Oil Shock Redux, We’ve Been Here Before – Lessons from 1979 for Today’s Energy Crisis
In 1979, the Iranian revolution triggered a seismic shock that reverberated through the global economy. As Iran’s oil production collapsed—by some estimates, by as much as 7 per cent of world output—the price of oil soared from $13 per barrel in mid-1979 to $34 per barrel by the early 1980s. The shock was felt the world over, and India was no exception. The country was already struggling to emerge from what has been described as probably the worst 15-year stretch for its economy. The decade and a half from 1962 to 1977 had seen three wars, devastating droughts, a sharp pivot towards socialism, the first oil shock of 1973-74, and a national emergency. The oil shock of 1979-80 pushed inflation to new heights, worsened the country’s balance of payments, and exerted relentless pressure on foreign exchange reserves. India, battered and bruised, was forced to navigate a treacherous economic landscape.
Fast forward to the present. The current conflict in the Middle East, which has sent oil prices soaring once again, has also arrived after a series of severe shocks to the Indian economy over the past decade and a half. From the taper tantrum of 2013, which sent capital fleeing emerging markets, to the shock of demonetisation in 2016, which disrupted economic activity; from the devastation of the Covid-19 pandemic in 2020-21 to the Russia-Ukraine conflict in 2022, which sent energy and commodity prices into a spiral—these back-to-back shocks have been persistently inflationary. They have exerted pressure on the rupee, widened the twin deficits (fiscal and current account), and repeatedly disrupted the country’s growth momentum. India, again, is no exception to the global turmoil.
No matter what their point of origin—whether political upheaval in the Persian Gulf or geopolitical confrontation in Eastern Europe—the reverberations of these crises have been felt the world over. The most recent shocks have caused severe dislocations in real economic activity, which have then spilled over to financial markets, creating volatility and uncertainty. These crises have not only economic consequences but profound political ones as well. In 2022, the surge in energy prices, combined with domestic political turmoil, contributed directly to the fall of the Imran Khan government in Pakistan. If the ongoing conflict in the Middle East continues, and it is of a much higher order of magnitude than the 2022 energy price spike, the damage to countries across the globe could be far greater.
Even the proposed release of 400 million barrels of oil by members of the International Energy Agency (IEA)—equivalent to roughly 20 days of the oil that normally flows through the Strait of Hormuz—has not been enough to calm the markets. This suggests that the market believes the conflict will last longer than the authorities hope, or that the underlying structural constraints that led to this crisis are no longer in place, or perhaps never were. The fundamental energy constraint that has haunted India for decades is unlikely to disappear anytime soon. India imports 85 per cent of its crude oil requirement, 50 per cent of its natural gas needs, and over 60 per cent of its LPG demand. This makes the country exceptionally vulnerable to any disruption in global energy markets, despite the steady and welcome expansion in alternate energy capacity over the past decade. The structural vulnerability remains.
While some economists estimate that the current price shock, when adjusted for inflation, is lower than that during the Iranian Revolution of 1979 or during the peak of July 2008, if the energy market disruptions sustain, the pressure on India will be transmitted through multiple channels, some of which are already becoming painfully evident. Economic activities across the country are being disrupted. Restaurants and hotels, heavily reliant on LPG for cooking, are already feeling the pinch, with reports of closures and reduced operations. Rationing and hoarding will inevitably follow as supply tightens, impacting both households and small businesses. A black market for LPG cylinders is already said to have emerged, a sure sign of distress in the system. Price pressures are already being reported across several commodities, as the cost of energy ripples through the entire economy.
The rupee, already under pressure from capital outflows, will weaken further. Money is already flowing to the safety of the US dollar, a classic flight to safety in times of global uncertainty. And the twin deficits will come under severe strain. The fiscal deficit will take a hit as governments at both the Centre and in the states try to cushion the blow for consumers, compelled by political compulsions to shield the public from the full impact of rising prices. At the same time, a widening current account deficit—driven by the rising cost of oil imports—at a time when capital inflows have already slumped, will make macroeconomic management exceptionally challenging. This is the classic dilemma of an oil-importing nation in a time of crisis. History, it seems, is likely to repeat itself, even if imperfectly.
