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1973 oil crisis

1973 oil crisis

The crisis lasted from 1973 to 1974

Economic crisis

The term “economic crisis” is generally understood to mean the situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis. In such a situation a country’s economy deteriorates significantly. Besides, an economy facing an economic crisis will most likely experience a falling GDP, a shortage of liquidity and rising or falling prices due to either inflation or deflation. An economic crisis has an influence on entire economic activities.

Crude Oil Market

The crude oil market ever since the relationships concerning this good occurred and started developing has never been stable. It has its roots in the nature of this good, as not many countries have access to it; therefore, international conflicts influence the availability of oil a lot. This market also depends on various rapidly changing factors(that will be discussed later in this essay), which makes the situation even worse. Moreover, changes in the oil market themselves have an effect on the economic and political agenda. The fact that these changes can greatly influence the stability in the world makes studying this crisis in detail essential. And this is exactly why we should retrace the steps which led to this crisis.

Causes and OPEC actions

In the post-war period, petroleum prices were stable and not very high, and difficulties with buying oil did not arise; the resource was imported mainly from Arab countries. At that moment Western countries fully relied on oil supplies from the East and expected neither disruptions nor price rises of importing the good. 

The figure of first importance at that time was the OPEC - organization of the petroleum exporting countries. The organization was founded in 1960 in the hope of coordinating oil prices and formulating joint oil production policy. Besides, OPEC was aimed to prevent the future decrease in prices of petroleum in the situation of excess supply in the market. During the next decade, the organization has been evolving rapidly and enlarging its scope of influence. By 1970 crude oil prices were mostly dependent on the OPEC policy. In 1973 the organization imposed an embargo on the United States and other Israel allies in the Yom Kippur War. This meant that member states of OPEC would stop exporting petroleum to these countries. Moreover, OPEC intentionally decreased oil production in order to increase the prices for the good. These actions were to put both political and economical pressure on Israel allies. 

Global consequences

By the time the embargo was lifted in March 1974 oil prices had risen from $3 to $12 per barrel. Moreover, at first, prices fluctuated even more significantly; during the first week there was a 7-times increase in price, it went from $7 to $50 per barrel. These great changes could not but have an effect on industrial production. On average, manufacturing declined by 15-20%. In addition, there was a sharp fall in equity prices that in some countries reached the critical point; for instance, in the USA and France, the decrease was 33%, in the UK - 56%. Obviously, prices for other goods increased greatly and the purchasing power of people declined. What is more, the crisis pushed governments to investigate other energy sources. 

Embargo directly affected the car manufacturing industry and caused the imposition of different sanctions. For example, in some countries prohibitions on motorway driving on Sundays were proposed. In the USA the national speed limit was reduced to 55 miles to conserve petroleum. As for the gas stations, they put colored signs to indicate whether they had petroleum or not; green meant that it was available, yellow stood for rationed amount, and red - for the absence of the good. 

Generally, this crisis created a precedent. It showed that OPEC now had a new tool of establishing its own policy as well as the dependency of other countries on Arab oil supply and their inability to counter OPEC decisions. 

Elimination of the consequences

The US Congress created the Strategic Petroleum Reserve that was believed to be able to supply at least 3 months of oil in case of another embargo. The number of flights was reduced to the minimum, both the number of available TV shows and the time for watching them was limited. The temperature of heating was strictly controlled in every house and apartment. Besides, close control over energy saving was introduced. 

In France, monthly checks of the temperature and the number of some equipment’s working hours were arranged, and for non-compliance with certain standards, inspections had the right to fine enterprises. In addition, any advertising that seemed to encourage the use of energy was banned. 

Japan has also taken measures to address the consequences of this crisis. As in the United States, the new policy was aimed at finding and extracting new energy sources. For example, Japan switched from liquid fuels to liquified natural gas and coal. Moreover, the new course in the development of the Japanese economy was set, introducing a strategy for the industry transition from “energy-intensive” to “knowledge-intensive”. 

What is more, in 1974 the intergovernmental organization IEA (International Energy Agency) was established. Its goal was to help countries affected by embargo in developing a joint policy to respond to oil supply disruptions. Many countries that have joined the IEA have created strategic national oil reserves.

As could be observed, the developed countries began to think about the level of dependence of their economies on oil imports. On the one hand, it allowed them to quickly coordinate their actions to prevent more serious consequences, and on the other hand it even helped countries to reach a brand new level of development. Obviously, the crisis had an effect on several other countries; however, the main trends can be analyzed using the examples of those discussed. 

Despite the terrible consequences that affected the economies of many of the world’s leading states, one country has benefited. The USSR took advantage of the vulnerable position of many countries and began to supply them with oil. Thanks to that action, it became possible to significantly increase the government revenue (within 10 years, budget revenues from oil supplies saw a 14 times increase). In addition, there were favorable conditions for developing the oil sector as well as the prospects of developing the economy of the country on the whole.

Is the repeat of the crisis possible?

According to current estimates, 79.4% of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 64.5% of the OPEC total. Organisation also controls 42% of the current world’s oil supply, which means that it has a huge influence on the oil supply. Therefore, the crisis may recur, even though after the first embargo in 1974, many countries took measures to reduce their dependence on Arabian oil suppliers and discovered alternative energy sources. 

Timeline

Further Resources

Title
Author
Link
Type
Date

 Energy Policy in the U.S. Politics, Challenges, Prospects for Change

Geri L. R., McNabb D. E

2011

“The Strategic Petroleum Reserve: Authorization, Operation, and Drawdown Policy”

Foxon T. J

2017

OPEC Oil Embargo, Its Causes, and the Effects of the Crisis

Kimberly Amadeo

Web

2022

OPEC: Twenty-Five Years of Prices and Politics

Skeet I.

1988

The Colder War: How the Global Energy Trade Slipped from America’s Grasp

Katusa M.

2014

References

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