Crude oil was $2.90 a barrel before the Arab embargo of 1973. By January 1974 it was $11.65. Markets remember that figure, and they remember what the S&P 500 did over the same stretch: it fell by more than 40%. Whenever the Gulf flares up, investors reach for that precedent first. The salient point, though, is that it is the worst case rather than the typical one.
What happened in 1973
On October 19, 1973, shortly after President Nixon asked Congress for $2.2 billion in emergency aid to Israel during the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries put an oil embargo on the United States. Production cuts followed, and they nearly quadrupled the price. The embargo was formally lifted in March 1974, after the producers fell out over how long to keep it going. The higher prices stayed.
The Federal Reserve’s own history of the episode is blunt about timing. Chairman Arthur Burns told Congress in 1974 that the oil producers’ manipulation of supply and prices “came at a most inopportune time for the United States.” Wholesale prices of industrial commodities were already rising at an annual rate of more than 10 per cent, he said, and factories were running at close to full capacity. Roughly 4.5 million barrels a day came out of the world’s supply. The shock landed on an economy that had no slack.
Three shocks, three outcomes
The 1979 shock, driven by the Iranian Revolution, went differently. Saudi Arabia raised its output to cover part of Iran’s lost production, and stocks came close to a bear market without entering one. The real damage came later. Paul Volcker’s aggressive rate rises, aimed at wringing out inflation, helped bring on the recession of 1980 to 1982. One reading of 1979 is that the policy reaction can hurt more than the oil price itself.
The Gulf War shock in 1990 was the most contained. Iraq’s invasion of Kuwait removed another large slice of supply, and the S&P 500 fell about 20%. But the war was short, the coalition acted fast and oil settled. Stocks then enjoyed one of the longest bull runs in American history.
Central banks face an awkward choice in all of these. Ben Bernanke put it this way in 2004: “monetary policy cannot offset the recessionary and inflationary effects of increased oil prices at the same time.”
The Hormuz comparison
An analysis published in April 2026 by ABC Money, a contributed piece, laid the same history over the US-Iran war. It said the Strait of Hormuz was blocking around 20 million barrels a day, about one-fifth of the world’s petroleum consumption, which is more than four times the 1973 disruption. Brent had risen about 50% in a few weeks, from about $66 a barrel before the conflict to over $100. The S&P 500 had lost roughly 5% over four straight weeks of declines. The International Energy Agency’s response was to release 400 million barrels from strategic reserves.
Analysts at Bank of America, the piece noted, point to duration as the variable that matters most. An oil spike that lasts six weeks and one that lasts eighteen months produce very different results, and only long, continuous supply disruptions consistently produce lasting inflation. The history on offer is mixed. It supports patience if supply returns quickly, and caution if it does not.
Sources
- Oil Shock of 1973-74 | Federal Reserve History (Michael Corbett)
- What the Last Three Oil Shocks in History Tell Us About Where Markets Go From Here | ABC Money (contributed content)
