The Year Global Oil Supplies Fell... By 4%

0:00 In 1979, global oil consumption per capita peaked.

0:03 And even to this day, almost 50 years later, it has never again fully recovered.

0:08 This is an especially shocking statistic when

0:11 you stop to realize that the average person living on Earth today is 500%

0:16 more economically productive than they were back then.

0:19 In plain English, what this means is that since the year 1980,

0:23 our global economy has become six times more fuel efficient,

0:27 which sounds great, but come on, you already know it wasn't diligent,

0:32 long-term planning, or environmental conscientiousness that got us here.

0:36 It was an economic shock so severe

0:38 that it literally reshaped the global economy.

0:41 The oil crisis of the late 70s and early 80s was kicked

0:44 off by a rapid succession of protests and regime change in Iran,

0:47 which was quickly followed by fullcale war across the region.

0:51 The fighting destroyed infrastructure and slowed

0:53 oil exports destined for countries

0:55 in the West that had become very accustomed to having easy energy on demand.

0:59 Prices more than doubled within just a few months.

1:03 And as people panicked to get their hands on fuel for their cars,

1:06 rationing was introduced across the world.

1:07 But cutting off the circulation of oil also impacted far

1:10 more than just the morning commute in 1970s land yachts.

1:13 It was a massive shock to global industry

1:16 that relied on oil to power their machinery,

1:18 fuel their trucks, and produce their chemicals.

1:21 All of these costs were eventually passed along to consumers,

1:25 resulting in some of the highest rates of inflation

1:27 ever seen in advanced economies in modern history.

1:30 Not to mention the most severe economic

1:33 downturn between the GFC and the Great Depression.

1:36 The impacts of what was ultimately

1:38 a short and not even particularly major disruption

1:41 in global oil supplies would also go

1:44 on to echo throughout the decades that followed,

1:47 directly impacting things like the savings and loans crisis of the early

1:51 1990s and of course the wider global industrial landscape of today.

1:55 And well, yeah, that hinted at perhaps the biggest irony of all in this story.

2:00 At the height of the greatest oil crisis in history,

2:04 total oil production was down by less than 5% worldwide.

2:07 Once again, proving that learning from history is easy until

2:11 there is a profit to be made from ignoring it.

2:14 Sum up in the word of one iate motorist,

2:16 the first day of the odd even system was a disaster.

2:20 For the first time since the war with Iran began,

2:23 we've discovered that some South Florida gas stations are running out of fuel.

2:27 You can see the price of unleted tonight is 739.

2:30 That's high enough for any of us who can remember when premium was 279,

2:33 but 739 is not as high as it's going to go.

2:37 The gallon of gas is higher than $4.

2:39 I've been in two gas lines already.

2:42 With war in the Middle East disrupting how the world gets its energy.

2:47 The impact is being felt thousands of miles away.

2:50 This is unreal.

2:51 Isn't this disgusting?

2:52 Why doesn't anybody contact the president?

2:54 Why is he letting this happen to us?

2:58 Now to understand how we got here,

3:00 we need to understand just how dependent the world

3:03 was on cheap oil when heading into the late 1970s.

3:06 The world today still cannot function without a steady flow

3:09 of the easy ondemand energy that comes from fossil fuels.

3:13 But before the 1980s,

3:14 this dependency was even greater both for households and the wider economy.

3:19 Cars at the time were enormously inefficient.

3:22 The average American vehicle in the mid

3:24 1970s got somewhere around 13 m per gallon,

3:27 which for Earth's metric people is roughly 18 L per 100 km.

3:32 And nobody cared.

3:33 Petrol was so cheap that fuel economy

3:35 wasn't even a consideration when buying a car.

3:37 Americans in particular had spent two decades falling in love with enormous

3:41 V8 engines and land yacht sedans that weighed more than some small boats.

3:45 The idea of buying a smaller car

3:47 to save on fuel would have been genuinely laughable.

3:50 We're talking about a country where the Cadillac

3:52 Elorado had a 500 cubic in engine, the largest production that V8 ever made.

3:57 It produced roughly 190 horsepower and got about 8 m per gallon.

4:02 And this dependency on massive fuel inefficient vehicles

4:05 became baked into the very structure of American society.

4:08 The entire highway system had been built around

4:11 the assumption that fuel would remain cheap and plentiful forever.

4:14 Suburbs had been designed for car-based commuting with residential

4:18 areas situated miles away from employment centers and commercial districts.

4:22 Without cheap petrol,

4:23 the whole suburban model started to become economically unsustainable.

4:26 But it wasn't just cars.

4:28 The whole world had truly embraced petrochemicals.

4:30 Heavy industry was a far bigger share of overall GDP than it is today,

4:35 where services and technology have largely taken over.

4:38 Everything from manufacturing to agriculture

4:40 to power generation was built around

4:42 the assumption that oil would remain cheap and plentiful basically forever.

4:47 Plastics, fertilizers, synthetic fabrics,

4:49 pharmaceuticals, road surfaces, heating fuel,

4:51 the list of things derived from or powered by oil was so long

4:55 that most people didn't even realize how

4:57 much of their daily life depended on it.

4:59 Farmers needed oil for the tractors, oil-based fertilizer for the crops,

5:03 and diesel for the trucks that took those crops to market.

5:07 A factory needed oil to power its machinery,

5:09 heat its buildings, and transport its finished goods.

5:11 Even the food on our plates had been touched by oil

5:15 at basically every step between the ground and your kitchen.

5:17 And for a while, the assumption that cheap

5:19 oil would last forever seemed pretty reasonable.

5:21 But while the rest of the world was getting more and more addicted to oil,

5:26 America's own domestic production had actually peaked back in the early

5:29 1970s and was on its way back down again.

5:32 This is something called peak oil and it's worth explaining

5:35 briefly because it matters for the rest of the story.

5:38 Oil production in any given region follows a rough bell curve.

5:42 You find the easy stuff first.

5:44 Production climbs and then as the reserve depletes, you have to drill deeper,

5:48 work harder, and extract lower quality crude that costs more to refine.

