The 1973 Oil Shock and the Birth of Stagflation

In October 1973, members of the Organization of Arab Petroleum Exporting Countries announced an oil embargo targeting the United States and other nations that had supported Israel during the Yom Kippur War. The embargo, combined with production cuts, sent crude oil prices climbing from around three dollars a barrel to nearly twelve dollars within a few months.

The impact on Western economies, heavily dependent on cheap oil to power industry and transport, was immediate and severe. Fuel shortages led to rationing and long queues at petrol stations in several countries, while the sharply higher cost of energy fed directly into the price of nearly everything else in the economy.

What made the episode particularly disorienting for economists at the time was the combination of outcomes it produced: high inflation alongside weak economic growth and rising unemployment. Mainstream economic theory of the period, built around the idea of a stable trade-off between inflation and unemployment, struggled to explain how both could rise together.

The term 'stagflation' entered common use to describe this combination, and the episode is widely credited with accelerating a shift in economic thinking away from the prevailing Keynesian consensus and toward monetarist ideas that placed more emphasis on controlling the money supply to manage inflation.

The shock also reshaped energy policy for decades. Western governments invested heavily in energy efficiency, alternative energy sources and strategic oil reserves, while the episode marked the moment OPEC nations became recognised as a decisive force in global economic and geopolitical affairs.