History · 1973–1982
The 1970s oil shocks: how expensive oil became a decade of inflation
In October 1973, Arab oil producers cut supplies to the West. Six years later, the Iranian revolution did it again. Each time the oil price jumped, inflation followed, and the second time it took a recession and interest rates near 20% to bring it down. It is the episode economists reach for whenever oil spikes, including this year.
1 · What happened
Two shocks, six years apart
- Oct 1973The embargoDuring the Yom Kippur War, Arab members of OPEC cut production and stopped oil sales to the US and the Netherlands. The posted price of crude roughly quadrupled within months; the US benchmark went from $4.31 a barrel in late 1973 to $10.11 in January 1974.
- 1974–75StagflationUS inflation reached 12.2% in November 1974. The economy fell into recession and unemployment rose to 9.0% by May 1975: high inflation and high unemployment at the same time.
- 1975–78Inflation never fully went awayInflation eased but stayed around 5–9%. The Federal Reserve cut rates to support jobs, and workers and firms came to expect prices to keep rising.
- 1979–80The second shockThe Iranian revolution and then the Iran–Iraq war cut supplies again. Oil went from $14.85 in December 1978 to $39.50 in April 1980, and US inflation hit 14.6% in March 1980.
- 1979–82The Volcker squeezePaul Volcker, Fed chair from August 1979, let interest rates rise as far as needed. The federal funds rate averaged 19.1% in June 1981. Unemployment reached 10.8% in December 1982, the highest since the Great Depression.
2 · The mechanism
Why an oil shock turned into a decade of inflation
The first shock raised prices. What made it last was what happened next: wages, expectations and policy.
First round
Oil up → fuel, heating, transport up
Energy was a large share of household and business costs, and there was little alternative to oil. The price jump went straight into inflation and acted like a tax on oil-importing countries.
Second round
Prices up → wage demands → prices up again
Many wage contracts were indexed to inflation, and unions were strong. As prices rose, wages followed, and firms passed the higher wage bills on. A one-off shock became a spiral.
Expectations
"Prices will keep rising" became self-fulfilling
Because the Fed eased whenever unemployment rose, people stopped believing inflation would come down. Expectations of high inflation fed into pay deals, prices and interest rates.
- Supply shock
- A sudden change in the supply of something important, such as oil, that moves prices without any change in demand. A negative supply shock raises prices and slows growth at the same time, which leaves central banks with a dilemma.
- Stagflation
- High inflation and weak growth or rising unemployment at the same time. It is hard to treat, because raising rates to fight inflation also weakens the economy further.
- Inflation expectations
- How fast people, firms or investors think prices will rise in the future. Central banks watch them because wage demands and price setting follow them, so expectations that drift up can make high inflation last.
- Real interest rate
- An interest rate minus inflation. It shows what borrowing really costs once rising prices are taken into account.
- Imported inflation
- Inflation that comes from abroad: higher prices for imported goods and energy, or a weaker currency that makes every import more expensive.
Example: The near-closure of the Strait of Hormuz in 2026 cut oil supplies to Asia and Europe.
Example: In the US, inflation reached 12.2% in November 1974 and unemployment 9.0% in May 1975, after the first oil shock.
Example: In October 2026, US households expected prices to rise 4.7% over the next year and 3.5% a year over the next five to ten years, according to the University of Michigan’s survey, both the highest since May.
Example: ECB rate 2.50% − euro area inflation 3.8% = a real rate of −1.3%.
Example: Japan buys oil in dollars. With the yen near 157 per dollar, each barrel costs more in yen than it did when the yen was stronger.
3 · How it ended
A painful cure, and lasting changes
The cure
Real interest rates far above inflation
Volcker's Fed pushed rates well above inflation, which made borrowing very expensive and caused two recessions. It worked: US inflation fell to 2.5% by June 1983, and oil prices fell through the 1980s as new supply arrived and demand fell.
The legacy
Independent central banks, strategic oil stocks
The episode convinced governments that central banks need independence and a clear inflation goal, and that credibility is cheaper than a recession. Importing countries created the International Energy Agency (1974) and strategic oil reserves, and economies became much less dependent on oil.
4 · What assets did
What assets did in the oil shocks
Shares and bonds both lost money after inflation. Oil and gold were the winners.
| Asset | Period | Move | What happened |
|---|---|---|---|
| US shares | Jan 1973 → Oct 1974 | −43% | −53% after inflation. Oil, inflation and rising rates hit profits and valuations together. |
| Oil (WTI) | Sep 1973 → Mar 1974 | +135% | $4.31 to $10.11 a barrel after the Arab embargo. A second jump of +149% followed from Jan 1979 to Dec 1980. |
| US 10-year yield | Jan 1973 → Sep 1974 | 6.46% → 8.04% | Rising yields mean falling bond prices; with inflation above 10%, bondholders lost in real terms. |
| Gold | 1973 → 1974 (annual average) | +63% | $98 to $160 an ounce, after the end of the fixed $35 price. It reached a high of $850 on 21 January 1980. |
| US dollar | Sep 1973 → Dec 1974 | +6% | Broadly steady against major currencies: the US was less dependent on imported oil than Europe or Japan. |
Monthly averages unless stated; daily highs and lows were more extreme. "After inflation" deflates by US consumer prices. Past moves describe what happened then; they are not a guide to what will happen next.
Then and now: what rhymes
- A war in the Middle East cut oil supplies: Brent's physical price reached about $123 in late October 2026.