5:53 By the early 1970s, America had passed the top of that curve.

5:57 harder to extract, lower quality domestic

5:59 crude was slowly being replaced by nice, cheap Middle Eastern oil,

6:04 and nobody seemed particularly concerned about what

6:06 might happen if that supply was ever disrupted.

6:08 This is one of those things that is incredibly obvious in hindsight,

6:12 but at the time, the logic sort of made sense.

6:15 Why would you spend more money drilling for worse oil at home when

6:18 you could buy better oil from abroad at a fraction of the price?

6:23 Well, because it meant that you were handing a lot of economic leverage

6:27 to a part of the world that had

6:29 some very strong opinions about your foreign policy.

6:31 But it wasn't just America.

6:33 Western Europe was even more dependent on Middle

6:36 Eastern oil than the United States was.

6:38 Countries like France, Germany,

6:39 and Italy imported the vast majority of their oil from the Persian Gulf region.

6:43 And unlike America, they didn't even have

6:46 significant domestic reserves to fall back on.

6:48 This created an interesting transatlantic tension.

6:51 America's foreign policy in the Middle East was shaped

6:54 heavily by cold war priorities and its relationship with Israel.

6:58 But European countries who are far more exposed to Middle

7:02 Eastern oil supplies often wanted a very different diplomatic approach.

7:06 The energy dependency made everyone vulnerable.

7:08 But it made them vulnerable in different ways.

7:10 Now if we are being completely accurate,

7:12 the 1979 oil crisis was actually the second major oil disruption of the decade.

7:18 The first happened in 1973 and it was tied directly to the Yam Kipper war.

7:23 A group of oil producing nations from the Arabian Peninsula attempted an embargo

7:27 of oil shipments to countries that had supported Israel during the conflict.

7:31 And well, it didn't really work.

7:34 Financial historians have generously called the oil embargo a non-event because

7:38 it was only conducted by a few countries on a few countries,

7:43 so it was extraordinarily easy to get around.

7:46 While the embargo itself wasn't all that effective

7:49 in terms of actually cutting off supply,

7:51 it sent a very clear signal about who had the leverage.

7:54 That's because OPEC, the organization of the petroleum exporting countries,

7:59 watched this whole thing play out and realized something important.

8:03 Oil prices adjusted for inflation had actually been

8:05 falling since the end of the Second World War.

8:08 The stuff was getting cheaper in real terms,

8:10 but the countries sitting on top of the biggest reserves

8:13 in the world were not getting their fair share of the value.

8:16 So they did what any rational cartel would do.

8:19 They raised prices.

8:20 Since OPEC had enough market dominance to control the global supply,

8:24 they were able to almost triple the price of oil worldwide,

8:28 and there wasn't much anybody else could do about it.

8:31 Now, it would be easy to frame this as simply

8:34 greedy oil states trying to squeeze the West.

8:36 But the reality is a lot more complicated than that.

8:39 These were developing countries that had watched Western oil

8:41 companies extract their most valuable natural resource for decades.

8:45 And while paying them pennies on the dollar for the privilege,

8:48 the price correction was overdue, even if the timing was terrible.

8:52 The 1973 crisis did cause some economic pain,

8:54 and it did serve as a warning about what could

8:58 happen when your entire economy depends on energy you don't control,

9:01 but the warning was largely ignored.

9:03 Oil prices settled at their new higher levels.

9:06 Some people grumbled about it.

9:08 A few concerned voices pointed out that this could happen again,

9:11 but the world adapted to the higher prices fairly quickly

9:14 and went right back to consuming oil as if nothing had changed.

9:17 Now, some governments did try to respond.

9:20 The United States introduced a national 55 mph speed limit to conserve fuel.

9:27 President Nixon launched Project Independence,

9:29 a grand plan aimed at achieving American energy self-sufficiency by 1980.

9:34 Various conservation efforts were initiated across the developed world.

9:37 But as soon as oil prices stabilized and the acute panic faded,

9:40 all of those efforts largely fizzled out.

9:42 The 55 mph limit became a speed bump that drivers found ways around.

9:47 Project independence was quietly abandoned when the political will evaporated.

9:50 The moment the immediate crisis wasn't staring everyone in the face,

9:54 the world went back to business as usual.

9:56 We've made videos before about how people and governments have

9:59 a remarkable talent for ignoring warning

10:02 signs when the alternative is inconvenient,

10:04 and this was one of the better examples.

10:06 But the first crisis was really just the warm-up act.

10:09 The main event came in 1979.

10:11 The second oil crisis is the one that most people remember.

10:16 Even though in absolute terms,

10:17 oil prices nearly doubled compared to the near tripling from the first crisis.

10:22 This time the trigger wasn't an isolated and largely ineffective embargo.

10:27 It was a revolution.

10:29 The Iranian revolution of 1979 ousted the sha of Iran,

10:33 a westernbacked authoritarian who had been

10:35 keeping the country stable for decades, depending on your definition,

10:38 and replaced him with the theocratic government

10:41 that has ruled the country ever since.

10:44 Now, the char Iran had been one of the West's closest allies in the Middle East.

10:48 America in particular had invested heavily in propping up his regime,

10:52 providing military equipment, intelligence support,

10:54 and diplomatic cover in exchange for reliable oil

10:57 exports and a strategically positioned ally in the region.

11:00 The problem was that a lot of ordinary Iranians absolutely despised the sha.

11:05 His secret police known as Savak were notorious for their brutality.

11:10 Wealth inequality in the country was staggering

11:12 and the rapid westernization that the sha

11:14 had pushed was deeply unpopular with a large portion of the population.

11:19 So when the revolution came, it came hard.

11:22 Millions of people took to the streets.

11:24 The sha's military, one of the largest and most well equipped in the region,

11:28 thanks largely to American arm sales, initially tried to suppress the protests,

11:32 but the scale of public anger was simply too great.

11:35 By January of 1979, the sha had fled the country

11:39 and Ayatollah Kmeni returned from exile to establish the Islamic Republic.

11:44 The speed of the collapse shocked Western intelligence agencies.

