After nearly six weeks, the Iran war has become the most severe disruption to global oil markets in decades. Oil prices have risen by as much as 40 percent, and Iran’s blockade of the Strait of Hormuz has decimated supply, affecting 20 percent of global petroleum consumption and roughly 25 percent of the oil trade by sea. Even with a temporary cease-fire, the damage done so far will have profound, lasting consequences for the global economy.
Some analysts have drawn comparisons of the current moment to the oil crises of the 1970s, which were also driven by geopolitical shocks in the Middle East. The first of these began on Oct. 6, 1973, when Egypt and Syria launched a surprise attack on Israel, prompting the United States to resupply Israeli forces. In response, Arab members of OPEC cut production and imposed an embargo on exports to the United States, the Netherlands, and other countries supporting Israel.
After nearly six weeks, the Iran war has become the most severe disruption to global oil markets in decades. Oil prices have risen by as much as 40 percent, and Iran’s blockade of the Strait of Hormuz has decimated supply, affecting 20 percent of global petroleum consumption and roughly 25 percent of the oil trade by sea. Even with a temporary cease-fire, the damage done so far will have profound, lasting consequences for the global economy.
Some analysts have drawn comparisons of the current moment to the oil crises of the 1970s, which were also driven by geopolitical shocks in the Middle East. The first of these began on Oct. 6, 1973, when Egypt and Syria launched a surprise attack on Israel, prompting the United States to resupply Israeli forces. In response, Arab members of OPEC cut production and imposed an embargo on exports to the United States, the Netherlands, and other countries supporting Israel.
Global shortages and a near quadrupling of oil prices resulted by 1974. A second shock followed in 1979, when the Iranian revolution sharply curtailed output from what was one of the world’s largest oil producers, driving prices up by roughly 250 percent. At first glance, today’s price increases appear relatively modest. But the comparison is misleading: Despite sharing the same epicenter, there are striking differences between the crises.
For one, real oil prices—adjusted for inflation—were far lower at the onset of the 1973 crisis, meaning that today’s 40 percent rise translates into a substantially larger absolute cost shock in U.S. dollar per barrel terms than raw percentages suggest. Moreover, the global economy enters this crisis with already elevated energy costs, leaving households and firms with less room to absorb additional increases than they had five decades ago.
More importantly, the current crisis is unfolding in a fundamentally different global energy system—one in which policymakers have fewer effective tools and where the heaviest burdens will fall on smaller and less developed economies.
A key difference is that unlike in the 1970s, the current conflict in Iran has sparked not only an oil crisis but also a natural gas crisis. Back then, gas markets were essentially regional, while today natural gas is a pillar of the evolving global energy mix and the widely preferred fuel for countries transitioning away from coal. The expansion of liquefied natural gas (LNG) technology has further globalized gas markets: Approximately 20 percent of annual LNG trade passes through the Strait of Hormuz, making it a critical chokepoint in ways that it wasn’t 50 years ago.
Geographic exposure has also shifted dramatically. In the 1970s, Europe and North America were the world’s industrial and consumption centers and bore the brunt of the shock. Today, Asia is more exposed, especially as China has become the hub of global industrial production.
Asia now accounts for around 40 percent of global oil consumption, up from 15 percent in 1970, and it drives an overwhelming majority of demand growth. Its role in natural gas markets has expanded similarly, now approaching one-quarter of global consumption. Approximately 83 percent of the LNG flowing through the Strait of Hormuz is destined for Asian markets—principally China, India, and South Korea.
Europe also finds itself in a precarious situation. It has fallen further behind in industrialization, seen its external accounts deteriorate, and now must grapple with an energy shock already compounded by Russia’s war in Ukraine.
By contrast, although the U.S. economy is not shielded from global price increases, the United States occupies a comparatively comfortable position when it comes to energy security. The shale revolution of the mid-2000s—encompassing both oil and LNG—helped spark a modest industrial revival and has given the United States a degree of energy independence unimaginable in the 1970s. The United States also stands to benefit from increased LNG exports to a supply-constrained Europe.
This time around, the damage also extends beyond hydrocarbons. Disruptions to helium production—particularly in Qatar, a key supplier—have cascaded into semiconductor manufacturing in South Korea and Taiwan. And the war’s effects on fertilizer supply chains combined with higher transportation costs are likely to push food prices higher, disproportionately affecting vulnerable households across the developing world.
