The 1973 OIL CRISIS began in October 1973 when the members of the
* 1 Summary
* 2 Background
* 3 Embargo * 4 Chronology
* 5 Effects
* 5.1 Immediate economic effects
* 5.2 Price controls and rationing
* 5.3 Conservation and reduction in demand
* 5.4 Alternative energy sources * 5.5 Macroeconomy
* 5.6 International relations
* 5.7 Automobile industry
* 5.7.1 Western Europe
* 6 Decline of OPEC * 7 See also * 8 References * 9 Sources * 10 External links
The embargo was a response to American involvement in the 1973 Yom
Kippur War . Six days after
The crisis had a major impact on international relations and created
a rift within
Independently, OAPEC members agreed to use their leverage over the world price-setting mechanism for oil to stabilize their incomes by raising world oil prices after the recent failure of negotiations with Western oil companies.
The embargo occurred at a time of rising petroleum consumption by industrialized countries and coincided with a sharp increase in oil imports by the world's largest oil consumer, the United States. In the aftermath, targeted countries initiated a wide variety of policies to contain their future dependency.
The 1973 "oil price shock", with the accompanying 1973–74 stock
market crash , was regarded as the first discrete event since the
The embargo's success demonstrated
US OIL PRODUCTION DECLINE
In 1970, US oil production started to decline, exacerbating the
embargo's impact. Following this, Nixon named
James E. Akins as US
The oil embargo had little effect on overall supply, according to Akins.
The Organization of the
At first, OPEC operated as an informal bargaining unit for resource-rich third-world countries. OPEC confined its activities to gaining a larger share of the profits generated by oil companies and greater control over member production levels. In the early 1970s it began to exert economic and political strength; the oil companies and importing nations suddenly faced a unified exporter bloc.
END OF THE BRETTON WOODS CURRENCY ACCORD
On August 15, 1971, the
This contributed to the "Oil Shock". After 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947 to 1967, the dollar price of oil had risen by less than two percent per year. Until the oil shock, the price had also remained fairly stable versus other currencies and commodities. OPEC ministers had not developed institutional mechanisms to update prices in sync with changing market conditions, so their real incomes lagged. The substantial price increases of 1973–1974 largely returned their prices and corresponding incomes to Bretton Woods levels in terms of commodities such as gold.
YOM KIPPUR WAR
On October 6, 1973,
On October 12, 1973, US president
In response to American aid to Israel, on October 16, 1973, OPEC
raised the posted price of oil by 70%, to $5.11 a barrel. The
following day, oil ministers agreed to the embargo, a cut in
production by five percent from September's output and to continue to
cut production in five percent monthly increments until their economic
and political objectives were met. On October 19, Nixon requested
Congress to appropriate $2.2 billion in emergency aid to Israel,
including $1.5 billion in outright grants.
George Lenczowski notes,
"Military supplies did not exhaust Nixon's eagerness to prevent
Israel's collapse...This decision triggered a collective OPEC
Price increases were also imposed greatly. Since short-term oil
demand is inelastic , immediate demand falls little when the price
rises. Thus, market prices rose from $3 per barrel to $12 per barrel
to reduce demand to the new, lower level of supply. The world
financial system, which was already under pressure from the Bretton
Woods breakdown, was set on a path of recessions and inflation that
persisted until the early 1980s, with oil prices remaining elevated
until 1986. The price of oil during the embargo. The graph is
based on the nominal, not real , price of oil, and so overstates
prices at the end. However, the effects of the
Over the long term, the oil embargo changed the nature of policy in the West towards increased exploration, alternative energy research, energy conservation and more restrictive monetary policy to better fight inflation.
* January 1973—The
1973–74 stock market crash commences as a
result of inflation pressure and the collapsing monetary system .
* August 23, 1973—In preparation for the
IMMEDIATE ECONOMIC EFFECTS
A man at a service station reads about the gasoline rationing system in an afternoon newspaper; a sign in the background states that no gasoline is available. 1974
The effects of the embargo were immediate. OPEC forced oil companies to increase payments drastically. The price of oil quadrupled by 1974 to nearly US$12 per barrel (75 US$/m3).
This price increase had a dramatic effect on oil exporting nations, for the countries of the Middle East who had long been dominated by the industrial powers seen to have taken control of a vital commodity. The oil-exporting nations began to accumulate vast wealth.