11:47 The CIA had reportedly been telling the White

11:51 House just months earlier that Iran was stable.

11:53 It was one of the most consequential intelligence failures of the Cold War.

11:57 But the revolution didn't just oust the sha,

12:00 it also created one of the most dramatic diplomatic ruptures in modern history.

12:04 52 American embassy staff were taken hostage and held for 444 days,

12:09 becoming a constant reminder of the broken relationship

12:12 between the United States and the new Iranian government.

12:15 This hostage crisis consumed American attention,

12:18 poisoned any chance of diplomatic negotiation over

12:21 the oil situation and made it essentially

12:24 impossible to work towards any kind of peaceful

12:27 resolution to the chaos engulfing the region.

12:29 Iran at this time wasn't just any oil producing country.

12:32 It was one of the biggest exporters in the world and its

12:36 oil infrastructure was almost entirely managed

12:38 through the National Iranian Oil Company,

12:41 a state-owned enterprise that was itself the successor

12:44 to the Westernowned Anglo Persian Oil Company.

12:47 Now, despite being a national oil company,

12:50 NIOC was still largely managed by a consortium of for-profit

12:54 oil companies back in the West at the time.

12:58 Western engineers, Western managers, Western expertise running Iranian wells.

13:03 This was a pretty common arrangement across the Middle East,

13:05 and it tells you something important

13:07 about how these relationships actually worked.

13:09 The countries owned the oil on paper, but the knowledge of how to get it out

13:14 of the ground efficiently was kept firmly in Western hands.

13:16 So, when the revolution happened, the new government nationalized the facilities

13:20 and expelled the western personnel working on them.

13:24 Without this expertise,

13:25 Iran struggled to maintain consistent production quality and outputs.

13:28 Wells that had been running smoothly

13:31 under foreign management were suddenly being operated

13:33 by people who hadn't been trusted with the knowledge of how to do it properly,

13:37 which is itself a pretty damning

13:39 indictment of how colonial resource extraction tends

13:41 to leave countries worse off even after

13:44 they take back control of their own resources.

13:46 And it wasn't just a management problem.

13:49 No major international oil company was exactly lining up to do

13:52 business with the same government that had just seized their infrastructure.

13:55 Iran went from being one of the most integrated oil producers

13:58 in the global market to being essentially cut off from it overnight.

14:02 But the disruption didn't stop there.

14:04 In September of 1980, Iraq invaded Iran, kicking off the Iran Iraq war,

14:09 a brutal 8-year conflict that further

14:11 devastated oil infrastructure across the region.

14:14 Between the two countries, millions of barrels of daily production capacity

14:17 were taken offline as refineries were bombed, pipelines were destroyed,

14:20 and shipping routes through the Persian Gulf became active war zones.

14:24 The Iran Iraq war is one of the deadliest conflicts since

14:27 World War II with estimates of over a million casualties combined.

14:32 It gets remarkably little attention in the West relative to its scale,

14:36 which probably tells you something about

14:37 which wars we consider worth remembering.

14:39 But what many people don't realize is that the war also involved a phase known

14:44 as the tanker war where both Iran and Iraq

14:47 targeted oil tankers moving through the strait of Hormuz.

14:50 Commercial vessels carrying oil from other

14:53 producers in the Gulf found themselves in the middle of a military

14:57 conflict with both sides attacking shipping indiscriminately.

15:00 This made the straight of Hammuz one of the most

15:02 dangerous shipping routes in the world and everyone

15:05 transporting oil through it had to pay a war

15:08 risk insurance premium on top of already elevated oil prices.

15:11 Every barrel of oil that passed through that choke point was

15:15 now carrying the literal cost of warfare built into its price.

15:19 A fun little historical footnote in all of this.

15:22 Both the National Iranian Oil Company and the Anglo

15:25 Persian Oil Company are still around today.

15:28 NIOC is still officially Iran's state oil

15:31 company despite the rather dramatic shakeup in 1979.

15:34 And the Anglo Persian Oil Company, well,

15:36 it changed its name a few times over the years.

15:39 First to the Anglo Iranian Oil Company,

15:41 then to British Petroleum, or as we know it today, BP.

15:45 So the next time you fill up at a BP station,

15:48 just know that the company's origin story involves a lot more geopolitics than

15:51 you might expect from a place that sells overpriced snacks and car washes.

15:56 What was about to unfold in the Middle East would

15:59 see Americans queuing for hours just to fill their tanks.

16:02 Western governments scrambling to ration fuel

16:05 and an inflationary spiral so severe that it would

16:09 eventually take the most aggressive monetary intervention

16:11 in modern history to bring it under control.

16:14 And by the time the dust settled, the entire political and economic landscape

16:19 of the Western world had been permanently redrawn.

16:22 So, it's time to learn how history works and to see how a relatively

16:27 small disruption in global oil supply

16:29 managed to reshape the entire world economy.

16:32 If you're not getting enough existential dread from these videos,

16:36 Compounded Daily will blast it straight into your inbox every morning.

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16:57 All right, so here's where this story

17:00 takes a turn that's almost comically frustrating.

17:02 Because despite all of this chaos, the revolution, the war, the nationalization,

17:06 the expelled engineers, global oil supplies did not actually fall that much.

17:12 By most estimates, the total reduction

17:14 in worldwide oil production was less than 4%.

17:18 Other oil producing countries simply ramped up their own

17:22 output to take advantage of the higher prices.

17:24 That's the thing about commodities.

17:26 When prices go up, everybody with supply rushes to cash in.

17:29 But it didn't matter.

17:30 What followed was one of the most spectacular

17:33 examples of collective panic in modern economic history.

17:37 Everybody from panicked motorists to major industrial companies to speculative

17:42 traders bought up whatever oil they could get their hands

17:46 on in anticipation of supply constraints and price increases that in many

17:50 cases never actually materialized to the degree that people feared.

17:53 Ironically, it was this panic buying that actually

17:56 limited supply and drove prices through the roof.

18:00 The crisis wasn't caused by a shortage of oil.

18:03 It was caused by a shortage of confidence.

