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File:1973Oil.jpg
One of many gas stations that ran out of fuel during the 1973 Oil Crisis when OPEC embargoed western countries and inflated prices.

The 1973 oil crisis began on October 17, 1973, when the members of Organization of Arab Petroleum Exporting Countries (OAPEC), the Arab members of OPEC plus Egypt and Syria, announced that as a result of the ongoing Yom Kippur War they would no longer ship petroleum to nations that had supported Israel in its conflict with Arabian countries. The United States, its allies in Western Europe, and Japan were effected by the embargo.

About the same time, OPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to raise world oil prices, after the failure of negotiations with the "Seven Sisters" earlier in the month. Because of the dependence of the industrialized world on crude oil and the predominant role of OPEC as a global supplier, these price increases were dramatically inflationary to the economies of the targeted countries, while at the same time suppressive of economic activity. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency on oil.

Events leading to the embargo

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Founding of OPEC

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Member countries of OPEC.
  Current member states

The Organization of the Petroleum Exporting Countries (OPEC) consisted of twelve nations, including Iran, seven Arab countries, Indonesia, Nigeria, Ghana and Venezuela.[1] OPEC had been formed on September 14, 1960 to protest pressure by major oil companies owned by American, British, and Dutch nationals to reduce oil prices and payments to producers.[1] At first it had operated as a bargaining unit for the sale of oil by oil producing nations.[2] It concentrated its activities to gaining a larger share of the revenues produced by Western oil companies and greater control over the levels of production. However, in the early 1970s it began to display its strength.[1]

Yom Kippur War

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After World War II, a homeland for Jewish people, Israel, was created on what was then Palestinian land.[3] The neighboring Arab countries were angry that Palestinian land had been taken to create Israel and refused to acknowledge Israel as an independent state.[3] Due to Israeli victories in the Yom Kippur War of 1973-74, Arab's responded by unifying.[3] During the war the Arab oil producing countries imposed an oil embargo against the United States, Western Europe, and Japan for their continued support of Israel.[4] By the early 1970s the Western oil companies suddenly faced a unified embargo by producers.

The Arab-Israeli conflict triggered a crisis already in the making.[5] President Nixon passed a series of price controls that blocked oil companies from passing the full cost of oil to the consumers.[6] The economy of the United States was in a spiral of inflation, with prices of raw materials and electricity spiking.[5] This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300%, and the same for sugar and cement...; You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say ten times more."[7]

End of Bretton Woods

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On August 15, 1971, the United States ended their use of the Bretton Woods System taking the US off the Gold Standard, where the value of the dollar had been pegged to the price of gold, allowing the dollar to "float".[8] Shortly thereafter, Britain followed, floating the pound off sterling. Industrialized nations followed suit with their respective currencies.[8] In anticipation of the fluctuation of currencies as they stabilized against each other, the industrialized nations also increased their reserves of printed money in amounts far greater than ever before. The result was a depreciation of the value of the US dollar as well as the other currencies of the world.[8] Since oil was priced in dollars this meant that oil producers were receiving less real income for the same price, and OPEC issued a joint communique stating that forthwith they would price a barrel of oil against gold.[9] This led to the Oil Shock of the mid-seventies.[10] In the years after 1971, OPEC was slow to readjust prices to reflect this depreciation. OPEC ministers had not developed the institutional mechanisms to update prices rapidly enough to keep up with changing market conditions, so their real incomes lagged for several years. The large price increases of 1973-74 largely "caught up" their incomes to Bretton Woods levels in terms of other commodities such as gold. [9]

Oil embargo

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On October 16, 1973, OPEC cut production of oil and placed an embargo on shipments of crude oil to western countries;[11] with the Netherlands and United States specifically targeted. Also imposed was a boycott of Israel[10] and worldwide price increases of oil. Since oil demand falls little with price rises, prices had to rise dramatically to reduce demand to the new lower level of supply.[12] Anticipating this, the market price for oil immediately rose substantially. A world financial system already under pressure from the breakdown of the Bretton Woods agreement was set on a path of a series of recessions and high inflation that persisted until the early 1980s, and elevated oil prices persisted until 1986.

