Energy crisis? We’ve been here before, haven’t we?

This article was originally published in The Times on 5th April 2026. It explores today's oil prices in context of the 1970s. 

The war in the Middle East points to UK stagflation: a stagnating economy coupled with rising inflation. Its geopolitical fallout will add to pressure for higher defence spending and further expose the weakness of the UK’s public finances. Government borrowing costs will continue carrying a risk premium, reflecting concern about sticky inflation and the poor debt outlook. Even when energy prices fall, they are unlikely to return to prewar levels for some time, unless there is a global recession.

In recent weeks, financial markets have looked for lessons from prior energy shocks. The key is not to generalise. Each shock should be seen in the context of the economy at that time.

The standard reference point is the 1973 oil crisis. In September that year, oil was $2.70 per barrel. The October Yom Kippur war led Arab oil exporters to cut supply and raise oil prices fourfold to near $12 per barrel by the year’s end.

Today’s rise in oil prices may be far smaller in percentage terms, but it is still steep. The shock is amplified by just-in-time supply chains and by high fertiliser prices feeding into food costs.

One policy lesson ingrained into thinking since 1973 is that the UK did not tighten policy sufficiently, as inflation rose to 25 per cent in 1975. In contrast, Germany and Switzerland tightened monetary policy quickly and kept inflation in check.

This is not relevant for now. Yet it has reinforced market thinking that central banks with a single mandate to control inflation like the Bank of England will need to put up interest rates. Before the war, the market expected two rate cuts this year; now it expects at least two hikes.

In contrast, the US Federal Reserve, with a twin mandate to look at jobs and inflation, may still ease. At a future date, when inflation is low, a UK change to a twin mandate should be considered.

Whereas UK inflation pressures were easing before the current war, in the early 1970s inflation problems had been building. The Barber boom, named after the chancellor Anthony Barber, was already in full swing, after the 1972 budget aimed for 5 per cent growth. It achieved 4.5 per cent. The money supply grew by 25 per cent in 1972 and 27 per cent in 1973.

Policy was tightened. The Bank of England raised the minimum lending rate to a record 11.5 per cent in July 1973, before the energy shock, and to 13 per cent in November. The Bank also introduced the “corset” to restrict bank lending.

At present, the bar for any rate rise should be set very high. If UK interest rates are not to be cut, that is already a significant tightening in itself. The economy will suffer as a result of this war. The Bank should focus on second-round effects, such as wages and firms’ pricing policy, when considering whether the inflation impact will pass through or persist. As growth weakens, the inflation hit may be contained.

A wider philosophical debate is also evident, with policy implications. That is, whether there should be action to protect people from higher energy prices.

An important lesson from 1973 was the acceptance that you could not protect the economy from an oil price shock even if you wanted to. Now, politicians talk as if they can.

The intervention then, unlike now, was to deter energy demand. In early December 1973, the motorway speed limit was reduced to 50mph, TV channels went off the air at 10.30pm and limits were put on the use of electricity for most of industry. Such intervention today is not possible.

The energy price cap has just fallen, but it will rise sharply this summer and winter. Bond markets are wary that the chancellor’s fiscal headroom is shrinking. Any measures must be small: timely, targeted and temporary.

If energy prices are kept low then demand does not adjust as it needs to, and the problem is likely to be transferred to an already poor debt position. One part of the present debate has also drawn attention to how big a role taxes and government policy already play in keeping prices high, particularly for petrol and energy.

The 1970s should remind us that the economy must avoid a drift back to the adversarial policies of the past. There had already been an energy crisis for two years in the UK before the October 1973 shock, largely because of industrial action. Indeed, the oil price rise that October was followed by industrial action by electricity power engineers and an overtime ban by miners.

It reminds us of how far the economy has come since then. While the official three-day week came into effect on January 1, 1974, the previous two winters had witnessed widespread energy problems: 1972 saw a miners’ strike in January and February, regular power cuts, a restriction of electricity supplies and a three-day week for the last two weeks of February 1972.

Although the state of emergency imposed in November 1973 as the oil shock hit was draconian, it was not without precedent. Another had already been declared in August 1972 after the national dock strike. It was a period of deep economic and financial turmoil.

A significant difference, which is positive for now, is that while the oil shock triggered the “secondary banking crisis” in December 1973, the banking sector now is in good shape and that is important in limiting contagion and may speed up recovery.

It takes time for the full economic effects of any energy shock to become clear. But the crisis of 1973 brought one point sharply into focus: energy security and self-sufficiency matter. That lesson still holds. Then, the focus became the North Sea. Now it should be a balanced mix of renewables, nuclear and fossil fuels.

Another point is that the UK has often faced an external constraint that has limited policy options. In the 1970s the worry was the balance of payments. Today, it is the need to retain the confidence of international investors.

This article is for informational purposes only and does not constitute financial advice. This is the opinion of Gerard Lyons as of 5th April 2026 and if you are unsure as to whether disinvesting or investing is suitable for you, please seek advice. 

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