18:05 In the United States, this played out in the most visible way possible.

18:09 Lines at petrol stations stretched for blocks.

18:11 Some stations ran out entirely and just closed.

18:14 In states across the country, governments introduced odd even rationing,

18:17 meaning you could only fill up on certain days depending on whether

18:21 your license plate ended in an odd number or an even number.

18:24 There were fist fights at pumps.

18:26 People started carrying siphon hoses in their cars.

18:29 Petrol theft became so common that locking gas

18:32 caps became a standard feature on new vehicles.

18:34 In some cities, the National Guard was

18:37 deployed to maintain order at filling stations.

18:39 Gas station attendants started working behind locked doors.

18:42 The price of oil had become a national

18:45 security issue playing out at the neighborhood level.

18:48 News broadcasts every evening led with the price of oil

18:51 in the same way they lead with the stock market today.

18:54 It became the single metric that defined whether

18:56 the country was doing well or doing badly.

18:59 And for months, it was doing very badly indeed.

19:02 And if that sounds dramatic for a 4% supply reduction, that's exactly the point.

19:07 President Carter appeared on television urging Americans to turn

19:11 their home thermostats down to 65° F to conserve energy.

19:15 Highway speed limits were enforced with unusual strictness,

19:19 and traffic enforcement actually became a tool of energy policy.

19:23 In some cities, petrol stations opened at 5 in the morning only to find cues

19:28 of 200 plus cars with the station's

19:30 entire daily allocation sold out by 7:00 a.m.

19:33 People were waiting 3, four, sometimes 5 hours in line just to fill a tank.

19:38 And that was if they were lucky enough to be there

19:41 on the day when their license plate number was allowed to buy.

19:45 But even if the underlying supply disruption was relatively modest,

19:49 the damage it caused was very real.

19:51 Oil at this time wasn't just an important commodity.

19:54 It was the commodity.

19:56 It literally fueled every part of the economy.

19:59 And this was especially true in the late 1970s when heavy

20:02 industry still dominated in a way that it simply doesn't anymore.

20:06 So when the price of oil doubled,

20:08 the price of basically everything else went up with it.

20:11 Fuel for trucks meant more expensive deliveries.

20:13 Oil for factories meant more expensive goods.

20:16 Prochemicals for plastics and fertilizers meant higher costs across industries

20:21 that most people don't even think about when they think about oil.

20:24 And if that sounds familiar, it should.

20:27 We've seen this exact same dynamic play out with everything

20:30 from toilet paper to semiconductor chips in recent memory.

20:33 Human nature doesn't change.

20:34 It just finds new things to hoard and new supply chains to panic about.

20:40 Now, this is where the real economic damage

20:43 started to compound because workers at this time, and this part is important,

20:47 still had strong union representation across most of the developed world.

20:51 And those unions did exactly what they were supposed to do.

20:54 They demanded higher wages to account for the higher costs of living,

20:59 which is perfectly reasonable,

21:01 except businesses responded by raising their prices even further

21:04 to cover the increased cost of paying their workers more.

21:08 And because consumers had more money from the wage increases,

21:11 businesses could actually get those higher prices because

21:14 people could technically still afford to pay them.

21:17 This created something called a wage price spiral.

21:20 And it is one of the most terrifying feedback loops in all of macroeconomics.

21:25 Prices go up, so wages go up, so costs go up,

21:29 so prices go up, so wages go up, so costs go up.

21:32 And the whole thing just keeps feeding itself with no natural end point.

21:36 Now, you might be wondering,

21:38 couldn't central banks have just stepped in and fixed all this?

21:41 Well, they certainly tried.

21:42 But the problem with a wage price spiral is that the standard tools of monetary

21:47 policy are a bit like trying to put out a grease fire with water.

21:51 It makes intuitive sense until you realize you're actually making it worse.

21:55 Raising interest rates, the go-to move for fighting inflation,

21:59 works by making borrowing more expensive, which slows down spending.

22:03 But it also slows down businesses,

22:05 which slows down hiring, which means fewer jobs,

22:09 which means less spending power for the very workers whose

22:12 wages were supposed to be keeping up with rising prices.

22:15 Lower interest rates would help businesses hire more people,

22:19 but it would also make borrowing easier,

22:21 which would dump more money into an economy

22:24 that was already overheating with inflation.

22:26 There was no good option, only less bad ones.

22:30 The result was something that most economists

22:33 at the time believed was basically impossible.

22:37 Stagflation.

22:38 High inflation and high employment and low economic growth all at the same time.

22:44 This was the macroeconomist's nightmare scenario.

22:47 The conventional wisdom up to this point said

22:50 that inflation and unemployment moved in opposite directions.

22:53 A relationship that economists had even given a name to the Philips curve.

22:57 When prices are high, demand is high, so businesses hire more people.

23:02 When unemployment is high, demand is low, so prices should fall.

23:06 But the oil crisis broke that logic completely.

23:09 Prices were being driven up not by strong demand

23:12 but by supply shocks and the panic that followed.

23:15 There was no extra demand to create jobs, just extra costs destroying them.

23:20 For ordinary people, this was devastating.

23:22 Your groceries cost more, petrol costs more, your heating bill costs more.

23:26 And on top of all of that, there was a real chance you might

23:30 lose your job because the company you

23:31 worked for couldn't afford its own energy costs.

23:34 It was the economic equivalent of being punched from every direction.

23:37 This period also shattered the intellectual consensus

23:40 that had dominated economic thinking since the 1940s.

23:44 Keynesian economics,

23:45 the idea that governments could manage the economy through spending

23:49 and monetary policy had been the bedrock of postwar economic management.

23:53 But stagflation wasn't supposed to be possible under Keynesian models.

23:57 The failure of established economics to predict or fix

24:00 stagflation opened the door to new schools of thought.

24:04 monetarism, supply side economics, the Chicago school,

24:07 ideas that would go on to reshape economic policy for the next 40 years.

24:12 Whether those ideas were actually better is still hotly debated.

