A missile in the Strait of Hormuz, a drone explosion, or a military incident can change fuel prices not only in the Middle East but all over the world. In recent weeks, the tension created by the Israel-Iran confrontation and the observed increase in oil prices have reminded many of us of the famous energy crisis of the 1970s. At that time, the turmoil in the oil market led the world economy to years of inflation and stagnation.
However, the interesting point is that today, even though similar geopolitical risks exist, the world economy does not seem as vulnerable as before. The latest analysis by the International Monetary Fund (IMF) confirms this. The Fund believes that the global economy has significantly increased its resistance to energy shocks over the past 50 years.
Why was the 1973 crisis so devastating?
In 1973, the oil embargo imposed by Arab countries against states supporting Israel caused a major upheaval in the world economy. After OPEC's decision, the price of oil increased by approximately four times in just a few months.
In the US, queues kilometers long formed in front of gas stations. In many European countries, car use was restricted on Sundays, and street lighting was reduced. Production costs rose, inflation reached record levels, and the world economy entered a long period of "stagflation" - a period of high inflation and weak economic growth simultaneously.
In 1979, the Iranian Islamic Revolution also caused a second major oil shock, further increasing uncertainty in the energy market.
The world is no longer the same world
Today, however, the situation is completely different. The IMF notes that over the past half-century, the world economy has become much more energy efficient. If in the 1970s it took twice as much energy to produce a certain volume of GDP, now the same economic result requires less energy.
The main reasons for this are technological development, optimization of production processes, digitalization, and the increasing share of the service sector in the economy. In other words, economic growth is no longer as dependent on oil as before.
Diversification of energy sources has changed the rules of the game
Another important reason why the world economy is more resilient to energy shocks is the significant diversification of energy sources compared to before. If in 1973, oil accounted for approximately half of global energy consumption, today that figure is below one-third. This change is not accidental. Over the past decades, the use of natural gas has expanded, nuclear energy has developed, and solar and wind energy have become the fastest-growing energy sources in the world. At the same time, the rapid increase in the number of electric vehicles is gradually reducing dependence on oil in the transport sector.
Data from the International Energy Agency (IEA) also shows that in recent years, the largest growth in the global energy sector has been in renewable energy sources. As a result, the world economy is no longer a system built solely on oil, as it once was. Today, although every increase in oil prices causes concern in the markets, its impact on the economy is not as devastating as it was 40-50 years ago. This is because countries have alternative energy sources, and these alternatives play the role of an additional safety cushion for the global economy.
Why is the Strait of Hormuz so important?
Nevertheless, the Strait of Hormuz still maintains its importance as one of the most sensitive points in the world energy market. This narrow waterway connecting the Persian Gulf to the open sea via the Gulf of Oman is considered one of the main arteries of global energy trade. Approximately a quarter of the world's crude oil transported by sea, as well as a large part of liquefied natural gas, passes through this route. Major energy exporters such as Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and Qatar mainly use this strait for access to the world market.
That is why any military tension or news about restrictions on transport in the region immediately resonates in the markets. Investors begin to factor in the possibility of reduced oil supplies into prices in advance. Even if the strait is not closed, the emergence of such a risk is enough for oil prices to rise and uncertainty in the energy market to increase. For this reason, the Strait of Hormuz is considered one of the most important points of strategic importance not only for the Middle East but also for the stability of the global economy.
But not all countries are equally affected
However, the increase in oil prices does not affect all countries equally. One of the key factors playing a decisive role here is the extent to which countries depend on energy imports. For example, large oil importers such as Japan, India, and South Korea feel the price increase more painfully. This is because as energy becomes more expensive, production costs increase, transportation and logistics become more expensive, which in turn accelerates inflation and increases pressure on the foreign trade balance.
Another important factor is the financial capabilities of states. Countries with strong fiscal reserves can mitigate the impact of price increases to some extent through fuel subsidies, tax breaks, and social support packages. States with limited financial capabilities, however, struggle to protect both businesses and the population in the same situation. That is why the same event in the global market can result in a mere price increase in one country, while in another, it can lead to weakening economic growth, high inflation, and even social tension. Considering that more than 80 percent of the world's countries are net oil importers, the scale of this risk becomes clearer.
What does this mean for Azerbaijan?
The situation in Azerbaijan is somewhat different. As an energy exporter, rising oil prices create certain advantages for the economy in the short term. During such periods, state budget revenues increase, State Oil Fund revenues rise, foreign exchange reserves strengthen, and the foreign trade balance improves. This provides the government with additional opportunities to finance economic and social programs.
However, it would not be correct to look at the issue only from this perspective. Azerbaijan is also a country that imports a large number of consumer goods, equipment, and industrial products. Since rising global energy prices increase transportation costs, this sooner or later reflects in the prices of imported products. In other words, while rising oil prices bring additional revenue to the budget, they also increase the risk of inflation. That is why the sustainability of the economy in the long term will depend not on the price of oil, but on the development of the non-oil sector, the expansion of production, and the diversification of the economy.
Who will be the winners of the future?
Geopolitical events in recent years show that the criteria for economic power are changing in the 21st century. If at one time natural resources were considered the main advantage of states, today how to use those resources is of greater importance. Countries that use energy efficiently, invest in innovation, develop high technologies, and diversify their economies across various sectors are better prepared for global crises.
Today, the concept of national security also differs significantly from its previous content. It is no longer just about military power. Energy security, food security, resilience of digital infrastructure, cybersecurity, and sound fiscal policy have become key factors determining the resistance capacity of states. In this sense, the winners of the future will not only be countries with rich energy resources but also states that adapt most quickly to the changing world and can manage global risks in advance.
