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The 1979 oil crisis & the Iranian revolution

Squared Direct | Jun. 27, 2019
The 1979 oil crisis & the Iranian revolution

June 27, 2019, | SQUARED DIRECT - The Iranian revolution was a series of events that ended the secular totalitarian regime of the Shah, also known as the ‘ancien regime’ and replaced the Shah with Ayatollah Khomeini.

 What really caused the Iranian revolution is still a matter of debate between historians with some claiming that it was related to resisting a forceful westernization, modernization, and secularization of Iran while others cite a reaction of the people against the social injustice of the regime and its other failures.   

1979 was a year in turmoil for the oil industry and the global economy. The Iranian Revolution caused the second oil shock which changed the course of geopolitics, global power balance and shook the oil markets much like the first oil shock of 1973.  

 The 1979 oil crisis chronology of events

  • Shah of Iran, Mohammad Reza Pahlavi, establishes the Bakhtiar government to preside him until the unrest subsides and leaves for Egypt on January 16, 1979.
  • On the 20thof January, Saudi Arabia announces an unexpected cut during the first-quarter production, imposing a ceiling of 9.5 million barrels, leading the price of Middle-Eastern crude to rise about 36 percent. The same day, a massive march of one million Iranians demonstrated in support of Ayatollah Khomeini,
  • By February 12th Bakhtiar resigns as prime minister after he loses the support of the Iranian military.
  • On March 5th, Iran starts to export oil again.
  • On April 1st, OPEC makes a 14.5 percent increase to the price of oil, raising crude to $14.56 per barrel.
  • OPEC raises prices again on July 1stto about 15%.
  • On November 4th, Iran takes hostage 52 American diplomats.
  • On November 12thUS President Jimmy Carter orders embargo on Iranian oil imports to the US
  • On November 15thIran cancels all US oil company contracts
  • On December 13thSaudi Arabia raises the price of crude to $24 per barrel

The outcome of the oil crisis

Global oil output had decreased to around 4% because of the Iranian Revolution and panic drove the price to more than double at $39.50 per barrel. This Event shaped geopolitics, power balance and global economy like the impact of the 1973 oil crisis, known historically as the Arab Oil Crisis.

Initially, other OPEC members had benefited from the crisis because of lower and inconsistent Iranian oil production. Saudi Arabia and other members had increased productivity but eventually, OPEC lost global influence with a further 10% percent decline in global oil production by 1980.  

In the US panic buying ensued with long lines appearing at gas stations, something reminiscent of the first oil shock of 1973. President Carter in his “Crisis of Confidence speech” declared the oil crisis as the “moral equivalent of war.”

President Carter attempted to deregulate the market by removing price controls that had been implemented by the previous administration to counter the first oil shock in 1973, managing to keep the price of oil at $6 domestically while it was more than $30 globally.

Gas rationing was proposed by some politicians and some states implemented odd-even gas rationing policies. Coupons for gas rationing were printed but were never actually used during the 1979 oil crisis.  President Carter also said he would impose a ‘windfall profit tax’ on the oil industry to boost the economy. By 1980, the US Government had established the Synthetic Fuels Corporation tasked with producing an alternative to imported fossil fuels.

In other oil-consuming nations with heavy industries, the high oil prices of the 1970s had forced them to move towards less OPEC oil dependence. By the end of the 70s electricity production was switched from coal to oil, natural gas and nuclear power and commercial exploration took advantage of large non-OPEC oil fields in Siberia, Alaska the North Sea and the Gulf of Mexico. Like the US other developed countries had also invested heavily in finding synthetic or other alternatives to fossil fuels. By 1986 daily global demand for oil dropped down by 5 million barrels while non-OPEC oil production rose to an even higher number.

Who benefited from 1979 oil crisis?

  • The Soviet Union became the world’s top oil producer
  • The North Sea and Alaskan oil flooded the market
  • Mexico, Nigeria, and Venezuela had increased production
  • Japanese car industry rose to competitive levels internationally

The year after the crisis

  • 1980 Iran-Iraq war, oil production in Iran declined to almost zero and Iraq’s oil production was severely affected as well
  • The recession was triggered in the US Economy
  • OPEC loses influence

During the 1980s global oil production enters its first ‘glut’ phase, meaning a period of an overflow of oil supply and lowered global demand. In our next article, we will be exploring the 1980s oil glut and its effects on the global oil industry and markets.  

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