The 1970s Oil Shocks and Stagflation
Rising prices are usually a sign the economy is good, so what if prices soar while the economy freezes? The 1970s were the era when that strange combination, "stagflation," became reality.
Oil Prices Jump 4x
In the wake of the 1973 Fourth Arab-Israeli War, OPEC (the Organization of the Petroleum Exporting Countries) imposed an oil embargo on the U.S. and others. Oil, at about $2.90 a barrel, jumped to about $11.65 in January 1974—roughly 4x in a matter of months.
Because oil was the raw material and fuel for almost every industry, the surge in oil prices immediately spread into across-the-board price increases. Long lines formed at gas stations of people trying to buy fuel.
What Is Stagflation?
Usually, when the economy is bad, prices fall (demand drops), and when the economy is good, prices rise. But in the 1970s, recession (stagnation) and inflation appeared at the same time. Combining the two, we call it "stagflation."
The cause was a "supply shock." Prices didn't rise because demand grew; costs soared because the supply of oil was cut off. So it fell into a dilemma: releasing money to revive the economy pushed prices up more, and tightening to tame prices worsened the economy.
In a stagflation phase, stocks and bonds can slump together, weakening the traditional diversification effect. This is why real assets that are resilient to inflation draw relatively more attention.
The Stock Market's Price: About -48%
During this period, the stock market collapsed heavily. The S&P 500 fell about -48% over roughly 21 months from January 1973 to October 1974. The real loss accounting for prices was even larger.
With high inflation and low growth overlapping, both corporate-earnings outlooks and valuations were pressed down together. The oil shock became a turning point that later led countries to prioritize energy security and price-stability policies.
Frequently Asked Questions
Q. Where should I invest during stagflation?
This article does not recommend a specific asset. That said, historically, in a stagflation phase, stocks and bonds can slump together, and real assets like commodities and gold have tended to draw relatively more attention. No asset is always effective, and phase-by-phase performance has differed by period.
Q. Are the 1973 and 1979 oil shocks different events?
Yes, they are two separate shocks. The first (1973) was triggered by the Arab-Israeli War and the OPEC embargo; the second (1979) by the Iranian Revolution. Both caused surging oil prices and inflation, making the entire 1970s a fight against prices.
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