The price of oil during the embargo. The graph is based on the nominal, not real, price of oil and overstates prices at the end. However, the effects of the Arab Oil Embargo are clear—it effectively doubled the real price of crude oil at the refinery level, and caused shortages in the U.S.
Gas stations were abandoned during the oil crisis en masse. Here, a station has been converted into a religious hall.
Year Date Event
1973 August 24 In preparation for the Yom Kippur War, Saudi King Faisal and Egyptian president Anwar Sadat meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the "oil weapon" as part of the upcoming military conflict[13].
1973 September 15 OPEC creates a negotiating front, consisting of the 6 Arab States, to pressure for price increases and an end of support of Israel, based on the 1971 Tehran agreement.[14]
1973 October 6 Egypt and Syria attack Israel on Yom Kippur, using Soviet technology.[4]
1973 October 8 OPEC negotiations with the Seven Sisters oil companies to revise the 1971 Tehran price agreement fail.[15]
1973 October 16 Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait, and Qatar raise posted prices by 17% to $3.65 per barrel and announce production cuts.[9]
1973 October 17 OPEC oil ministers agree to use oil as a weapon to punish western countries for their support of Israel in the Arab-Israeli conflict. OPEC recommends an embargo against unfriendly states and mandate a cut in exports.
1973 October 19 Saudi Arabia, Libya and other Arabian states proclaim an embargo on oil exports to the United States.
1973 October 23 The oil embargo is extended to the Netherlands.[5]
1973 November 5 OAPEC announce a 25% output cut for the continued support of Israel. A further 5% cut is threatened.
1973 November 23 The oil embargo is extended to Portugal, Rhodesia, and South Africa.
1973 November 27 U.S. President Richard Nixon signs the Emergency Petroleum Allocation Act authorizing price, production, allocation and marketing controls.[5]
1973 December 9 Oil ministers agree to another five percent cut for non-friendly countries for January 1974.
1973 December 25 The 5% production cut scheduled for January is canceled. Saudi oil minister Yamani promises a ten percent OPEC production rise.[3]
1974 January 7–9 OPEC decides to freeze oil prices until April 1.
1974 February 11 United States Secretary of State Henry Kissinger unveils Project Independence, a plan to make the U.S. energy independent.[16]
1974 March 17 OPEC countries, with the exception of Libya, announce the end of the embargo against the United States.[5]

Economic Impact

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The immediate economic impact of the oil embargo wreaked havoc on the economies of the world.[5] OPEC forced the oil companies to increase payments drastically. The price of oil quadrupled from US$3 in 1974 to nearly US$12 per barrel.[17] This increase in the price of oil had a dramatic effect on oil exporting nations, who had long been dominated by the industrial powers. The traditional flow of capital reversed as the oil exporting nations accumulated vast wealth.[18] Some of the income was dispensed in the form of aid to other underdeveloped nations whose economies had been caught between higher prices of oil and lower prices for their own export commodities and raw materials amid shrinking Western demand for their goods. Much of it, however, fell into the hands of elites who enhanced their own well-being.[18]Much was absorbed in massive arms purchases that exacerbated political tensions, particularly in the Middle East.[10]

OPEC-member states in the developing world withheld the prospect of nationalization of the companies' holdings in their countries. Most notably, the Saudis acquired operating control of Aramco, fully nationalizing it in 1980 under the leadership of Ahmed Zaki Yamani.[19] As other OPEC nations followed suit, the member's income soared. Saudi Arabia undertook a series of large five-year development plans that began in 1980.[10] Other OPEC members also undertook major economic development programs.[1]

Meanwhile, the shock produced economic chaos in the west, the worst slump after the Great Depression.[10] In the United States, the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to $1.20 cents in June 1974.[5] The New York Stock Exchange shares lost $97 billion in value in six weeks.[5] With the onset of the embargo, U.S. imports of oil from the Arab countries dropped from 1.2 million barrels (190,000 m³) per day to 19,000 barrels (3,000 m³). Daily consumption dropped by 6.1% from September to February, and by 7% during summer of 1974.[3]

The embargo was not uniform across Europe. Of the nine members of the European Economic Community (EEC), the Dutch faced a complete embargo for their support of Israel,[10] the United Kingdom and France received almost uninterrupted supplies by having refused to allow America to use their airfields and embargoed arms and supplies to both the Arabs and the Israelis, whilst the other six faced only partial cutbacks.Underscoring the interdependence of the world societies and economies, oil-importing nations in the world saw sudden inflation and economic recession.[10]

Despite being a target of the embargo as well, Japan fared particularly well in the aftermath of the world energy crisis of the 1970s compared to other oil-importing developed nations.[20] Japanese automakers led the way in an ensuing revolution in car manufacturing.[20] The large automobiles of the 1950s and 1960s were replaced by far more compact and energy efficient models, some of which were imported from Japan.<refname="Yom Kippur"/>

On March 17, 1974, the crisis eased. The embargo was lifted after negotiations at the Washington Oil Summit, but the effects of the energy crisis lingered on throughout the 1970s. The price of energy continued increasing in the following year, amid the weakening dollar in world markets.

