Lessons from the Past? How 1970s Middle East Conflict Reshaped the US Economy

With the current atrocities taking place against the citizens of Israel with terrorist group Hamas, it harkens back to the 1973 Arab-Israeli War, also known as the Yom Kippur War, was fought between Israel and a coalition of Arab states led by Egypt and Syria. The war began on October 6, 1973 when Egyptian and Syrian forces launched surprise attacks against Israel on the Jewish holy day of Yom Kippur. While Israel ultimately prevailed, the conflict had profound economic consequences for much of the Western world, especially the United States.

One of the most significant effects of the 1973 war was a steep rise in oil and gas prices. In 1973, the national average price for a gallon of gas was about $0.40. Due to the OAPEC oil embargo imposed on the United States and allies in response to their support of Israel, oil prices quadrupled from around $3 per barrel to over $12 globally. This led gas prices to shoot up as well, rising to over $1.20 per gallon in the US. The embargo also led to gasoline shortages, rationing, and long lines at American gas stations. Today in October 2023, average gas prices remain elevated at around $4.25 per gallon nationally. While not as drastic, another supply impact could put upward pressure on prices.

The oil shocks contributed to severe economic problems in the U.S. and a stock market crash. With the cost of oil skyrocketing, inflation worsened and the economy entered a recession. The country’s GDP declined by 3.1% in 1974, while inflation reached over 10%. The sudden hike in oil prices and economic turmoil even led to a new term: stagflation, or stagnant growth combined with high inflation.

The turbulent economy also had major implications for the U.S. housing market and construction industry. As inflation strained household budgets, demand for new homes and housing construction plunged. Housing starts, or new home constructions, fell by over 26% from 1973 to 1974. The government even imposed a temporary ban on housing construction to reduce energy usage during the oil crisis. With mortgage rates climbing above 10%, home buying became difficult for many Americans. The housing slump continued several more years before starting to recover in the late 1970s.

While the 1970s energy crisis was decades ago, the current conflict between Israel and Hamas has raised some concerns about its potential economic impacts if tensions continue to escalate. Here are some key factors to consider regarding how the violence could affect oil, the US economy, and housing in New Jersey and nationally today:

Oil Prices

- Unlike 1973, the U.S. is now the world's largest oil producer and is far less dependent on foreign oil imports. This makes an OPEC embargo unlikely to affect the U.S. as severely. However, prolonged conflict could constrain Middle East oil production and put upward pressure on prices.

- Benchmark oil prices have already hit multi-year highs in 2022 due to increasing demand as the economy recovers from COVID-19. More tensions could add to this pressure.

- Higher oil prices driven by geopolitical uncertainty could filter into higher fuel and energy costs, feeding into inflation.

US Economy

- The U.S. economy remains in recovery but growth is expected to slow in 2023 compared to 2022. New turmoil in the Middle East has potential to further weaken consumer and business sentiment. This could negatively impact growth, spending, and investment.

- While the U.S. is less dependent on foreign oil than in the 1970s, higher energy prices would still drive up production costs and impact American households. This could take a toll on consumer spending.

- Elevated oil prices could also feed into inflation, which remains high. Rising energy costs would put further upward pressure on prices economy-wide. This could make it more difficult for the Federal Reserve to get inflation under control.

- However, the U.S. economy is also far more diversified than 50 years ago, so impacts would likely be less pronounced than the 1970s crisis. Strategic policy responses could help mitigate the economic damage.

Housing Market

- The housing market faces supply constraints, elevated demand, and affordability challenges in 2023, with average 30-year fixed mortgage rates now over 8% as of October 2023. Conflict leading to higher mortgage rates could exacerbate these issues, cooling demand especially for first-time buyers. For context, mortgage rates shot up to over 10% during the 1973 crisis.

- Building costs are also rising, so oil/fuel price spikes could worsen housing construction and availability. This could impact residential construction jobs.

- For New Jersey, the state's economic reliance on construction/real estate poses risks if housing market slows. However, New Jersey would likely fare better than other states due to economic diversity.

So while parallels exist between current tensions in Israel/Palestine and the 1973 crisis, the differences in U.S. economic fundamentals today make severe stagflation highly unlikely. But potential impacts on oil and energy costs bear monitoring. Any substantial conflict escalation threatens to weaken economic recovery momentum in 2023. But the U.S. economy enters this period far stronger than 50 years ago, suggesting it is better positioned to withstand turmoil. With strategic policy responses, the country can work to mitigate these risks.