The shift of global industrial production toward Asia, combined with the deeper integration of energy markets through LNG and global supply chains, has enabled the current oil shock to spread faster and further than before. More troubling still, the long decline in oil intensity—the amount of oil required to produce a unit of GDP—has fostered a sense of complacency that leaves governments, institutions, and markets ill-prepared for precisely this kind of shock.
Escaping the crises of the 1970s required a combination of market deregulation, conservation policy, monetary tightening, and diplomacy. Removing price controls on oil allowed markets to rebalance supply and demand, while new fuel economy standards reduced oil intensity. In the United States, the Federal Reserve’s aggressive interest rate hikes broke the spiral of inflation expectations, and sustained diplomacy played a crucial role in ending the Arab oil embargo and easing the immediate supply crunch.
These efforts also accelerated U.S. diversification away from Middle Eastern oil, spurring technological breakthroughs in exploration, including deepwater drilling in the Gulf of Mexico through the 1990s. Taken together, these measures helped reduce U.S. oil intensity by more than 70 percent between its peak in 1973 and 2025.
Yet those structural improvements have not insulated economies from the current crisis. Deep integration of global energy markets means that the United States and Europe are exposed primarily through prices, while Asia—whose supply chains depend more on physical flows from the Gulf—is exposed through quantities. Both channels inflict real damage, driving up inflation while leaving lasting economic scars such as elevated unemployment.
As the nature of the price shock has changed, so have the tools available to respond. High public debt across advanced and emerging economies means that fiscal space to confront the crisis is limited. Though it may be politically tempting to reinstate price controls or broad fuel subsidies, doing so would be fiscally reckless and would blunt the price signals needed to encourage conservation and fuel switching. Yet doing nothing also has political costs, given that oil price shocks have a tendency to reduce approval ratings and reelection odds. Leaders are caught in a bind: doomed if they intervene and doomed if they don’t.
The conditions that made aggressive rate hikes effective in the United States in 1979—low public debt and a credible, independent Fed—have been substantially eroded. Indeed, the stated priorities of the current nominee for Fed chair sit in uncomfortable tension with the unambiguous anti-inflation commitment that a supply shock of this magnitude demands. Without such conditions in place, rate hikes today would risk triggering recession and financial instability—making them a 1970s remedy that contemporary balance sheets are ill-equipped to absorb.
The developing world, meanwhile, will bear costs entirely disproportionate to its responsibility for this crisis. Oil-importing countries across Africa and South Asia confront the shock from positions of acute vulnerability: debt at or near distress, depleted reserves, and currencies already strained by a strong U.S. dollar. Higher energy prices translate directly into higher food prices, and the disruption to Gulf fertilizer exports threatens spring planting cycles in ways that will deepen food insecurity well into next year. For the most fragile economies, the danger is not a slowdown but a full-blown crisis.
The longer-term risks are equally grave. Many countries in the global south that had begun to industrialize on the back of affordable energy now face an interrupted trajectory. Their immediate policy imperative is to resist blanket fuel subsidies, which are fiscally damaging and largely benefit the wealthy, in favor of targeted transfers that protect the poor without overwhelming public finances.
Unlike the Arab oil embargo, which reflected deep regional alignments, the current crisis is the product of a war of choice—which can be ended by choice. But even if the cease-fire becomes permanent and the Strait of Hormuz reopens, it cannot undo the damage to fiscal positions and development trajectories worldwide. Most of all, it cannot revive the assumption at the heart of the postwar economic order that the United States would act as its responsible guarantor.
Because of this, the current crisis will accelerate the erosion of petrodollar dominance, as Asian importers move to price and settle energy trade outside the dollar system; the energy transition, now driven as much by security imperatives as climate ones; and China’s emergence as an alternative pole of the international order, whose offer of partnership without the precondition of geopolitical alignment will find a more receptive audience across the global south than before.
What is needed now is genuine statesmanship to secure an enduring resolution to this war and proactive economic measures to help the developing world avoid the worst outcomes. Emergency liquidity, debt relief, and coordinated support from the International Monetary Fund and multilateral development banks are the difference between a shock that is absorbed and one that causes lasting damage to development progress.
This crisis can still be contained, but doing so will require more than market adjustments—it demands sustained and courageous political leadership.