But there is a crucial difference this time. The pain is now being felt, though not in equal measure, by both the sellers of energy—Iran and the Gulf countries—and the buyers. India is not alone in its suffering. European consumers, already reeling from the energy crisis triggered by the Russia-Ukraine war, will feel the pain of even higher prices. And critically, American consumers will also feel it. The calculus of the conflict, therefore, may be different. In the United States, the cost of gasoline has now crossed $3.5 per gallon, up around 60 cents from just a month ago. This is not an abstract geopolitical issue for American voters; it is a direct hit to their wallets. The economic pain of high energy prices has a way of translating into political pain for the party in power.
Donald Trump, who launched this conflict, is unlikely to want the midterm elections to be held in the shadow of a stock market in the red and oil prices stubbornly above $100 a barrel. His political fortunes, and those of his party, depend on a strong economy. A prolonged war that drives up energy costs and fuels inflation could quickly become politically unpalatable, as the thresholds of pain for ordinary voters are breached. Domestic political compulsions may, in the end, prove more powerful than geopolitical ambitions. There is a limit to how much pain any electorate will endure, especially when the cause of that pain is a war that seems distant and whose objectives are unclear.
The parallels with 1979 are striking, but so are the differences. Then, the crisis was driven by a revolution that was largely outside the control of Western powers. Now, the crisis is a direct result of an attack launched by the US and its allies. The responsibility for ending it lies, in large part, in the hands of those who started it. For India, the path forward is narrow but clear. It must navigate this crisis with the same combination of pragmatic diplomacy, strategic reserve management, and domestic economic prudence that has served it through past shocks. It must continue to diversify its energy sources, accelerate its transition to renewables, and build its strategic petroleum reserves. But in the immediate term, it must also hope that the political calculus in Washington and Tel Aviv shifts towards de-escalation. The alternative—a prolonged conflict that keeps oil prices high and global markets volatile—would be a disaster not just for India, but for the entire global economy. History shows that such shocks can be survived. But they come at a cost, and the cost is always borne, disproportionately, by the most vulnerable.
Questions and Answers
Q1: What was the impact of the 1979 Iranian revolution on the global oil market and on India?
A1: The 1979 revolution caused Iran’s oil production to drop by an estimated 7% of world output, sending oil prices soaring from $13 to $34 per barrel. For India, which was already struggling after a difficult 15-year period of wars, droughts, and the 1973-74 oil shock, this new shock pushed up inflation, worsened the balance of payments, and exerted pressure on foreign exchange reserves.
Q2: What are the “twin deficits” mentioned in the article, and how does an oil shock affect them?
A2: The “twin deficits” refer to the fiscal deficit (the gap between government revenue and expenditure) and the current account deficit (the gap between a country’s exports and imports of goods and services). An oil shock widens the current account deficit because India imports 85% of its crude, making imports more expensive. It also widens the fiscal deficit as governments feel compelled to subsidize fuel to cushion consumers from the full price impact.
Q3: Why has the release of 400 million barrels of oil by IEA members failed to calm the markets?
A3: The article suggests that the market believes the conflict will last longer than authorities hope. The release, equivalent to only about 20 days of the oil that normally flows through the Strait of Hormuz, is seen as insufficient to offset a prolonged disruption. It signals that the market doubts the underlying structural constraints that led to the crisis have been resolved.
Q4: How does the article argue that the political calculus of the conflict might change, particularly in the US?
A4: The article argues that rising oil prices directly hurt American consumers, with gasoline prices having risen by 60 cents a gallon in a month. President Trump is unlikely to want to face midterm elections with a weak stock market and oil above $100 a barrel. Domestic political compulsions may therefore push him to seek de-escalation, as the political pain of high energy costs may outweigh the perceived benefits of the war.
Q5: What structural vulnerability does India face that makes it particularly susceptible to oil shocks?
A5: India’s structural vulnerability is its heavy dependence on imported energy. The country imports 85% of its crude oil requirement, 50% of its natural gas needs, and over 60% of its LPG demand. Despite steady expansion in alternative energy capacity, this fundamental import dependence remains, making India exceptionally vulnerable to any disruption in global energy markets.
