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- With the recent spike in oil prices, there are a lot of myths about the 1973-4 oil shock causing the 1970s inflation, and also triggering the deep 1973-4 share market crashes.
- Here are the facts about what actually happened to shares, bonds, interest rates, exchange rates, oil, gold, and inflation before, during, and after the 1973-4 oil shock.
- SHARE MARKETS actually ROSE during the October 1973 Yom Kippur War, which included the OPEC production cuts, embargoes, and oil price spike (All Ords +8%, Dow Jones + 2%).
- However, the oil price spike was only part of a much larger 1973-4 share market crash in which the US market fell -48% and the ASX fell -60% by the end of September 1974, but there were several other fundamental forces in play.
- INFLATION was already running at a very high 7.4% in US and 10.1% in Australia BEFORE the oil price spike crisis. Oil prices certainly added to inflation pressures, but the 1970s inflation problem had its roots in rising government spending from the mid-1960s, and poor policy decisions in the early 1970s.
- CASH RATES were already running at high levels before the oil spike: 6.9% in Australia and 7% in the US. Cash rates eventually peaked in August 1974 at 9.47% in Australia 9.7% in the US.
- GOLD prices actually FELL during the oil crisis, but then doubled in over the next three months.
- There are many SIMILARITIES to today’s conditions (aside from rising energy prices): including problematic pre-exiting inflation, slowing economic growth, currency instability, fiat currencies lacking money supply constraints, military/geopolitical tensions, political unrest, racial division, protectionist policies.
- Most importantly we also have over-priced share markets primed for a major correction.
- DIFFERENCES this time – Today we have some additional problems we didn’t have in the 1970s: huge government deficits and debts, flat-lined productivity growth, casualisation / uberisation of workforces fostering populism, nationalism, xenophobic backlashes against immigration, and governments’ complete lack of discipline on fiscal policy.
- In the 1970s, the US was the world’s largest consumer and importer of oil, but today it is by far the largest oil producer, and a major exporter of oil. However, it is still a major importer of crude oil for its domestic needs, and is still very much reliant on the Middle East exporters.
- In the 1973-4 crash the Australian share market fell further than the US because our market was more over-priced and we had the over-hang of our speculative mining bubble. Today the US market is more over-priced, with the over-hang of its speculative tech boom, and so the US market will fall further than the Australian market when the current boom ends.
- As with the 1973-4 crash, rising energy prices were only one negative factor in the much larger cocktail of conditions driving inflation and share market boom/bust cycle.
Background
Politicians of all flavours to this day still universally blame the 1970s inflation and stagflation on the oil shocks in 1973-4 (Yom-Kippur war/OPEC embargos) and 1979 (Iranian revolution). They also routinely cite rising energy prices following Russia’s invasion of Ukraine in 2022 as a main cause of the post-Covid stimulus inflation.
And, as I predicted, they are now blaming the 2026 oil price spike as a major cause of the current inflation.
I warned of this, and wrote about the actual impacts of oil price spikes on inflation during these oil shocks -
Today’s article provides more detail on the 1973-4 oil shock, when oil prices trebled in just three months and remained high for a decade.
1973-4 oil shock
Today’s charts show daily prices before, during and after the 1973-4 oil crisis:
The main events in the 1973-4 oil crisis included:
- The ‘Yom Kippur’ War (6-25 October 1973) in which Arab states led by Egypt and Syria (and backed by USSR) attacked Israel (backed by US) to try to win back territory Israel had seized and occupied in the 1967 ‘Six-day war’.
- From 17 October to January 1974 – several initiatives by Saudi Arabia and other OPEC members to cut production, raise prices, and impose embargoes on oil exports to the US in retaliation for US backing Israel.
- As a result of these measures, the benchmark oil price quadrupled from US$2.90 to $11.65 (and remained around these levels until the 1978-9 spike).
- 17 March 1974 – embargoes on US lifted.
- 8 June 1974 – US/Saudi ‘Petro-Dollar’ agreements - in return for US protection and arms, Saudis agreed to price oil sales in US dollars and invest surplus revenues in US treasuries and US banks – ie finance US government spending. This meant other oil importers needed US dollars to buy oil from OPEC. (This 50-year agreement expired in June 2024, so Arab states are now free to price oil currencies other than the US dollar)
Here is what happened to shares (chart A), bonds (B), interest rates (C), exchange rates, (D) oil and gold (E), and CPI inflation (F).
Share markets (chart A)
Share markets actually rose during the Yom Kippur War itself (6 – 25 October 1973), which included OPEC production cuts, export embargoes and oil price spike (All Ords +8%, Dow Jones + 2%).