Prior to the embargo, the political competition between the Soviet Union and the United States, in combination with low oil prices and high demand, presented the Arab States with financial security, economic growth, and international bargaining power.[4] Following the embargo, higher oil prices opened new avenues for energy exploration or expansion including Alaska, the North Sea, the Caspian Sea, and Caucasus.[21]

Price controls and new alternatives

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Gas rationing stamps issued by the US government during the Oil Crisis

The crisis was further increased by government price controls in the United States, which limited the price of "old oil" that had already been discovered, while allowing newly discovered oil to be sold at a higher price, resulting in a withdrawal of old oil from the market and artificial shortage.[22] The rule had been intended to promote oil exploration. This scarcity was dealt with by rationing of gasoline, with motorists facing long lines at gas stations.[22]

In the United States, owners of vehicles with license plates having an odd number as the last digit or a vanity license plate were allowed to purchase gasoline for their cars odd numbered days of the month, while drivers of vehicles with even-numbered license plates were allowed to purchase fuel only on even-numbered days.[22]

The energy crisis led to greater interest in renewable energy and spurred research in solar power and wind power. It led to increased North American oil exploration, and increases of nuclear power. In Australia, heating oil ceased from being considered an appropriate winter heating fuel. Gas-conversion kits that let the heaters burn natural gas or propane were introduced.

The Brazilian government implanted a project called "Proálcool" (pro-alcohol) that would use a mixture of ethanol and gas for fueling motor vehicles. This project is still ongoing and has a positive influence in the efficiency of the vehicles and has decreased the price of the gas in Brazil.

Conservation and reduction in demand

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Gas stations abandoned during the fuel crisis in the winter of 1973-74 were sometimes used for other purposes. This station at Potlatch, Washington, west of Olympia was turned into a religious meeting hall.

The U.S. government response to the embargo was quick but of limited effectiveness. A National Maximum Speed Limit of 55 mph (88 km/h) was imposed to help reduce consumption. President Nixon named William Simon as an official "energy czar," and in 1977, a cabinet-level Department of Energy was created, leading to the creation of the United States's Strategic Petroleum Reserve. The National Energy Act of 1978 was also a response to this crisis.

Year-round daylight saving time was implemented: at 2:00 a.m. local time on January 6, 1974, clocks were advanced one hour across the nation. The move spawned significant criticism because it forced many children to commute to school before sunrise. As a result, the clocks were turned back on the last Sunday in October as originally scheduled, and in 1975 clocks were set forward one hour at 2:00 a.m. on February 23. The pre-existing daylight-saving rules, calling for the clocks to be advanced one hour on the last Sunday in April, were restored in 1976.

The crisis also prompted a call for individuals and businesses to conserve energy — most notably a campaign by the Advertising Council using the tag line "Don't Be Fuelish." Many newspapers carried full-page advertisements that featured cut-outs which could be attached to light switches that had the slogan "Last Out, Lights Out: Don't Be Fuelish" emblazoned thereon.

The U.S. "Big Three" automakers' first order of business after Corporate Average Fuel Economy (CAFE) standards were enacted was to downsize existing automobile categories. By the end of the 1970s, 121-inch wheelbase vehicles with a 4,500 pound gross weight were a thing of the past. Before the mass production of automatic overdrive transmissions and electronic fuel injection, the traditional front engine/rear wheel drive layout was being phased out for the more efficient front engine/front wheel drive, starting with compact cars. Using the Volkswagen Rabbit as the archetype, much of Detroit went to front wheel drive after 1980 in response to CAFE's 27.5 mile per gallon fuel consumption mandate.

Though not required by legislation, the sport of auto racing voluntarily sought reductions. The 24 Hours of Daytona was cancelled in 1974. Also in 1974, NASCAR reduced all race distances by 10%. At the Indianapolis 500, qualifying was reduced from four days down to two, and several days of practice were eliminated.


Effects on international relations

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The Cold War policies of the Nixon administration also suffered a major blow in the aftermath of the oil embargo. They had focused on China and the Soviet Union, but the latent challenge to U.S. hegemony coming from the Third World became evident. U.S. power was under attack even in Latin America.

