1979 Energy Crisis

The 1979 energy crisis, the second of two oil-price shocks in the '70s, resulted in a widespread panic about potential gasoline shortages, and far higher prices for both crude oil and refined products. Oil output declined by only 7% or less, but the short-term supply disruption led to panic buying and long lines at gas stations. 

Several states passed state-mandated gasoline rationing including California, New York, Pennsylvania, Texas and New Jersey. In these populous states, consumers could only purchase gas every other day, based on whether the last digit of their license plate numbers was even or odd. 

The 1979 energy crisis occurred when the global supply of crude oil declined notably in the aftermath of the Iranian Revolution, which started in early 1978 and ended in early 1979 with the fall of Shah Mohammad Reza Pahlavi, the state’s monarch. Short-run disruptions in the global supply of gasoline and diesel fuel were particularly acute in the spring and early summer of 1979. In the U.S., the gasoline shortage also led to fears that heating oil might be in short supply in the winter of 1979-80. This prospect was especially concerning for New England states, where demand for home heating oil was the highest.

It would be erroneous, however, to blame the crisis solely on the fall of the Shah. Notably, the U.S. faced more-acute pain from the crisis than other developed countries in Europe which also depended on oil from Iran and other Middle East countries. Part of the reason behind the crisis had to do with fiscal policy decisions in the U.S.

In the U.S. in early 1979, the government regulated oil prices.  The regulators ordered refiners to restrict the supply of gasoline in the early days of the crisis to build inventories. This constrained supply directly contributed to higher prices at the pump. Also playing a role was an unintended supply restriction resulting from the Department of Energy’s (DOE) decision to make a handful of large U.S. refiners sell crude to smaller refiners who could not find a ready supply of oil. Unfortunately, the smaller refiners had limited production capabilities, which further delayed gasoline supply.

Monetary policy leading up to the crisis also seemingly played a role to a degree, with the Federal Open Market Committee’s (FMOC) reluctance to raise target interest rates too quickly contributing to rising inflation late in the decade. The jump in inflation resulted in higher prices for energy and a range of other consumer products and services.

Amid the crisis, consumers were actively encouraged by politicians to conserve energy and limit unnecessary travel. In subsequent years, the 1979 crisis led to the sale of more compact and subcompact vehicles in the U.S. These smaller vehicles had smaller engines and provided better fuel economy. Utility companies worldwide sought alternatives to crude oil generators. These alternatives included nuclear power plants, and governments spent billions on the research and development of alternative fuel sources. As a result of these combined efforts, daily worldwide oil consumption declined in the six years following the crisis. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) global market share fell to 29% in 1985, down from 50% in 1979.

(For related reading, see: How Does Crude Oil Affect Gas Prices and Peak Oil: What to do When the Well Runs Dry.)