- Inflation jumped quickly: US 3.7%, euro area 4.0%, UK 3.5% in autumn 2026.
- Central banks fear the same thing, second-round effects, and are raising rates to stop them.
What's different
Rich economies use far less oil for each dollar of output than in the 1970s, wage indexation is rare, and central banks are independent with explicit inflation targets. That is why most acted within months this year, instead of waiting years. Whether that is enough depends on the same thing as in the 1970s: whether people keep expecting inflation to come back down.
Echoes today
The same mechanism in this year's news
Recent stories where the forces behind this episode are at work again, newest first.
Link 1 · InflationEffect
US inflation ran hotter than expected in October, and services are the reason
The CPI rose 0.4% in October (forecast 0.3%) after 0.6% in September. Core CPI, without food and energy, rose 0.3% (forecast 0.2%). Energy rose 0.7%, food 0.5% and shelter 0.3%. Gasoline was 37.4% dearer than a year earlier.
US consumer prices rose 0.4% in October and core prices 0.3%, both a tenth more than economists expected. Energy cooled after September's jump; what kept inflation up was food, rents and other services. That matters because it suggests the oil shock is spreading beyond fuel, the "second-round effect" central banks fear.
11 Nov 2026 · United States
Link 4 · EnergyCause
Oil drops below $90 for the first time since August as war fears ease
Brent fell almost 6% on 9 November and dipped below $90 on 10 November for the first time since August, closing about 2% lower at $90.69. Shipments through Hormuz averaged 7.82 million barrels a day in the week to 8 November, about 46% of the prewar level, according to Kpler.
Brent crude briefly fell below $90 a barrel on 10 November, after an almost 6% drop the day before, when President Trump said further strikes on Iran did not seem necessary. Yet less than half the usual oil is moving through the Strait of Hormuz. The gap between those two facts is the war premium draining out of the price.
11 Nov 2026 · Global
Link 4 · EnergyEffect
Oil is near $100, so why is Saudi Arabia running a deficit?
Saudi Arabia's budget deficit reached SAR84bn ($22.4bn) in the third quarter, 2.4 times the second quarter's. Oil revenue fell 23% on the year to SAR116.5bn, as the Iran war disrupted exports, even though Brent averaged about $101 a barrel.
An oil shock is supposed to make oil exporters rich. Saudi Arabia's budget shows it is not that simple: in July–September, with Brent around $100 a barrel, its oil revenue fell 23% from a year earlier and the government ran a deficit of 84 billion riyals. Price is only half the sum.
10 Nov 2026 · Emerging markets · Saudi Arabia
Link 2 · Central bankCause
Why the ECB is watching wage deals, not just prices, before December
Lagarde told Japan's Yomiuri Shimbun that inflation will stay high, but that second-round effects are no worse than projected and wage indicators show "no evidence of a shift yet". A December rise is likely unless something changes "significantly".
Christine Lagarde says euro-area inflation will "remain high in the quarters to come", but that the ECB sees no sign yet of the second-round effects it fears most. What decides December is whether higher energy prices start to feed into wages, and wages into everything else.
9 Nov 2026 · Europe · Euro area
External shock → Link 1In the chain
A tense weekend around Hormuz: tanker fires, a wider US blockade
Iran's Revolutionary Guards said three tankers caught fire on 8 November after using routes it calls illegal; a tanker fire off Oman was also reported. The US extended its blockade campaign to Iran's land borders and the Caspian Sea. Brent ended last week near $100.
Over the weekend, Iran said tankers hit mines in the Strait of Hormuz, the US widened its blockade of Iran to land routes, and Tehran lifted its own limits on missile ranges. Oil markets reopen this week after Brent's 12% weekly fall on hopes of a deal. Why this kind of news moves prices so much.
9 Nov 2026 · Global
Link 5 · Real economyEffect
Europe's shoppers pull back: retail sales fell 0.7% in September
Retail sales volumes fell 0.7% on the month, against a forecast of −0.1%, and rose only 0.4% on the year. Non-food sales fell 1.2% and food 0.3%; spending on fuel rose 1.0%. Germany fell 2.0%, France 0.6% and Spain 0.4%.
Euro-area retail sales fell 0.7% in September, far more than expected, led by a 2% drop in Germany. Spending on non-food goods fell 1.2%. With inflation at 4%, higher energy bills leave households less to spend on everything else.
8 Nov 2026 · Europe · Euro area · Germany
All news →
Sources and notes
- Asset moves — FRED: OECD share price indices (SPASTT01USM661N, SPASTT01KRM661N), NASDAQ Composite (NASDAQCOM), 10-year Treasury yield (GS10), WTI oil (WTISPLC), Fed major-currencies dollar index (TWEXBMTH), CPI (CPIAUCNS).
- Asset moves — Gold: US Geological Survey, gold price history (annual averages; the $850 daily high of 21 January 1980).
- Oil: spot price of West Texas Intermediate (WTISPLC), monthly averages, via FRED. Posted Gulf prices rose more steeply than this US benchmark in 1973–74.
- US inflation: consumer price index (CPIAUCSL), % change on a year earlier, computed from FRED data. Unemployment: BLS (UNRATE). Federal funds: effective rate, monthly average (FEDFUNDS).
- Dates of events: standard histories of the period, including the Federal Reserve History project. Figures for 2026: our data pages and stories.
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