A second energy crisis: the Iranian Revolution and its aftermath
A year or two of relative energy price and supply stability ended in 1978 and 1979 with the outbreak of the Iranian Revolution. A decade of wild fluctuation in price and supply followed, punctuated by political crises of varying intensity and longevity, mostly centered around the volatile Persian Gulf. Buyer's panic first forced prices upward to $40 per barrel, weakening the economies of energy importing states sufficiently to induce a significant reduction in the demand for oil and a concomitant increase in the employment of substitutes for oil. Despite Iraq's attack on Iran in 1980, an oil surplus had accumulated by 1981. The availability of non-OPEC oil and reduced oil and energy consumption in the leading oil importing nations added to the surplus and depressed oil prices in 1982-83. Thereafter, powerful deflationary pressures dominated. Oil prices plunged as low as $8-$9 in mid-1986, rose to the $20 range in 1987, but slipped below $14 in fall 1988. By late 1989 OPEC had fashioned a new production agreement that stabilized prices just under $20.
Sudden, sharp price gyrations created new groupings of winners and losers and forced new quandaries to the fore. OPEC grappled with the thorny problem of production quotas. Price deflation blunted the incentive to explore and develop high cost oil or to hurry along the commercialization of synthetic fuels. Oil at $20 and abundant supply deadened the impulse to conserve. The remarkable revenue windfalls enjoyed by the exporting states from 1973 through 1981 afforded no final cure for underdevelopment and little protection against subsequently shrinking revenues. Neither did greatly reduced energy import bills smooth the path to development for the importing LDCs. Lower energy costs after 1982 permitted renewed economic growth within OECD but did not