24:15 But the point is that the oil crisis didn't just break the economy,

24:19 it broke the framework we used to understand the economy.

24:22 And on top of that, the inflation and the unemployment.

24:26 Something called the misery index,

24:27 the simple sum of inflation rate plus unemployment rate,

24:31 hit its highest point in American history.

24:33 Americans confidence in their economic future created

24:36 to levels not seen since the Great Depression itself.

24:39 People genuinely didn't believe things were going to get better.

24:42 And that psychological collapse was as damaging

24:45 to the economy as the material conditions themselves.

24:48 And there was no easy fix.

24:49 The economic chaos that followed all but guaranteed

24:52 the election of Ronald Reagan in the United States.

24:55 But it wasn't just America.

24:56 Across the developed world, whoever happened to be in charge when the oil

25:00 prices hit was replaced with the other party.

25:03 It didn't even particularly matter how much the sitting

25:06 government actually had anything to do with the crisis itself.

25:09 Voters wanted somebody different and they were going to get it.

25:12 Jimmy Carter in America, James Callahan in Britain, Valer Jesan in France.

25:17 The political casualties of the oil

25:19 crisis stretched across the entire Western world.

25:22 This is a pattern we've seen play out dozens of times throughout history.

25:26 Economic pain leads to political change regardless

25:29 of whether the new people have any better ideas.

25:32 In the USA specifically, inflation had become the problem.

25:36 And because the US dollar was the world's reserve currency,

25:40 there was enormous international pressure to get it under control.

25:44 That was until Paul Vulkar came along.

25:47 Vulkar was appointed chairman of the Federal Reserve in 1979.

25:51 Essentially, he was handed a financial system that was on fire

25:55 and told to do whatever it took to put it out.

25:58 His solution was about as subtle as a sledgehammer.

26:01 He raised interest rates, not by a little bit,

26:04 not by a reasonable amount that might gradually cool things down.

26:09 He raised them to 20%.

26:12 For context, the current rate cycle that most

26:15 people have been complaining about peaked at around 5.5%.

26:19 Vulkus Fed went to 20.

26:21 The man famously said he wanted to break

26:25 the back of inflation and he meant it literally.

26:28 To understand how extreme this was,

26:30 imagine your mortgage payment roughly tripling because the rates

26:34 on your adjustable loan just went from 8% to 20%.

26:38 That's what happened to millions of Americans.

26:41 Now, this worked.

26:42 Eventually, inflation did come down, but the cost was extraordinary.

26:47 By making borrowing that expensive,

26:50 Vulkar essentially forced the economy into a deep recession on purpose.

26:55 Businesses couldn't afford to take on debt.

26:58 Consumers couldn't afford mortgages.

27:00 Construction ground to a halt.

27:02 Unemployment spiked to nearly 11%, the highest since the Great Depression.

27:06 Car dealers and construction workers mailed him 2x4s and car keys

27:10 to protest the fact that their industries had just been crushed.

27:14 Farmers drove tractors to Washington.

27:16 He reportedly received death threats, but he held firm and slowly,

27:21 painfully, the back of inflation was broken.

27:24 Now, most people who know the Vulkar story stop here.

27:29 The brave Fed chairman made the hard call, took the hit, and saved the economy.

27:34 End of story.

27:35 But the thing about Vulkar that doesn't fit

27:37 neatly into the tough leader makes hard choices narrative.

27:40 He was one of the few government officials

27:43 in that entire era who was actually willing to accept being

27:47 despised in the short term to do what he generally

27:50 believed was necessary for the long-term health of the country.

27:54 That kind of willingness to absorb public hatred

27:56 for a principle has become almost unheard of in modern politics,

28:00 where elected officials and appointed technocrats alike seem far more

28:04 interested in smoothing over short-term pain than making difficult choices.

28:08 Vulkar was genuinely hated while he was doing his job,

28:13 and he simply didn't care.

28:15 But it's not the end of the story,

28:17 because 20% interest rates didn't just break inflation,

28:20 they broke a lot of other things, too.

28:23 And this is where one of those long echoing

28:26 consequences of the oil crisis starts to become visible.

28:29 Savings and loans institutions or SNLs as they

28:32 were commonly known were essentially community banks

28:34 that took in deposits from regular people

28:37 and lent that money out as home mortgages.

28:40 Simple boring banking.

28:41 The business model was straightforward.

28:43 Take in deposits at say 5% interest.

28:46 Lend that money out as a 30-year mortgage at 8%.

28:49 Pocket the difference.

28:51 It worked fine as long as interest rates stayed relatively stable.

28:54 But most of these SNLs had locked in long-term mortgages at those lower rates.

28:59 When Vulk had jacked rates up to 20%,

29:02 these institutions suddenly found themselves paying depositors far more

29:05 in interest than they were earning on their existing mortgage portfolios.

29:09 They were losing money on every single account.

29:12 In desperation, many SNLs started making increasingly risky

29:16 investments to try and make up the shortfall.

29:19 lending money to speculative real estate developments,

29:22 commercial ventures, even outright fraud in some cases.

29:26 Congress didn't help.

29:28 In a spectacularly illtimed piece of deregulation,

29:31 they loosened the rules around what SNLs could invest in, essentially handing

29:36 over the matches to institutions

29:38 that were already burning through their reserves.

29:41 The result was this savings and loans crisis of the late 1980s and early 1990s.

29:46 one of the most expensive financial disasters

29:48 in American history up to that point,

29:51 which eventually cost taxpayers over $130 billion to clean up.

29:55 More than a thousand SNLs failed.

29:58 Several executives went to prison, and it all traces back to oil prices in Iran.

30:04 Now, if this sounds like a pattern that should have

30:07 been familiar by the time 2008 rolled around, you'd be right.

30:11 The savings and loan crisis was in many ways

30:14 a dress rehearsal for the global financial crisis two decades later.

30:18 Financial institutions chasing returns to cover losses,

30:22 deregulation removing the safeguards,

30:24 and taxpayers left holding the bill when it all fell apart.

30:27 The specifics were different, but the underlying structure was almost identical.

