This Iran crisis had an impact on oil prices.  This oil shock in Iran was associated with events in the Middle East, but it was also driven by strong global oil demand.  The formation of OPEC, the oil producing countries, in the late 1960s led to the first gas price shock.  OPEC restructured the global system of oil production in favor of oil-producing states and away from an oligopoly of dominant Anglo-American oil firms.  In the 1970s, restrictions in oil production led to a dramatic rise in oil prices with long-lasting and far-reaching consequences for the global economy.  The Iranian Revolution began when the royal reign of Shah Mohammad Reza Pahlavi collapsed and Sheikh Khomeini took control as grand ayatollah of the Islamic Republic in 1979.  Iranian oil output declined by 4.8 million barrels per day, 7% of the world production at that time.  The Iranian disruption may have prompted a fear of further disruptions and spurred widespread speculative hoarding.  Oil prices began to rise rapidly in mid-1979, more than doubling between April 1979 and April 1980.  Surging oil demand, coming both from a booming global economy and a sharp increase in precautionary demand, was responsible for much of the increase in the cost of oil during the crisis.  Through early 1978, the Federal Reserve had maintained a highly accommodative stance on monetary policy, hoping to combat rising unemployment.  However, the policies showed little success in stifling the deterioration in the unemployment rate and likely fostered an environment that allowed the rising energy prices to be transmitted into more general inflation.  Consumer inflation, which had already begun to accelerate in the United States, continued to rise, from below 5% in early 1976 to nearly 7% in 1979.  Despite increasing concern among the public about the declining value of the dollar and the rising pace of inflation, the Fed committee remained hesitant to raise interest rates too aggressively, fearful of stifling fragile economic growth.  Nevertheless, the Fed raised the federal funds rate from 6.9 % in April, 1978, to 10% by the end of the year.  The increase was a clear move to try to curb rising inflation.  However, the increases were timid and insufficient to stem a surge in inflationary pressure, which had already become entrenched in the American psyche and economy.  The twelve-month consumer price index inflation rose to 9% by the end of 1979.  The Carter administration’s decision to appoint Paul Volcker as Fed chairman in August 1979 was a strong endorsement of using more aggressive monetary policy to try to break inflation’s stranglehold on the US economy.  As the president of the Federal Reserve Bank of New York, Volcker had been an outspoken proponent of using monetary policy to combat rising inflation. Volcker and the policy-setting Fed made taming inflation their top priority, even if it came at the detriment of short-term employment.  The policies ultimately proved successful in breaking the cycle of stagflation in the United States.  Volcker guided the Fed in raising the federal funds rate from 11% at the time he took office to a peak of 19% in 1981.  These policy moves successfully lowered the rate of twelve-month inflation from a peak of nearly 15% to 4% by the end of 1982.  Though the Fed’s resolve under Volcker was effective in reducing inflation, the monetary contraction, combined with the impact from the oil price shock, pushed the economy into the most severe recession since the Great Depression and spurred strong popular opposition.  Eventually, slowing economic activity in industrial countries and investments in additional energy production and energy conservation technologies helped to saturate the market with oil and brought an end to the oil crisis.  Beginning in mid-1980, real oil prices began to subside, igniting a decline that would last for much of the next twenty years.  What do you know about oil, inflation, and interest rates?