Ukraine, Kippur and Iran: energy crises compared
Throughout history all war conflicts have had economic and financial repercussions. But the invasion of Ukraine caused an unprecedented surge in the prices of energy goods, re-proposing an inflationary pattern similar to that recorded in the 1970s, on the occasion of the Yom Kippur war of 1973 and the Islamic revolution in Iran of 1979.
The Yom Kippur War and stagflation
The acceleration of price growth in the 1970s can be traced back to the increase in the price of oil established by OPEC following the Yom Kippur war which took place from 6 to 25 October 1973. The conflict saw Egypt and Syria, on the other Israel. The Arab countries associated with OPEC decided to support the military campaign of Egypt and Syria by decreeing the increase in the price of oil and the blocking of exports, with the aim of hitting the United States and other countries supporting Israel.
Between 1971 and 1974, the real price of oil increased significantly causing the recession that hit industrialized countries between 1973 and 1975. World economic growth went from 6.8% in 1973 to 2.8% in 1974 For the first time, economists found themselves facing the simultaneous presence of high inflation (in the United States it went from 3% in 1972 to 12% in 1974) and low or zero growth, questioning the Keynesian theories that had been that moment a point of reference for western rulers. Shortly thereafter, economic liberalism and the monetarist school would take hold. Central banks would begin to place price stability at the top of monetary policy priorities. Inflation had to be fought, even at the cost of higher unemployment.
The Iranian Revolution and the 1979 Crisis
In 1979–80, a second energy crisis occurred following the Islamic revolution in Iran and the Iran-Iraq war. The price of oil rose to 80 dollars a barrel, putting Western economies in serious difficulty for the second time, once again exposed to the risks deriving from a strong energy dependence on politically unreliable actors.
The 1979 regime change in Iran led to the suspension of the export of black gold which would later resume under the new regime but at higher prices. Following Iraq’s invasion of Iran, production fell dramatically in both countries, resulting in a slowdown in economic activity in industrialized countries.
Following the decline in demand, the 1980s witnessed an excess supply of oil, due to increased production by other OPEC members, lower crude oil costs, technological innovation, investments in new alternative energy sources such as natural gas and nuclear power, the discovery of new deposits in the North Sea and the creation of national strategic oil reserves. The double oil crisis of the 1970s prompted Western governments and, in particular, European countries to diversify their energy supplies and to think for the first time about energy security.
From a great crisis to a great opportunity
From what has been said, the main analogy between the energy crises of the 1970s and the current energy crisis clearly emerges, which sees its ultimate but not exclusive cause in the Russian invasion of Ukraine: an unbalanced energy dependence on an oligopolist.
As in the 1970s, the response of the West today is also that of diversifying the sources of supply and the energy mix, but with significant differences.
Firstly, this crisis is not caused by an embargo unilaterally established by the oligopolist, but by the risk that the latter may interrupt gas exports by reacting to the financial sanctions imposed on it by the international community, or that the international community decides first to suspend imports to punish the military escalation (action currently undertaken only by the United States, less exposed to hydrocarbon imports than its European allies).
Secondly, in the 1970s the main industrialized economies were linked exclusively to the import of oil extracted from a few fields, while today they have access to a more diversified energy mix (between oil, natural or liquefied gas, renewables, nuclear, etc.) and a plurality, albeit limited, of more efficient energy deposits and infrastructures. If the United States has always guaranteed itself minimal energy independence, European countries have moved from dependence on OPEC oil to dependence on Russian gas. Transition determined by the combination of geopolitical, economic and geographical factors but also the result of the absence of a shared European strategy. Today, more than ever, the urgency of a European policy capable of guaranteeing the security of the region from an energy point of view emerges.
It’s not just an energy crisis
From a macroeconomic point of view, the current conflict compared to those of the 1970s could have far more significant long-term effects, as financial markets and international trade are much more sophisticated, interconnected and global than forty years ago . Furthermore, the Russian Federation exports not only energy products, but also strategic raw materials, such as nickel and grain. The same goes for Ukraine.
The energy crisis is already following signs of a food and inflationary crisis (now on the rise for months) which is difficult to resolve for Western and European governments, already breathless with the execution of the reconstruction plans for post-pandemic economies.
It will once again be necessary to resort to further public debt to cushion the blow, with the inevitable renewal of the suspension of the Stability Pact and the postponement of the normalization of the ECB’s monetary policy to a later date.