30:31 All of this was also happening at what might have been

30:35 the worst possible time for the United States and the West more broadly.

30:40 The Vietnam War, which had been lost just 4 years earlier,

30:44 had turned into a costly quagmire that demanded an enormous

30:47 amount of military spending while delivering absolutely nothing in return.

30:52 The war had eroded public trust in the government,

30:55 consumed resources that could have been invested elsewhere,

30:58 divided the country in ways that would take decades to heal,

31:02 and also shook the image of the USA as an unstoppable global force.

31:07 The breakdown of the Bretonwood system in the early

31:10 1970s meant that the United States was no

31:12 longer the deacto center of global trade that it

31:15 had been since the end of World War II.

31:17 There was now genuine uncertainty about

31:20 the reliability of America as a trade partner.

31:23 Most people think of 1971 as just the year Nixon took the dollar off gold,

31:29 but the reality was far more disruptive than that.

31:32 The whole system of fixed exchange rates

31:35 that had provided stability and predictability for decades,

31:38 but was now gone, replaced with floating currencies

31:41 that made international trade more volatile and less certain.

31:45 On top of all of this, America was

31:48 facing rising competition from newly industrializing countries in Asia.

31:52 Japan and South Korea in particular were eating

31:55 into Western dominance in primary industries like steel,

31:59 ship building, and electronics.

32:01 These countries had lower labor costs, newer factories,

32:05 and governments that were actually supporting

32:08 their industrial expansion with subsidies and trade protections.

32:12 For American workers in heavy industry, this was devastating.

32:16 Factories that had employed entire towns for generations were suddenly

32:19 uncompetitive and the jobs that disappeared were not coming back.

32:23 Any one of these problems might have caused a recession eventually on its own.

32:28 The Vietnam spending was unsustainable.

32:29 The Breton Woods collapse was destabilizing.

32:32 The Asian competition was structural.

32:33 But the oil crisis was the perfect catalyst to start the reaction.

32:37 It was the spark that landed in a room full

32:40 of kindling which had been quietly piling up for years.

32:43 Now, if this story so far has been mostly about how everything fell apart,

32:48 the next section is about how the world starting putting

32:51 itself back together in a way that nobody really expected.

32:55 Because by 1982, the problem was almost the opposite

32:59 of what it had been just 3 years earlier.

33:02 The world had a glut of oil.

33:05 Remember all those countries that ramped up

33:07 production to cash in on higher prices?

33:10 Well, they never stopped producing.

33:12 And with global economic activity significantly lower thanks to the recession,

33:17 which Vulkar's interest rates had helped create,

33:20 demand for oil was dropping just as supply was surging.

33:24 The result was a long slow decline back toward precrisis prices,

33:30 not overnights, but steadily over the course of the 1980s.

33:34 Now, this glut actually caused its own set of problems.

33:38 Countries that had based their government budgets on high oil prices,

33:41 particularly in OPEC, suddenly found themselves short of revenue.

33:44 Some of them borrowed heavily to maintain spending,

33:47 setting up debt crises that would play out through the 1980s and 1990s.

33:51 But for the oil importing countries of the West,

33:54 falling prices felt like an enormous relief.

33:57 The higher prices had also done something

33:59 else that people hadn't anticipated at the time.

34:01 They made it economically viable for other

34:04 countries to start exploring their own oil reserves,

34:07 even in locations that had previously been too expensive to develop.

34:10 The North Sea is probably the best example of this.

34:13 Britain and Norway had known about oil reserves under the North Sea for years,

34:18 but the cost of drilling into deep,

34:20 freezing, storm battered waters had made it uneconomical

34:24 compared to just buying cheap Middle Eastern crude.

34:26 But when Middle Eastern crude stopped being cheap,

34:29 suddenly those North Sea wells looked like very attractive investments.

34:33 Britain went from being a net oil importer

34:36 to being essentially self-sufficient in oil by the mid1 1980s,

34:39 which had massive implications for the British economy

34:43 and not coincidentally for Margaret Thatcher's political fortunes.

34:46 Norway, however, took a very different approach to its oil windfall.

34:50 Rather than spending all their revenues

34:53 immediately like other oil producing nations,

34:55 Norway eventually created the government pension fund in 1990.

34:59 Systematically saving oil reserves for future generations.

35:02 While most oil producing nations squandered

35:04 their wealth in a burst of consumption, Norway built a fund that now generates

35:10 hundreds of billions of dollars in annual returns.

35:14 It's one of the rare examples of a country actually learning from the oil

35:18 crisis and making structural decisions

35:19 to insulate itself from future resource shocks.

35:22 The same logic applied to deeper reservoirs,

35:24 oil sands in Canada and fields in West Africa and South America.

35:28 Higher prices didn't just change behavior,

35:31 they changed the geography of global oil production permanently.

35:35 OPEC's share of global oil production actually fell during the 1980s precisely

35:39 because the high prices they had engineered made it profitable for everybody

35:44 else to start producing which is one of those delicious economic ironies

35:48 where trying to maintain a monopoly creates the conditions that destroys it.

35:53 Saudi Arabia in particular found itself in an awkward position.

35:57 As OPEC's largest producer, it had been acting as the cartel's swing producer,

36:03 cutting its own output to keep prices high,

36:06 while other OPEC members cheated on their quotas

36:08 and produced as much as they could.

36:11 By the mid 1980s, the Saudis got tired of being

36:14 the only ones playing by the rules and opened the taps.

36:18 The resulting flood of oil crashed prices even further,

36:21 creating chaos not just in other OPEC nations,

36:23 but also in countries like the Soviet Union,

36:26 whose economy was heavily dependent on oil exports.

36:29 Some historians have argued that Saudi Arabia's decision to crash oil prices

36:33 in the 1980s did more to destabilize

36:36 the Soviet economy than any Western military spending.

36:40 So, the oil crisis essentially created its own solution,

36:43 at least from a supply perspective,

36:45 which is one of those things that sounds reassuring until

36:48 you realize how much damage was done in the meantime.

36:51 But here's where the story gets genuinely interesting,

36:54 because the long-term consequences of the oil crisis were not all bad.

