What it means
Iran was a major oil exporter, and the political upheaval of 1978 and 1979 disrupted its production and exports. Even though other producers raised output, the loss of supply, combined with fear of further disruption, drove buyers to compete for cargoes and sent prices sharply higher.
Prices roughly doubled over a short period, and in some countries, including the United States, motorists faced long queues at fuel stations and rationing measures. Governments, businesses and households had to adjust to costs that few had planned for.
Airlines, haulage firms and farms, which depend heavily on fuel, were among the hardest hit. The shock fed through the economy in a familiar way.
Higher energy costs raised transport and manufacturing costs, businesses passed them on in higher prices, and workers pushed for higher wages, which kept inflation high. Many economies suffered both slow growth and rising prices at once, a combination known as stagflation.
Central banks responded firmly. In the United States, the Federal Reserve under its new chair raised interest rates very sharply to bring inflation down, which caused a severe slowdown in the early 1980s, with business failures and rising unemployment in many sectors.
The crisis also changed behaviour. Consumers bought more fuel-efficient cars, companies invested in energy saving and many governments promoted alternative energy and built strategic oil reserves.
Producers outside the main cartel were encouraged to explore for oil, and prices eased as new supply arrived and demand weakened. For managers and analysts, the episode is a reminder that commodity shocks can spread through every part of a business.
Companies that had hedged fuel costs, or could pass costs on, did better than those with fixed-price contracts and thin margins. The pattern is still used in stress tests, where a sudden doubling of an input cost is modelled against the budget.
In practice
Real-world examples.
Example
A trucking company spends $3,000,000 a year on diesel when prices suddenly double. Its contracts with customers are fixed for twelve months, so it cannot raise its rates. The extra cost of about $3,000,000 wipes out its profit for the year. The owners are forced to ask the bank for a short-term loan to cover the gap, and the lender asks for monthly cash flow reports until fuel costs settle.
Example
An airline's finance director reviews her exposure to fuel prices after a supply disruption. She buys fixed-price contracts for part of next year's fuel to protect the budget. The hedge costs a premium but removes a large part of the uncertainty.
Example
A manufacturer of household appliances sees demand fall as families cut spending to pay for fuel. At the same time its own energy bills rise, so it brings forward an investment in more efficient equipment. The plan costs $2,500,000 but is expected to cut energy use by a fifth. The finance team calculates the payback period using a cautious forecast of energy prices, so the investment still makes sense if costs fall back.
Case study
Seen in the real world.
Ashgrove Haulage is an illustrative, fictional regional freight company that runs 80 diesel trucks. When fuel prices doubled in a few months, its costs rose by more than a quarter while its customer contracts stayed fixed.
The owner called her finance manager, who ranked every contract by margin and calculated which could be renegotiated. The two largest customers agreed to a fuel surcharge linked to a published price index, while the least profitable routes were dropped.
The company survived with a smaller fleet and a new rule that every contract must include a fuel adjustment clause. Managers now review the clause against the published price index every quarter. The illustrative lesson is that fixed prices on one side of a business and floating costs on the other can turn a supply shock into a threat to survival.
Watch out
Common mistakes.
- Treating the crisis as simply a story about oil, when its main business lesson is how cost shocks spread through prices, wages and interest rates.
- Confusing it with the 1973 oil embargo, which was a separate event caused by a deliberate export ban.
- Assuming that high energy prices always lead to lasting inflation, when the result depends on how central banks, wages and supply respond.
Questions
People also ask.
What caused the 1979 energy crisis?
A drop in Iranian oil output after the revolution, together with fear of further disruption, led buyers to bid up prices quickly.
How is it different from the 1973 oil crisis?
The 1973 crisis followed a deliberate embargo by some producers, whereas the 1979 crisis followed a revolution that reduced supply.
What can a business learn from it today?
Build fuel and energy price clauses into contracts, hedge significant exposures and keep enough cash to absorb a sudden jump in costs.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related