The oil embargo was announced roughly just one month after a right-wing military coup in Chile toppled elected socialist president Salvador Allende on September 11, 1973. The United States' subsequent assistance to this government did little to curb the activities of socialist guerrillas in the region. The response of the Nixon administration was to propose doubling of the amount of military arms sold by the United States. As a consequence, a Latin American bloc was organized and financed in part by Venezuela and its oil revenues, which quadrupled between 1970 and 1975.

In addition, Western Europe and Japan began switching from pro-Israel to more pro-Arab policies (some of which are still in effect today). This change further strained the Western alliance system, for the United States, which imported only 12% of its oil from the Middle East (compared with 80% for the Europeans and over 90% for Japan), remained staunchly committed to its backing of Israel.

A year after the unveiling of the 1973 oil embargo, the nonaligned bloc in the United Nations passed a resolution demanding the creation of a "new international economic order" in which resources, trade, and markets would be distributed more equitably, with the local populations of nations within the global South receiving a greater share of benefits derived from the exploitation of southern resources, and greater respect for the right to self-directed development in the South be afforded by the North.



See also

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References

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  1. ^ a b c d "A brief history of OPEC". Organization of Petroleum Exporting countries. Retrieved 2007-11-25.
  2. ^ Hervey, Jack. "1973 oil crisis: One generation and counting, The". Chicago Fed Letter. {{cite news}}: Unknown parameter |accesdate= ignored (|access-date= suggested) (help)
  3. ^ a b c d e Horton, Sarah. "The 1973 Oil Crisis". CCDS. Retrieved 2007-11-25.
  4. ^ a b c Richie Ovendale, The Origins Of The Arab-Israeli Wars (New York: Pearson Longman, 2004), p. 184-191 and 197
  5. ^ a b c d e f g h Trumbore, Brian. "The Arab Oil Embargo of 1973-74". Buy and Hold. Retrieved 2007-11-25.
  6. ^ "Time to lay the 1973 Oil Embargo to Rest". CATO Institute. Retrieved 2007-11-25.
  7. ^ Smith, William. D. “Price Quadruples for Iranian Crude Oil at Auction”, New York Times 12 Dec 1973.
  8. ^ a b c Cohen, Benjamin. "Bretton Woods System". Retrieved 2007-12-01.
  9. ^ a b c Hammes, David. and Douglas Wills. “Black Gold: The End of Bretton Woods and the Oil-Price Shocks of the 1970s,” The Independent Review, v. IX, n. 4, Spring 2005. pp. 501-511.
  10. ^ a b c d e f g "Arab Oil Embargo". Palestine Facts. Retrieved 2007-11-26.
  11. ^ "This Day in History 1973". The History Channel. Retrieved 2007-11-26.
  12. ^ "Oil:It's Back To Supply and Demand". Businessweek. Retrieved 2007-11-26.
  13. ^ Yergin, Daniel H., The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon and Shuster, 1991), p. 597.
  14. ^ "Turbulent Oil Prices". Al-Ahram Weekly. Retrieved 2007-11-26.
  15. ^ "Is OPEC a Cartel?". Boston College. Retrieved 2007-11-26. {{cite web}}: Unknown parameter |publishdate= ignored (help)
  16. ^ "America, Oil, and National Security". National Environmental Trust. Retrieved 2007-11-26.
  17. ^ "The price of oil - in context". CBC. Retrieved 2007-05-29.
  18. ^ a b "Middle East politic, War, Oil". Retrieved 2007-11-26.
  19. ^ "Our Story". Saudi Aramco. Retrieved 2007-11-26.
  20. ^ a b "This Day in History 1973". The History Channel. Retrieved 2007-11-26.
  21. ^ Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon and Shuster, 1991), p. 619-625
  22. ^ a b c "1974 Gas Rationing In The U.S." Gasolinegasoline.com. Retrieved 2007-12-01.

Further reading

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  • Alan S. Blinder, Economic Policy and the Great Stagflation (New York: Academic Press, 1979)
  • Otto Eckstein, The Great Recession (Amsterdam: North-Holland, 1979)
  • Mark E. Rupert and David P. Rapkin, "The Erosion of U.S. Leadership Capabilities"
  • Paul M. Johnson and William R. Thompson, eds., Rhythms in Politics and Economics (New York: Praeger, 1985)
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