The first oil crisis of my lifetime was in the mid-1970s and it revolves around a hazy memory of the Rumble in the Jungle. Fought in Kinshasa (then in Zaire, now the Democratic Republic of Congo), the fight saw the older Muhammad Ali tactically ensnare the younger, more powerful George Foreman with his now-famous “rope-a-dope” strategy.

Ali knew he couldn’t go toe to toe with Foreman, but if he lay on the ropes, using the elasticity of the ropes to absorb the punches, Foreman would eventually tire himself out, allowing Ali to conserve energy and then pounce. The fight, watched by one billion people worldwide (one in four of the global population), was timed for 9pm American prime-time viewing, making it 2am in Ireland and 4am in Zaire.

It was the biggest event of my seven-year-old life, made more exciting by the fact that not only was I allowed to stay up all night but, in our black-and-white 1970s world, my dad rented a colour TV from Eddie Totterdell’s in Dún Laoghaire for the night. Neighbours crowded into our kitchen to watch in technicolour. We were witnessing the future.

But why was the fight in Zaire? Who paid for it and with what money? This is where the 1973 oil shock comes in. By the early 1970s, Egypt and Syria were determined to avenge their defeat in the 1967 war against Israel, when Gaza, Sinai, the Golan Heights and the West Bank were lost to the Israelis. Oil markets were beginning to change. The big American and British companies, the so-called Seven Sisters that had controlled the oil markets, keeping oil prices artificially low, had been pushed out by Arab leaders determined to be paid the going price for their precious resource.

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Arab-dominated Opec replaced the Seven Sisters as the arbiter of oil prices. Western dependency on oil had also increased dramatically. In the US, domestic oil consumption rose from 6.5 million barrels per day in 1950 to more than 15 million just before the Yom Kippur War in 1973, while oil generated 50-70 per cent of most western countries’ electricity by 1973.

In October 1973, Arab armies together with Cuban forces, armed by the Soviet Union, attacked Israel. They lost and, angry at the West for supporting Israel, OAPEC (the Arab subset of Opec) responded to Nixon’s $2.2 billion military aid pledge to Israel with an oil embargo on the US from October 19th, paired with large production cuts. The embargo ran until March 1974.

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The global oil price – $2.90 per barrel before the war – surged more than fourfold to $11.65 by January 1974, reaching $13.06 per barrel by June 1974. Wealth moved from the West to the Arab oil-producing countries, which were not prepared for and couldn’t absorb this enormous quantity of money. The Arabs lent this money to the western banking system and the banks in turn lent to any government that could back their loans with collateral.

For Zaire, one of the biggest commodity producers in the world, the spike in commodities prices enabled it to borrow heavily. Flush with petrodollars,Mobutu Sese Seko, the president of Zaire, decided to finance any number of pet projects that might put his country on the global map, the most prominent of which was the world heavyweight bout. And that is why the Rumble in the Jungle took place in Zaire. It was an unlikely consequence of the shifts in global money associated with the movement in oil prices.

Meanwhile, oil-importing countries in the West went into recession. As inflation rose, output and trade collapsed. World income, which had been rising at 6 per cent in 1973, slumped to 1.4 per cent in 1975. World trade swung from 12 per cent growth in 1973 to a 7.3 per cent contraction in 1975. Foreign investment halved between 1973 and 1975. In Ireland, an economy that was managing to grow in the early 1970s for the first time since independence, took a battering. Inflation jumped from 8.6 per cent in 1972 to 20.9 per cent by 1975 and growth fell from 6.5 per cent in 1972 to 1.4 per cent in 1976. Unemployment accelerated and Ireland didn’t recover from the 1973 oil shock and it was hit again by another oil shock in 1979 after the Iranian Revolution.

Emboldened by the damage to the West caused by the first oil shock, the new regime in Tehran halted Iran’s oil exports of 4.8 million barrels per day, which was 7 per cent of global production, driving prices from just under $15 per barrel in December 1978 to $30 a year later. Then the 1980 Iraq-Iran War removed Iraqi exports of more than three million barrels per day. Arab production fell a further 35 per cent and prices peaked at $39 per barrel in February 1981 – 160 per cent above pre-revolution levels. The western economy slumped again.

Economic history has a habit of repeating itself and I don’t see how this time could be different. Do you?

Economic history has a habit of repeating itself and I don’t see how this time could be different. Do you?

The reaction in the West is so immediate to price shocks that these price increases rarely persist because the recessions bring down the demand for oil. In addition, every time there is a spike in oil prices, oil production in inaccessible and expensive oil fields such as the North Sea comes on stream, raising global supply, meaning the prices tend to fall quickly. But still the damage is done.

As a general rule, factories that close when oil prices are high don’t tend to reopen when oil prices fall. The associated unemployment in the 1970s and 1980s, therefore, tended to be permanent as the deindustrialisation of large parts of the west was accelerated by both oil shocks. There was another milder oil shock in 1990 and a modest recession in the early 1990s.

Even the 2008 crash, which was mostly associated with over-lending, was preceded by a period when oil prices surged to a record high of roughly $147 per barrel, driven not by supply disruption but by overheating global demand. Within months, the global financial system collapsed and oil prices crashed too, falling to about $40 by early 2009. But as we know too well in Ireland, again the damage was already done.

Are you seeing a pattern here? Every time there is an oil shock there is a recession. By now you would think that 50 years of experience, and four decades of environmental politics and green parties in governments, might have weaned us off our dependency on fossil fuels and switched us towards renewables and nuclear. That has not happened. In fact, things have worsened. Ireland is now one of the most oil- and gas-dependent countries in Europe and, as a result, we have the third most expensive electricity in the EU.

Now that we are experiencing another oil shock, will there be a recession as has been the case four times in the past five decades? If we had spent the past half century finding alternative sources of energy to power the country, we might have a hope. But we didn’t. Economic history has a habit of repeating itself and I don’t see how this time could be different. Do you? Who are the dopes and who is on the ropes now?

© The Irish Times