Commentary
The West is experiencing its third energy crisis. The first, in 1973, was caused by the near-quintupling of the price of crude oil by Gulf oil producers in response to America’s support for Israel in the Yom Kippur war. Their action brought an end to what the French call the trente glorieuses—the unprecedented post–World War II economic expansion. The second occurred at the end of the 1970s, when Iran’s Islamic revolution led to a more than doubling of oil prices. This again inflicted great economic hardship, but the policy response was far better. Inflation was purged at the cost of deep recession. Energy markets were permitted to function. High oil prices induced substitution effects, particularly in the power sector, and stimulated increased supply. In the space of nine months, the oil price cratered from $30 a barrel in November 1985 to $10 a barrel in July 1986. It’s no wonder that the economic expansion that started under Ronald Reagan had such long legs….