Some of the income was dispensed in the form of aid to other
underdeveloped nations whose economies had been caught between higher
oil prices and lower prices for their own export commodities, amid
shrinking Western demand. Much went for arms purchases that
exacerbated political tensions, particularly in the Middle East. Saudi
Arabia spent over 100 billion dollars in the ensuing decades for
helping spread its fundamentalist interpretation of Islam, known as
Wahhabism , throughout the world, via religious charities such
al-Haramain Foundation , which often also distributed funds to violent
Control of oil became known as the "oil weapon." It came in the form
of an embargo and production cutbacks from the
In the United States, scholars argue that there already existed a negotiated settlement based on equality between both parties prior to 1973. The possibility that the Middle East could become another superpower confrontation with the USSR was of more concern to the US than oil. Further, interest groups and government agencies more worried about energy were no match for Kissinger's dominance. In the US production, distribution and price disruptions "have been held responsible for recessions, periods of excessive inflation, reduced productivity, and lower economic growth."
The embargo had a negative influence on the US economy by causing immediate demands to address the threats to U.S. energy security. On an international level, the price increases changed competitive positions in many industries, such as automobiles. Macroeconomic problems consisted of both inflationary and deflationary impacts. The embargo left oil companies searching for new ways to increase oil supplies, even in rugged terrain such as the Arctic. Finding oil and developing new fields usually required five to ten years before significant production. Gas stealers beware, 1974
OPEC-member states raised the prospect of nationalization of oil
company holdings. Most notably,
US retail price gas prices rose from a national average of 38.5 cents
in May 1973 to 55.1 cents in June 1974. State governments requested
citizens not to put up Christmas lights .
The embargo was not uniform across Europe. Of the nine members of the
European Economic Community (EEC), the
The EEC was unable to achieve a common policy during the first month
of the War. It issued a statement on November 6, after the embargo and
price rises had begun. It was widely viewed as pro-
Despite being relatively unaffected by the embargo, the UK nonetheless faced an oil crisis of its own—a series of strikes by coal miners and railroad workers over the winter of 1973–74 became a major factor in the change of government . Heath asked the British to heat only one room in their houses over the winter. The UK, Germany, Italy, Switzerland and Norway banned flying, driving and boating on Sundays. Sweden rationed gasoline and heating oil. The Netherlands imposed prison sentences for those who used more than their ration of electricity.
A few months later, the crisis eased. The embargo was lifted in March 1974 after negotiations at the Washington Oil Summit, but the effects lingered throughout the 1970s. The dollar price of energy increased again the following year, amid the weakening competitive position of the dollar in world markets.
PRICE CONTROLS AND RATIONING
Price controls exacerbated the crisis in the US. The system limited the price of "old oil" (that which had already been discovered) while allowing newly discovered oil to be sold at a higher price to encourage investment. Predictably, old oil was withdrawn from the market, creating greater scarcity. The rule also discouraged development of alternative energies . The rule had been intended to promote oil exploration . Scarcity was addressed by rationing (as in many countries). Motorists faced long lines at gas stations beginning in summer 1972 and increasing by summer 1973.
In 1973, Nixon named William E. Simon as the first Administrator of the Federal Energy Office, a short-term organization created to coordinate the response to the embargo. Simon allocated states the same amount of domestic oil for 1974 that each had consumed in 1972, which worked for states whose populations were not increasing. In other states, lines at gasoline stations were common. The American Automobile Association reported that in the last week of February 1974, 20% of American gasoline stations had no fuel. Oregon gasoline dealers displayed signs explaining the flag policy in the winter of 1973–74
Odd–even rationing allowed vehicles with license plates having an odd number as the last digit (or a vanity license plate ) to buy gas only on odd-numbered days of the month, while others could buy only on even-numbered days.
In some states, a three-color flag system was used to denote gasoline availability at service stations—green for unrationed availability, yellow for restricted/rationed sales and red for out of stock. Gasoline ration stamps printed by the Bureau of Engraving and Printing in 1974, but not used.
Rationing led to violent incidents, when truck drivers chose to
strike for two days in December 1973 over the limited supplies Simon
had allocated for their industry. In
America had controlled the price of natural gas since the 1950s. With the inflation of the 1970s, the price was too low to encourage the search for new reserves. America's natural gas reserves dwindled from 237 trillion in 1974 to 203 trillion in 1978. The price controls were not changed despite president Gerald Ford 's repeated requests to Congress.