36:59 In fact, some of them might be among

37:02 the most important economic shifts of the 20th century.

37:05 The crisis lived up to its name and generally

37:07 shocked the world into realizing just how catastrophically

37:10 dependent it was on cheap energy to grow its

37:14 economy and people actually started doing something about it.

37:17 Fuel efficiency in cars went from being

37:19 an afterthought to a selling point almost overnight.

37:23 In 1975, the US government introduced calf standards,

37:27 corporate average fuel economy, which for the first time in history

37:31 required manufacturers to meet minimum fuel efficiency targets.

37:34 The average fuel economy of American vehicles

37:37 essentially doubled over the decade following the crisis,

37:40 going from that embarrassing 13 mp gallon we

37:43 mentioned earlier to over 25 by the late 1980s.

37:47 Japanese automakers who had been building smaller,

37:49 more efficient cars for years because Japan had never had cheap

37:53 domestic oil suddenly found themselves with the hottest products in America.

37:58 Toyota, Honda, and Datson went from being curiosities

38:01 to being serious competitors to Detroit's almost overnight.

38:04 It was one of those rare moments where a crisis created a massive

38:08 competitive advantage for the people who had already been doing the right thing,

38:13 even if they were doing it for completely different reasons.

38:16 This shift was so dramatic that it effectively killed the dominance

38:20 of the big three American automakers for an entire generation.

38:23 General Motors, Ford, and Chrysler had spent decades building bigger and bigger

38:29 vehicles because that's what Americans wanted when fuel was cheap.

38:33 When fuel stopped being cheap, they had nothing to offer.

38:36 And by the time they caught up, the Japanese brands had already captured

38:39 a permanent share of the American market.

38:42 Homeowners started insulating their houses,

38:44 replacing old heating systems and paying attention to energy

38:47 costs in a way that they simply hadn't before.

38:50 President Carter literally put solar panels on the White House in 1979,

38:55 which Reagan promptly removed when he took office.

38:58 industry started treating energy inputs as a real

39:00 cost and more importantly as a strategic vulnerability.

39:03 If your business model depended on cheap oil and cheap oil could disappear

39:08 in a matter of months because of a revolution on the other side of the world,

39:12 then maybe it was time to think about plan B.

39:16 Many of those alternative energy efforts evaporated once prices stabilized.

39:19 Carter's solar panel investments were defunded

39:22 almost immediately after Reagan took office.

39:24 Nuclear power expansion plans were abandoned.

39:27 Research into synthetic fuels and other alternatives was

39:30 deprioritized the moment oil stopped being visibly scarce.

39:34 The lesson of the crisis that we needed to diversify our energy sources

39:39 was learned in theory but forgotten

39:42 in practice the instant the financial pain subsided.

39:45 It proved once again that even when a crisis teaches us the right lesson,

39:50 we forget it the moment the immediate danger passes.

39:53 entire governments started building out contingencies.

39:56 Strategic petroleum reserves like the one in the United

40:00 States that holds around 700 million barrels

40:02 today were either created or massively expanded specifically

40:05 in response to the lessons of the late 1970s.

40:08 The International Energy Agency,

40:09 which today coordinates energy policy between major consuming countries,

40:14 was actually founded in 1974, specifically in response to the first oil crisis.

40:18 By the time the second one hit,

40:21 it was already warning governments that they needed emergency stockpiles.

40:24 The idea was simple enough.

40:26 If you can't prevent a supply disruption, at least have enough oil in storage

40:30 to buy yourself time before the panic sets in.

40:33 It was basically a national insurance policy against

40:36 exactly the kind of crisis we've been talking about.

40:39 But perhaps the most profound long-term consequence of the oil

40:43 crisis was one that most people don't immediately connect to it.

40:47 The global economy became far less industrial.

40:50 And to be clear, this wasn't just about energy costs.

40:54 The oil crisis changed the way entire economies thought about risk.

40:58 If your economy was built around heavy industry,

41:01 you were exposed to energy price shocks.

41:03 If your economy was built around services, you were far more insulated.

41:08 Governments and investors started to favor the sectors that were

41:12 less vulnerable to the kind of disruption they'd just lived through.

41:16 Now, the oil crisis was not directly responsible for this.

41:20 The shift towards a service-based economy

41:22 had been happening gradually for decades.

41:24 But the crisis accelerated it enormously.

41:26 Because when you stop to think about it,

41:28 the biggest industries in the world today are not

41:31 really what most people would think of as industrial technology,

41:34 finance, media, and professional services are all far less

41:38 dependent on burning fossil fuels to operate than steel mills,

41:43 car factories, and prochemical plants.

41:45 A tech company's biggest energy expenses are data centers and office buildings.

41:49 A consulting firm's biggest energy expense is business travel.

41:53 A bank's biggest energy expense is keeping the lights on.

41:56 These are all real costs,

41:57 but they're a tiny fraction of what a steel mill or an aluminium smelter uses.

42:01 So, the crisis didn't create the service economy,

42:04 but it made the old industrial economy significantly less competitive,

42:09 significantly faster.

42:10 Companies that could shift toward less energyintensive business

42:14 models had an enormous advantage over those that couldn't.

42:18 And the countries that adapted fastest to this new reality were

42:21 the ones that came out of the 1980s in the strongest position.

42:25 But while the world was shifting away from heavy industry,

42:29 there was a massive social cost that often gets overlooked.

42:32 The rust belt as we know it today.

42:35 Cities like Detroit, Pittsburgh, and Cleveland that had been industrial

42:39 powerhouses was essentially born from this era.

42:42 Manufacturing jobs that had supported an entire generation

42:45 of workers and built the postwar middle class simply vanished.

42:48 Many of these cities that had been

42:51 centers of prosperity became symbols of economic decline.

42:54 And many of them have never fully recovered even decades later.

42:58 The oil crisis didn't just reshape the global economy.

43:02 It left entire regions and communities behind because while the world spent

43:07 four decades reducing its dependence

43:08 on fossil fuels for traditional industrial purposes,

43:11 we might have quietly started building a new one.