However, after share prices peaked at the end of the war itself, share markets started falling, and kept on falling through to the end of September 1973. Although the oil price spike added to cost pressures and inflation (see below), there was a lot more to the 1973-4 US/global share market crash than just oil prices.
For my story on the 1973-4 crash in Australian and US share markets see –
US share market
Although US share market rose during the Yom Kippur War / OPEC embargoes and oil price spike, US market ended (Dow Jones Industrial Average) ended up falling by -48% from the peak on 11 Jan 1973 to the bottom on 3 Oct 1974. It was the third deepest crash for the US market up to that time, and the fifth worst to date. (By far the deepest crash for the US market was the 1929-32 decline of -86%).
The 1973-4 oil price spike certainly did not help, but inflation was already running high from the Vietnam War deficits, Nixon’s ending of US dollar convertibility into gold, plus his tariffs, price & wages freezes, and other policy blunders on inflation.
The US economy was already slowing. A major factor was the US steel crisis that resulted in bankruptcies and unemployment in steel and downstream industrial sectors with the rise of post-war re-industrialised Japan. High-quality, low-cost Japanese steel beat the protected, inefficient US steel makers and downstream manufacturers. This hollowed out of the Rust-Belt manufacturing regions of the US from the early 1970s (as well as in the industrial heartlands in Britain and Germany). (Australian manufacturing remain protected for another two decades.)
The crowning glory for the Japanese crushing of US steelmaking was Nippon Steel’s contract to supply the steel for the construction of New York’s World Trade Centre (1965-1973). (Well, crowning glory until September 11, 2001 anyway!)
On top of these problems we also had the humiliating US withdrawal/retreat from Vietnam, and the Nixon Watergate crisis.
Australian share market
The Australian share market was hit even harder than the US market in the 1973-4 crash. The All Ords index fell a total of -60% from the peak on 23 Jun 1972 to the bottom on 30 Sep 1974. It was Australia’s second deepest ever crash in nominal terms (not adjusted for inflation). The only deeper crash was 1929-31, but in real terms (ie adjusted for inflation) the 1973-4 crash was the deepest.
There were two main reasons our share market was hit harder than the US:
First, both markets suffered from severe credit squeezes imposed to quell strong economic growth, speculative commercial property bubbles, and rising inflation (from well before the oil crisis – see below). However, in Australia we also had the final cleaning out of our late 1960s speculative mining bubble which purely a home-grown bubble and bust.
The second reason for Australia’s bigger hit in the 1973-4 crash was that inflation was significantly higher in Australia than the US, even before the oil shock (see below). As a primary monetary policy tool in the credit squeeze, government bond yields were kept at much higher rates here than in the US (chart B). (In that era, US treasury yields were market-priced instruments, and US monetary policy targeted the short end, as they are still today.)
We also had our own major political crisis – Whitlam’s chaotic government and controversial removal.
Exchange Rates (chart D)
US dollar
Although the US dollar was in new territory as a floating currency free of the gold link since 1971, it rose during the Yom Kippur War and resultant oil price spike (as per its usual pattern as a ‘safe haven’). It fell back again as the crises eased in early 1974.
This is the usual pattern for the US dollar – rising in a crisis (as investors dumb foreign assets and rush back to the US safe haven), and then falling back in rebounds and rallies (as investors sell dollars to venture overseas assets again). Same as today’s oil crisis.
Australian dollar
The Aussie dollar was not free-floating at that time. The Aussie dollar had been pegged to the British Pound since January 1931 but after the US abandoned gold convertibility in 1971, the Australian government switched the AUD peg from the British Pound to US dollar on 23 December 1971.
Prior the AUD float in1983, the government used the AUD exchange rate as a major monetary policy tool. For example to slow exports by upward revaluations of +7% on 12 Feb 1973, and another +5% in November 1973 as part of the 1973-4 credit squeeze. The AUD was devalued by -12% on 23 September 1974 as part of the government’s monetary easing policy.
Bond Yields (chart B)
US Treasury yields actually fell during the War, OPEC embargo and oil price trebling.
In Australia, Commonwealth Government bonds were used as a monetary policy tool, especially during the 1973-4 credit squeeze. See chart B for details of policy tightenings during the period.
Interest rates (chart C)
Cash rates were already running at high levels before the oil spike: 6.9% in Australia and 7% in the US Eventually, rates peaked in August 1974 at 9.47% in Australia 9.7% in the US. These triggered deep recessions in both countries.