CONSERVATION AND REDUCTION IN DEMAND
To help reduce consumption, in 1974 a national maximum speed limit of
55 mph (about 88 km/h) was imposed through the Emergency Highway
Energy Conservation Act . Development of the Strategic Petroleum
Reserve began in 1975, and in 1977 the cabinet-level Department of
Energy was created, followed by the
National Energy Act of 1978. On
November 28, 1995,
Year-round daylight saving time was implemented from January 6, 1974, to February 23, 1975. The move spawned significant criticism because it forced many children to travel to school before sunrise. The prior rules were restored in 1976. Gas stations abandoned during the crisis were sometimes used for other purposes. This station at Potlatch , Washington, was turned into a revival hall.
The crisis prompted a call to conserve energy, most notably a campaign by the Advertising Council using the tagline "Don't Be Fuelish". Many newspapers carried advertisements featuring cut-outs that could be attached to light switches, reading "Last Out, Lights Out: Don't Be Fuelish."
By 1980, domestic luxury cars with a 130-inch (3.3 m) wheelbase and gross weights averaging 4,500 pounds (2,041 kg) were no longer made. The automakers had begun phasing out the traditional front engine/rear wheel drive layout in compact cars in favor of lighter front engine/front wheel drive designs. A higher percentage of cars offered more efficient 4-cylinder engines. Domestic auto makers also began offering more fuel efficient diesel powered passenger cars as well.
Though not regulated by the new legislation, auto racing groups
voluntarily began conserving. In 1974, the
24 Hours of Daytona was
In 1976, Congress created the Weatherization Assistance Program to help low-income homeowners and renters reduce their demand for heating and cooling through better insulation .
ALTERNATIVE ENERGY SOURCES
A woman uses wood in a fireplace for heat. A newspaper headline before her tells of the community's lack of heating oil.
The energy crisis led to greater interest in renewable energy , nuclear power and domestic fossil fuels. According to Peter Grossman, American energy policies since the crisis have been dominated by crisis-mentality thinking, promoting expensive quick fixes and single-shot solutions that ignore market and technology realities. He wrote that instead of providing stable rules that support basic research while leaving plenty of scope for entrepreneurship and innovation, congresses and presidents have repeatedly backed policies which promise solutions that are politically expedient, but whose prospects are doubtful.
The Brazilian government implemented its " Proálcool " (pro-alcohol) project in 1975 that mixed ethanol with gasoline for automotive fuel.
The crisis was a major factor in shifting Japan's economy away from oil-intensive industries. Investment shifted to industries such as electronics . Japanese auto makers also benefited from the crisis. Increased fuel costs allowed their small, fuel-efficient models to gain market share from the "gas-guzzling" American competition. This triggered a drop in American auto sales that lasted into the 1980s.
Western central banks decided to sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers. The policy is now considered by some to have deepened and lengthened the adverse effects of the embargo. Recent research claims that in the period after 1985 the economy became more resilient to energy price increases.
The price shock created large current account deficits in oil-importing economies. A petrodollar recycling mechanism was created, through which OPEC surplus funds were channeled through the capital markets to the West to finance the current account deficits. The functioning of this mechanism required the relaxation of capital controls in oil-importing economies. It marked the beginning of an exponential growth of Western capital markets .
Many in the public remain suspicious of oil companies, believing they profiteered, or even colluded with OPEC. In 1974, seven of the fifteen top Fortune 500 companies were oil companies, falling to four in 2014.
Cold War policies suffered a major blow from the embargo.
They had focused on China and the
In 2004, declassified documents revealed that the U.S. was so
distraught by the rise in oil prices and being challenged by
under-developed countries that they briefly considered military action
to forcibly seize Middle Eastern oilfields in late 1973. Although no
explicit plan was mentioned, a conversation between U.S. Secretary of
James Schlesinger and British Ambassador to the United States
Lord Cromer revealed Schlesinger had told him that "it was no longer
obvious to him that the U.S. could not use force." British Prime
Edward Heath was so worried by this prospect that he ordered
a British intelligence estimate of U.S. intentions, which concluded
America "might consider it could not tolerate a situation in which the
U.S. and its allies were at the mercy of a small group of unreasonable
countries," and that they would prefer a rapid operation to seize
Western Europe began switching from pro-
With the embargo in place, many developed countries altered their
policies regarding the Arab-Israeli conflict. These included the UK,
which refused to allow the
Although lacking historical connections to the Middle East,
The oil embargo was announced roughly one month after a right-wing
military coup in
A year after the start of the embargo, the UN's nonaligned bloc passed a resolution demanding the creation of a "New International Economic Order " under which nations within the global South would receive a greater share of benefits derived from the exploitation of southern resources and greater control over their self-development.
