How the 1973 Oil Crisis Changed the Way America Drives
By Leandro Wiggett Introduction & Overview: What Happened In late 1973, members of OAPEC (Arab oil‑exporting countries) imposed an oil embargo on nations supporting Israel during the Yom Kippur War. The global oil supply was sharply cut, causing oil prices to 4x almost overnight. This was a major negative supply shock which rippled through economies: energy costs soared, inflation surged, growth slowed, and consumers and industries were forced to adjust to a new reality of more expensive fuel. The automotive sector, heavily dependent on imported, cheap oil, was among the hardest hit. Consumer Choices and the Shift to Fuel-Efficient Cars American households faced a straightforward budget problem: they couldn't afford both their existing vehicles and the now-expensive gasoline to run them. Their response shows the substitution and income effects working together. The substitution effect was immediate and dramatic. As petrol became more expensive, the relative cost of operatin...