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 operating fuel-inefficient vehicles skyrocketed. Rational consumers substituted away from gas-guzzlers toward fuel-efficient alternatives, exactly as classical economic theory predicts (rational agents seek to maximise utility). The data bears this out: average fuel economy jumped from 11.9 mpg in 1973 to 16.9 mpg by 1991, with passenger cars improving even more sharply from 13.4 mpg to 21.2 mpg.

Higher fuel costs also created a significant income effect. Households were effectively poorer - a larger budget share now went to petrol, leaving less for everything else. This inward shift of the budget constraint forced consumers to reconsider their vehicle choices entirely. Many couldn't afford to maintain their previous consumption patterns, so they either drove less or bought smaller, more efficient cars when replacement time came. At the macroeconomic level, this massive outflow of dollars to OAPEC nations exemplified Dutch Disease through import dependence - the resource drain weakened domestic manufacturing as capital flowed out to pay for expensive oil rather than strengthening tradable sectors. The impact on consumption can also be linked to the marginal propensity to consume (MPC): as more of household income was absorbed by essential expenses like fuel, the portion available for discretionary spending decreased, meaning that overall consumption of non-essential goods fell proportionally to the MPC. Even consumption of essential fuel-related goods declined where possible - heating oil consumption per household dropped by 37% as families reduced usage to preserve their budgets. At the start of the decade (pre-oil crisis), the most popular vehicle sold in the US was the Chevrolet Impala, available with a base 4.1L I6 to a 7.4L V8 engine option. By 1975, the Oldsmobile Cutlass, a mid-sized car with better fuel economy, became the best-selling car in 1975 with 324,610 units.

Lasting Impact: From Consumer Choices to Energy Independence

The 1973 crisis triggered lasting changes in how Americans think about and purchase vehicles, all rooted in how they respond to price changes - what economists call elasticity.

The crisis revealed something surprising: while people couldn't immediately change their driving habits when stuck with gas-guzzling cars, their long-term response was enormous. CAFE standards requiring 27.5 mpg by 1985 – 2x the 1973 average - locked in this shift toward efficiency. Consumers proved remarkably willing to abandon domestic brands for Japanese manufacturers offering better fuel economy. Toyota's US sales exploded from 346,920 in 1976 to over 2M by 2000, with the Camry becoming America's best-selling car from 1997 to the present day. The 1973 shock permanently increased consumer sensitivity to fuel costs, a trend that has only intensified with the rapid adoption of EVs led by California start-ups like Tesla and Lucid (backed by generous federal subsidies/grants). EVs represent the ultimate expression of consumer desire to eliminate fuel price volatility entirely from transportation costs.

Beyond individual choices, the crisis forced America to rethink its oil dependence at a national level. The 1973 shock exposed a critical vulnerability: heavy imports meant foreign supply disruptions could shift SRAS left, triggering dramatic cost-push inflation and stagflation.

Leftward shift of SRAS due to rising oil prices, increasing production costs and reducing output at existing price levels

By 2005, imports hit 60% of consumption, leaving the economy exposed to the Prebisch-Singer hypothesis - the risk that commodity prices would trend upward over time relative to manufactured goods, creating persistent terms of trade deterioration for oil-importing economies. The response came in 2 waves. First, efficiency improvements reduced oil intensity - fleet fuel economy rising from 13.4 mpg (1973) to 25.4 mpg (2010) meant less oil per unit of output, weakening inflationary pressure from price shocks. Then fracking transformed supply entirely: domestic production surged from 5M barrels/day (2008) to 13M (2019), making America a net exporter and cutting imports to 11%. This created a reverse J-curve effect - when prices spike now, domestic producers ramp up output quickly, moderating increases and preventing the severe SRAS shifts that caused 1970s stagflation. The economy gained an automatic stabilising hedge against cost-push inflation, reducing vulnerability to supply-side shocks.

 Glossary

Ø    Substitution effect - When people switch from buying something that's gotten more expensive to buying a cheaper alternative instead, like choosing chicken when beef prices increase.

Ø    Income effect - When a price change makes you feel richer/poorer, affecting how much you can buy overall.

Ø    Dutch Disease - When a country becomes dependent on exporting one commodity (like oil) that it weakens the rest of its economy, making other industries less competitive

Ø    Marginal Propensity to Consume - Proportion of each additional dollar of income that people spend instead of saving – so if an individual’s MPC is 0.7, they spend 70 cents of every extra dollar they earn.

Ø    Prebisch-Singer Hypothesis - Theory that states that over time, prices of raw materials/commodities tend to fall relative to prices of manufactured goods, meaning that ‘periphery’ countries that export commodities gradually get poorer in terms of what they can buy from ‘core’ industrialised nations.

Ø    Terms of Trade - Ratio of export prices to import prices, showing how much a country can import for each unit it exports. Calculated as (Index of Export Prices / Index of Import Prices) × 100. The Prebisch-Singer hypothesis predicts this ratio declines over time for commodity-exporting periphery countries.

Ø    Reverse J-Curve Effect - When an economy experiences a brief negative impact from a price shock but recovers faster than traditional models predict, because domestic production can quickly increase to moderate the shock and stabilize prices.

Ø    Automatic Stabilisers - Built-in features of the economy that automatically cushion against shocks without needing government action, like unemployment benefits kicking in during recessions.

References

U.S. Energy Information Administration. Emission Standards: USA: Cars Fuel Economy (1978-2011). DieselNet. Available at: https://dieselnet.com/standards/us/fe.php

U.S. Energy Information Administration. United States produces more crude oil than any country, ever. Available at: https://www.eia.gov/todayinenergy/detail.php?id=61545

Union of Concerned Scientists. A Brief History of US Fuel Efficiency Standards. Available at: https://www.ucs.org/resources/brief-history-us-fuel-efficiency

University of Michigan (2013) Fuel efficiency of vehicles on the road: Little progress since the 1920s. University of Michigan News. Available at: https://news.umich.edu/fuel-efficiency-of-vehicles-on-the-road-little-progress-since-the-1920s/

Best Selling Cars Blog (2013) USA 1975: Oldsmobile Cutlass and Ford Granada on top. Available at https://bestsellingcarsblog.com/1976/01/usa-1975-oldsmobile-cutlass-and-ford-granada-on-top/

Federal Reserve Bank of Chicago (1994) The 1973 Oil Crisis: One Generation and Counting. Chicago Fed Letter, October. Available at: https://www.chicagofed.org/publications/chicago-fed-letter/1994/october-86

About the Author

Leandro D. Wiggett is a first-year BSc Business student at Northeastern University London, pursuing a pathway in Economics. Having won several business-related competitions, he continues to pursue academic excellence through essay writing that bridges economics, business, and politics. Selected to attend university-run programmes at Oxford, Cambridge, and UCL, he has built a strong foundation in economic theory and its real-world applications. For questions and inquiries, he can be reached at: wiggett.l@northeastern.edu.