Prior to the embargo, the geo-political competition between the
The oil shock disrupted the status quo relationships between Arab
countries and the US and USSR. At the time, Egypt,
The USSR's invasion of Afghanistan was only one sign of insecurity in
the region, also marked by increased American weapons sales,
technology, and outright military presence.
In the wake of the 1979
In November 2010, Wikileaks leaked confidential diplomatic cables
pertaining to the
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The oil crisis sent a signal to the auto industry globally, which changed many aspects of production and usage for decades to come.
World War II
The oil crisis pushed West European car buyers away from larger, less
economical cars. The most notable result of this transition was the
rise in popularity of compact hatchbacks . The only notable small
hatchbacks built in Western Europe before the oil crisis were the
Peugeot 104 ,
Buyers looking for larger cars were increasingly drawn to
medium-sized hatchbacks. Virtually unknown in Europe in 1973, by the
end of the decade they were gradually replacing saloons as the
mainstay of this sector. Between 1973 and 1980, medium-sized
hatchbacks were launched across Europe: the Chrysler/Simca Horizon ,
Fiat Ritmo (Strada in the UK), Ford Escort MK3 ,
Renault 14 , Volvo
340 / 360 ,
These cars were considerably more economical than the traditional saloons they were replacing, and attracted buyers who traditionally bought larger vehicles. Some 15 years after the oil crisis, hatchbacks dominated most European small and medium car markets, and had gained a substantial share of the large family car market.
See also: Malaise era See also: Automotive industry in the United States
Before the energy crisis, large, heavy, and powerful cars were
popular. By 1971, the standard engine in a Chevrolet Caprice was a
400-cubic inch (6.5 liter) V8. The wheelbase of this car was 121.5
inches (3,090 mm), and _Motor Trend_'s 1972 road test of the similar
The crisis reduced the demand for large cars. Japanese imports,
From Europe, the
Volkswagen Beetle , the Volkswagen Fastback , the
Renault 8 , the Renault LeCar , and the Fiat Brava were successful.
Detroit responded with the
Some buyers lamented the small size of the first Japanese compacts,
and both Toyota and Nissan (then known as Datsun) introduced larger
cars such as the
Compact trucks were introduced, such as the
An increase in imported cars into North America forced General
Motors, Ford and
Economical imports succeeded alongside heavy, expensive vehicles. In 1976 Toyota sold 346,920 cars (average weight around 2,100 lbs), while Cadillac sold 309,139 cars (average weight around 5,000 lbs).
Federal safety standards, such as NHTSA Federal Motor Vehicle Safety
Standard 215 (pertaining to safety bumpers), and compacts like the
1974 Mustang I were a prelude to the DOT "downsize" revision of
vehicle categories. By 1977, GM's full-sized cars reflected the
crisis. By 1979, virtually all "full-size" American cars had shrunk,
featuring smaller engines and smaller outside dimensions. Chrysler
ended production of their full-sized luxury sedans at the end of the
1981 model year, moving instead to a full front-wheel drive lineup for
1982 (except for the M-body
DECLINE OF OPEC
OPEC soon lost its preeminent position, and in 1981, its production was surpassed by that of other countries. Additionally, its own member nations were divided. Saudi Arabia, trying to recover market share, increased production, pushing prices down, shrinking or eliminating profits for high-cost producers. The world price, which had peaked during the 1979 energy crisis at nearly $40 per barrel, decreased during the 1980s to less than $10 per barrel. Adjusted for inflation, oil briefly fell back to pre-1973 levels. This "sale" price was a windfall for oil-importing nations, both developing and developed.
The embargo encouraged new venues for energy exploration including
Part of the decline in prices and economic and geopolitical power of OPEC came from the move to alternate energy sources. OPEC had relied on price inelasticity to maintain high consumption, but had underestimated the extent to which conservation and other sources of supply would eventually reduce demand. Electricity generation from nuclear power and natural gas , home heating from natural gas, and ethanol -blended gasoline all reduced the demand for oil.
The drop in prices presented a serious problem for oil-exporting
countries in northern Europe and the
When reduced demand and increased production glutted the world market
in the mid-1980s, oil prices plummeted and the cartel lost its unity.
* Energy portal
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_ Wikimedia Commons has media related to 1973 OIL CRISIS _.
* Hakes, Jay (2008). 35 Years After the