices rose rapidly, economic recessions reared their ugly heads again.

In the US, inflation hit seven percent and the Federal Reserve raised interest rates to control it. Gas-guzzling cars became too expensive to run. It was also an era of opportunities because Japan took advantage and sold its cheaper, smaller cars to American consumers.

The US government decided to source more oil from territories like Alaska. Similar decisions were taken in the UK to develop its own energy sources. The North Sea oil industry received heavy investment and incentives.

The oil crises in the 1970’s were world-changing in addition to price-changing. They are also an example of demand-side imbalances. During the next decade, different problems arose in the oil markets.

The 1986 oil price crash is taught in university as an example of a supply-side problem. When there is an over-supply on the market, oil prices can fall incredibly fast.

In 1986, Saudi Arabia got tired of other OPEC countries cheating on supply quotas.

So they turned the taps on full. Saudi Arabia flooded the market with oil, and the price fell as low as seven dollars a barrel.

This was a different type of crisis but it was connected with the economic slowdown triggered by the embargo in the 1970’s. Demand plunged during the slowdown. Like the snake eating its own tail, OPEC’s pressure tactics came back to bite them economically.

Whether the crisis is demand-side or supply-side, it results in macro-economic shifts. Oil-producing countries suffer financially during oil gluts when demand falls to lower levels…along with the price.

As the revenues fall, so does the investment in oil fields and development, meaning eventually supplies will be reduced down the line.

Leading to a supply-side crisis.

And so it goes in the oil markets, with each decade bringing its own challenges.

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