43:14 The explosion of cloud computing, artificial intelligence,

43:18 and cryptocurrency mining has created an enormous

43:22 and rapidly growing demand for electricity,

43:24 much of which is being met by natural gas turbines.

43:28 Data centers alone now consume more electricity than some small countries.

43:33 And the largest tech companies are signing deals with power

43:37 utilities that would have been unimaginable even 5 years ago.

43:41 I genuinely hope that doesn't become a problem.

43:44 But if you've been paying attention to the rest of this video,

43:48 you probably already know how that story tends to play out.

43:52 Anyways, now the recovery from the oil

43:54 crisis also had some rather notable political consequences.

43:58 Specifically, it made certain world leaders look really good,

44:01 even when their actual ideas were questionable.

44:04 Ronald Reagan came to office in 1981, right at the peak of the economic pain.

44:09 Inflation was still raging, unemployment was climbing,

44:11 and people were genuinely angry.

44:13 Over the next few years,

44:15 as Vulkar's interest rate medicine worked its way through the system,

44:18 and oil prices gradually fell back to more normal levels, the economy recovered,

44:23 growth came back, inflation dropped,

44:25 people felt better, and Reagan got the credit.

44:29 Was this entirely fair?

44:30 Not really.

44:31 The recovery had more to do with Vulkar's Fed policy,

44:34 which Reagan had nothing to do with, and the natural easing of oil prices,

44:38 which nobody in Washington controlled,

44:40 than it did to any specific policy Reagan implemented.

44:43 But politics is perception,

44:44 and the perception was that Reagan had fixed the economy.

44:48 This is actually a pattern with a name.

44:51 Economists call it attribution bias.

44:53 In political contexts, the tendency for voters to credit or blame whoever is

44:58 in office for economic conditions that are largely outside their control.

45:02 And the oil crisis era might be the single best example of it in modern history.

45:07 Reagan didn't cause the recovery.

45:08 He was simply standing in the right place when it happened.

45:12 But the story of Reagan saved the economy became one

45:15 of the most powerful political narratives of the 20th century.

45:18 This narrative became so powerful that it reshaped

45:21 American economic policy for the next four decades.

45:24 Tax cuts, deregulation, and a general skepticism of government intervention

45:28 became the default approach to economic management.

45:31 Not because they were proven to work in this context,

45:34 but because they happened to coincide with a recovery

45:36 that was mostly driven by completely unrelated factors.

45:39 And this wasn't unique to America.

45:41 Margaret Thatcher in Britain and similar leaders across

45:44 the developed world all benefited from the exact same dynamic.

45:47 The oil crisis created the pain.

45:50 Vulkar style monetary policy and falling oil prices fixed the pain.

45:54 But the politicians who happened to be standing

45:56 there when things got better took the credit.

45:58 But there is something even more unsettling about

46:01 this whole story that we haven't addressed yet.

46:04 If total oil production was only down 4%

46:07 and the crisis still managed to reshape the entire global economy,

46:11 change governments across the western world, create a decade of stagflation,

46:16 trigger a banking crisis, and accelerate the decline of heavy industry,

46:20 then what does that tell us about how

46:22 fragile the systems we rely on actually are?

46:25 The sad truth is that this was largely a crisis

46:28 of human nature rather than a genuine catastrophe of supply.

46:31 The oil was still there.

46:33 The wells were still producing.

46:35 The tankers were still sailing.

46:36 But panic, speculation, and political inaction turned a manageable

46:41 disruption into a decade of economic pain.

46:44 We've actually seen smaller versions of this same

46:47 pattern play out multiple times since.

46:49 The 1990 Gulf War caused a brief oil price spike.

46:53 The 2008 financial crisis saw oil prices swing wildly.

46:56 And of course, the pandemic lockdown of 2020

46:59 temporarily crashed oil prices to negative territory,

47:02 meaning producers were literally paying people to take

47:06 their oil because they had nowhere to store it.

47:09 Each time, the same dynamic plays out.

47:12 A disruption hits, panic amplifies it,

47:14 the consequences ripple outward into parts

47:16 of the economy that seem completely unrelated,

47:19 and then eventually things settle down,

47:21 and everybody goes right back to doing exactly what they were doing before.

47:25 The lesson of the 1979 oil crisis isn't really about oil at all.

47:30 It's about how tightly wound our economic systems

47:33 become when they're built around a single point

47:36 of vulnerability and how a relatively small disruption

47:39 can cascade into consequences that last for decades.

47:42 It's about how panic does more damage than the actual problem in most crises.

47:47 How human nature turns a 4% supply drop into rationing and stagflation.

47:52 and how the political fallout from economic pain

47:55 almost never punishes the people who actually caused it.

47:58 And well, it's also about the fact that we've known all of this since 1979.

48:04 And we keep doing it anyway.

48:06 Not always with oil specifically, but the pattern repeats.

48:10 We build complex, interconnected,

48:12 globalized systems with very little redundancy because

48:15 redundancy is expensive and efficiency is profitable.

48:18 And then we act surprised when a revolution or a war

48:22 or a pandemic exposes the fragility that was there the whole time.

48:26 Supply chains in the 1970s were built around

48:29 the assumption that Middle Eastern oil would flow forever.

48:32 Supply chains today are built around

48:34 the assumption that Taiwanese semiconductors will ship forever,

48:37 that Chinese manufacturing will stay cheap forever,

48:40 that global shipping lanes will remain open forever.

48:43 And the people making the decisions know this.

48:46 They've read the history.

48:47 They've seen the pattern.

48:48 They just don't think it will happen to them.

48:51 Now, if this video made you curious about

48:54 the political fallout from all of this economic chaos,

48:56 especially in the United States,

48:58 we made a whole video about the rise and impact of Ronald

49:01 Reagan that picks up almost exactly where this story leaves off.

49:03 Go check that out if you want to see how the recovery from this crisis

49:07 was used to justify an entire generation

49:09 of economic policy that we're still living with today.

49:12 And don't forget to like and subscribe to keep on learning how history works.