Gold (chart E)
Gold prices fell during the War, OPEC embargo and oil price trebling, but then doubled in over the next subsequent three months. (Gold also fell from the start of the 2026 war on Iran.)
Inflation (chart F)
Inflation was certainly a factor in the 1973-4 crash. The oil shock added inflationary pressures, but even BEFORE the oil shock, inflation was already running out of control at 7.4% in USA and 10.1% in Australia.
Inflation eventually peaked at 16.4% in Australia (September quarter 1974), compared to 12.2% in the US (November 1974).
Inflation in Australia and the US both had their roots in rising government spending from the mid-1960s (social infrastructure, tax cuts, Vietnam War), and poor policy decisions in the early 1970s. However Australia had additional inflationary problems stemming from our centralised wage fixing system, including quarterly wage indexation, which created a self-fulfilling inflation spiral here.
What is similar today
The trebling of oil prices in the 1973-4 oil crisis reduced consumer spending, added to corporate input costs, reduced profits, which played a significant indirect role in the 1973-4 US / Australian / global share market crashes. The recent oil price spike is less severe this time, but will also reduce spending and profits.
Aside from rising energy prices, today’s conditions have several similarities with the 1970s crisis: slowing economic growth, rising pre-exiting inflation, currency instability, fiat currencies lacking money supply constraints, political unrest, racial division.
What is different
But now we have some additional factors - including big government deficits and debts, flat-lined productivity growth, casualisation / uberisation of workforces which is fostering populism, nationalism, xenophobic backlashes against immigration.
We also have two additional problems in tackling inflation: – 1) governments’ lack of discipline on fiscal policy, and 2) lack of courage and political will on monetary policy.
The outcomes are likely to be higher inflation and interest rates, plus lower asset market returns.
Oil market very different today
In the 1970s crisis the US was the world's largest consumer and importer of oil. Today the US is by far the largest oil producer (twice the production of the next largest producer, Saudi Arabia), and is a major exporter of oil. However, the US is still a major importer of crude oil for its domestic needs, and is still very much reliant on the Middle East exporters.
Inflation already a problem – today not as bad as 1973
Before the 1973-4 oil price spike, inflation was already running at very high levels (7.4% in US and 10.1%) in Australia. The 1973-4 oil price spike certainly added to inflationary pressures, but the 1970s inflation problem had its roots in rising government spending from the mid-1960s, and poor policy decisions in the early 1970s.
On the other hand, in today's world, investors everywhere have become accustomed to zero and ultra-low interest rates over the past fifteen years since the 2008-9 GFC, and it is widespread but unrealistic assumptions of a continuation of these ultra-low rates that is underpinning today’s very share market valuations.
Once people realise that historically ‘normal’ interest rates of 4% to 6% may be back for a while, it will shatter the illusion supporting current high share prices.
Share markets in similar position: high pricing and due for major correction
By 1973 both the US and Australian share markets were running at high levels and primed for a major correction. The big difference today is that this time it is the US market which is much more over-priced than Australia.
In the late-1960s-to-early-1970s cycle it was our turn for the bigger boom and the bigger bust. Now it is America’s turn for the bigger boom (recent tech run-up) and therefore the bigger bust to come.
A note on recessions
Readers may notice that I make no mention of recessions, which featured prominently in the early-mid-1970s in Australia, US and around the world.
Economists and policy makers are obsessed with recessions, but as an investor I am primarily interested in financial markets, not recessions per se. The problem is that recessions are back-looking, but financial markets are forward looking. Recessions are fascinating to study of course, but by the time a recession hits, financial markets have already rebounded into the next cycle.
In fact, economic recessions have almost always been GOOD for the Aussie share market, because shares tend to rebound out of the middle of recessions. A prime example being the strong share market returns during Australia’s June 1974 to December 1975 recession (see my story on the 1973-4 crash for details).
It’s a bit like the myth about rising oil prices being bad for shares. In fact rising oil prices have been mostly good for shares – see:
Conclusion
As with the 1973-4 crash, rising energy prices are only one negative factor in the much larger cocktail of conditions driving inflation and share market boom/bust cycle. It pays to ignore uninformed but catchy-sounding market myths.
Instead (a) focus on the facts; and (b) take time to form your own views about markets, what drives them, where they may be headed, how to protect yourself, and how to capitalise on opportunities.
‘Till next time – safe investing and stay healthy!
For my detailed story on the 1973-4 crash in Australian and US share markets see –
On the impact of oil price spikes on inflation -
On the impact of wars and military flare-ups on share markets =
On Australia and USA taking turns to have the bigger share market boom and bust cycle –
For my latest monthly report on global markets for Aussie investors -