Chapter 33: The Second Shock: The Great Panic

The enormous amount of money flowing into Iran caused inflation, waste, and corruption, which generated economic hardship and social and political tensions in Iran. Much of Iran, therefore, began to resent modernization, and instead preferred the traditional Islamic teachings. This was the onset of the collapse of the “westernized” version of Iran. But because they were such a key player in the oil market, “what happened in Iran didn’t stay in Iran.”

This Iran issue helped lead to another oil shock. With Iranian oil off the market, other sources increased their production, but an actual shortage existed, and this helped to create the Second Oil Shock. For example, oil prices went from $13 to $34 a barrel, resulting in huge changes in the world economy and global politics. Panic ensued. The panic resulted from a number of reasons: the growth of oil consumption and its impact on the market, disruptions of contractual agreements and breaking of the industry vertical integration and creating new buyers, the inconsistent and contradictory policies of the industrial nations, the oil exporters taking advantage of any opportunity to increase rents, and the power of pure emotions (uncertainty, anxiety, confusion, fear, and pessimism). The buyers, for fear of a repeat of the oil shock in 1973, worsened the shortage by buying and storing the oil even though it was expensive to hold the oil in inventories as insurance against price and shortage. This, obviously, led to further increases in the price of oil.

Nuclear had become a major alternative source of power to many industrial countries after the Suez Crisis and the first oil shock. Unfortunately, in late March 1979, part of the Three Mile Island nuclear plant near Harrisburg, Pennsylvania malfunctioned from a pump and valve failure. The accident limited the public interest in the nuclear option, and the cost and uncertainty of alternative energy also increased and contributed to the gloom, pessimism, and fatalism in the Western world. While, previously, the industrial countries had been able to obtain both low-priced oil and guaranteed secure supplies, now these two objectives had become contradictory, and governments ended up pursuing the latter.

Gasoline lines, the nightmare of 1973, re-emerged in the US during the Second Oil Shock. The US was caught in a gasoline shortage, and ineffective US policy made matters worse. Price controls limited conservation, and the gas lines essentially led to rationing and created more gas lines. The blame fell on President Carter, and his approval rating fell to as low as 25%. Oil companies once again became public enemy #1.

The gas lines and the Iran hostage crisis helped to bring down Jimmy Carter - and could be a cautionary tale for the Biden Administration in the current geopolitical energy landscape, mainly with the conflict in Eastern Europe. In April 1979, Carter announced decontrol of oil prices (which angered liberals who blamed oil companies). He also imposed a “windfall profits tax” on “excess” oil earnings (which angered conservatives who blamed government regulation and intervention). Thus, the new policy only intensified the barrage. Carter made a series of other mistakes that alienated people on both sides of the aisle as well as the general public. His actions also caused doubt and uncertainty in other countries about the stability and practicality of US policy.