Albert Carreras,
Director of the ESCI-UPF and professor of the Department of Economics and Business

The experience of the long oil crisis that erupted in 1973 and lasted more than a decade is highly instructive for the current expensive energy situation resulting from the effects of the war in Ukraine. The origins are similar: a war and the use of energy sources as an economic weapon. In the face of the sudden and dramatic increase in the price of oil – which quadrupled between 1973 and 1974 – as a result of the OPEC countries’ boycott of the states that supported Israel in the wake of the Yom Kippur War (early October 1973), briefly put, oil-importing countries responded with three types of policies. These responses are clearly emerging again as alternatives in today’s world.

There were some who refused to allow prices to rise because they found it politically dangerous. This was the case of Spain at the tail end of the Franco regime, which was panicked by the idea of protests against the regime with non-political slogans but political consequences. To circumvent this threat, the authorities chose to subsidize imported oil by first reducing and then eliminating taxes on petroleum products, especially petrol. The subsidies were large enough to make Spain a country in which the consumption of petroleum products was subsidized, which, in turn, attracted investment from countries with cheap, but unsubsidized energy. It was a disaster that forced the country to invest in things it should not have invested in, such as energy-intensive factory projects. Today, the country is again practising this policy. We know that if it goes on too long, it will be disastrous.

Others – including some of Spain’s European neighbours, such as France, the UK and Italy, as well as the United States – adopted compensatory policies. Although they did not subsidize oil, to combat the impact of rising oil prices on all other prices in the form of higher inflation and lower real wages, they had their central banks provide credit to businesses so they could increase wages and offset the higher energy prices. By financing pay rises not based on productivity gains, they stimulated ‘second-round’ effects, i.e. widespread price and wage increases, helping to make permanent the inflation imported through the higher oil prices. Within a few years, these policies had given rise to ‘stagflation’, that is, inflation with economic stagnation. What was gained on the one hand was lost on the other. Ultimately, they had to prevent their central banks from lending in inflationary situations; hence, the painful contractionary monetary policies. We could slip back into these policies, but the ECB is trying to avoid them.

Finally, some countries, such as Germany and Japan, accepted that it was better simply to resign themselves to the fact that they had become poorer and pass on the oil price increases to individual, public and corporate consumers without providing them with financing to offset the higher prices. Within a few years, these countries had dramatically reduced their energy consumption, closed down the most energy-intensive industries and activities, implemented energy savings across the board, and shifted towards human capital-intensive, but energy-saving sectors and activities. This enabled them to emerge from the oil crisis sooner, with strong currencies and high value-added exports.

We are not doing this at all. However, if we did, we would save energy, modernize our economies and help reduce global warming. History can still teach us important and useful lessons.