Gas prices up fourfold – so what’s new?

Dr Edward Libbey

Oil prices have always been a subject of much discussion, but we have recently discovered that natural gas prices can be just as exciting!

Let's consider the comparison of today's energy price challenges with those of the oil crises in 1973-74 and 1978-79. In 1973, I was in the commercial center of BP, ensuring we dispatched 4 million barrels of oil each day, while still being heavily impacted by the embargo. By the time of the three-day week, I was deemed a critical worker while much of the economy was collapsing. I remember those times well, though my recollection of exact figures may no longer be perfect!

The crisis was precipitated by the Middle East war, which led OPEC (or at least the Arab members) to cut production by about 5%. Prices rose from $2-3 to $10-11 per barrel effectively overnight, though the full economic impact was somewhat mitigated as freight rates collapsed, and at that time, freight cost more than the oil itself! The mantra at the time, which I recall so clearly, was "oil demand is inelastic" - but within 3-4 months, we witnessed the beginnings of a five-year gross oversupply and a massive oil freight surplus that lasted until the next turmoil in 1978 with the fall of the Shah. Demand was indeed very price sensitive! Interestingly, even discounting today's $75 oil price, it is still well below the real price in 1978. Even the ‘super-spike’ in 2005 did not match the 1978 price.

Looking back, what was surprising was that supply disruption was completely unanticipated, even though all the evidence was there facing decision-makers (sound familiar?). Oil demand had been increasing steadily since about 1950 by 3-4% per annum. I was in California that summer and vividly remember checking the papers every morning before going out due to systemic shortages of gasoline! The Libyans had already nationalized BP and others to push prices up. The supply-demand imbalance was not sustainable. All that was needed was a spark, and that was the outbreak of war, though the war itself had little direct impact on physical operations, except on the Suez Canal and the trans-Syrian pipelines. US support for Israel precipitated the Arab embargo on certain countries.

The situation in 1978-79 painted a similar picture with another near fourfold increase in oil prices to over $40 following the revolution in Iran and the fall of the Shah. While there was disruption and political unrest in the UK - remember the Winter of Discontent - oil supply was not a structural problem as there was growing production of non-OPEC sourced oil. The UK and Norway were becoming major oil producers.

Looking at today's natural gas problems, the only difference is that it was not an overnight crisis but one that developed over many months, which politicians chose to ignore. The price change impact is broadly the same - a fourfold increase in UK natural gas wholesale prices - though the real price of gas is still well below the real energy value of oil in KWH/Dollar. (I have not factored in a carbon price). In the US, gas was $2/mcf in the 1970s and for much of the noughties was well below that in real terms. Energy is undoubtedly cheaper in real terms than it was in 1975-1985. Today's natural gas crisis is caused by a simple imbalance between supply and demand, and when the surplus diminishes, the market goes off the scale - just as oil did in 1973 and 1978.

It's worth noting that UK oil production peaked when oil prices peaked in the '80s. If you are going to deplete a limited resource, it's best to do so when prices are the highest. I know that was not what was planned—it was an accident of history—but a fortunate one!

Just to reflect on history: the fourfold oil price rise in '73 led to the end of the Heath Government; the fourfold oil price rises in '78/'79 had the same impact on Callaghan. Is today's gas price rise Putin's revenge on others?

September 2021, with minor updates