1973 oil crisis

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

About the same time, OPEC members agreed to use their leverage over the world price-setting mechanism for oil in order to quadruple world oil prices, after attempts at negotiation with the " Seven Sisters" earlier in the month failed. Due to the dependence of the industrialized world on OPEC oil, 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.

Origins of the 1973 world oil shock

The Arab-Israeli conflict triggered an energy crisis in the making. Before the embargo, the industrialized West, especially the United States, was used to cheap and plentiful petroleum. Post-World War II American cities, with expansive suburbs full of detached, single-family homes, depended on the automobile as the principal form of transportation — a form that consumes oil en masse as fuel. Between 1945 and the late 1970s, the West and Japan consumed more oil and minerals than had been used in all previous recorded history. Oil consumption in the U.S. had more than doubled between 1950 and 1974. With only 6% of the world's population, the U.S. was consuming 33% of the world's energy. At the same time, the U.S. economy accounted for a quarter of total global production, meaning U.S. workers were over four times more productive than the global average. This was a result of their advanced industrial sector, which accounted for over five times the global average for energy usage.

Oil, especially from the Middle East, was paid for in United States dollars (aka petrodollars), at prices fixed in dollars. U.S. President Richard Nixon presided over an economy in which growth was already sluggish, and in which inflation was already troubling. By the summer of 1971, Nixon was under strong public pressure to act decisively to end the dilemma of rising prices and general economic stagnation (see " stagflation"). To allow the value of gold to fall in world markets, Nixon ended the convertibility of the US dollar into gold on August 15, 1971, thereby ending the Bretton Woods system, which had been in place since the end of World War II. The U.S. dollar was devalued by 8% in relation to gold in December 1971, and devalued again in 1973.

The devaluation resulted in increased world economic and political uncertainty. Concurrently, in the early 1970s, the fall in the U.S. dollar went along with a fall in the price of oil (in USD). This improved the situation of U.S. industrialists in relation to European and Japanese competition. But the de-valorization — and then devaluation — of the dollar crystallized the unease of raw materials producers in the Third World; they saw the wealth under their lands being reduced and their assets growing in a currency that was worth significantly less than it had been recently. This set the stage for the struggle for control of the world's natural resources and for a more favorable sharing of the value of these resources between the rich countries and the oil-exporting nations of OPEC .

OPEC devised a strategy of counter-penetration, whereby it hoped to make industrial economies that relied heavily on oil imports vulnerable to Third World pressures . Dwindling foreign aid from the U.S. and its allies, combined with the West's pro-Israeli stance in the Middle East, angered the Arab nations in OPEC.

Founding of OPEC

OPEC consisted of thirteen nations, including seven Arab countries, Iran, and also other major petroleum-exporting countries in the developing world like Venezuela. It had been officially announced on September 14 in Cairo, 1960 to protest pressure by major oil companies (mostly owned by U.S., British, and Dutch nationals) to reduce oil prices and payments to producers. At first it had operated as an informal bargaining unit for the sale of oil by Third World nations. It confined 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.

The Yom Kippur War

The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political force. After the Six Day War of 1967 the Arab members of OPEC formed a separate, overlapping group ( Organization of Arab Petroleum Exporting Countries) for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Ostensibly a reaction to the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces (while at the same time the Soviets were resupplying the Arab forces), the Arab world imposed the 1973 oil embargo against the United States, Western Europe, and Japan. It has since come to light that an accord regarding the usage of the "oil weapon" was actually negotiated before the war by Egypt and Saudi Arabia. Thus by the early 1970s the great Western oil conglomerates suddenly faced a unified bloc of producers.

As mentioned, the Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5% annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil and the closest ally of the United States in the Middle East 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, redefined 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."

Arab oil embargo

On October 16, 1973, as part of the political strategy that included the Yom Kippur War, OAPEC cut production of oil and placed an embargo on shipments of crude oil to the West, with the United States and the Netherlands specifically targeted. Also imposed was a boycott of Israel. Since oil demand is very price inelastic, (i.e., the quantity purchased falls little with price rises), prices had to rise dramatically to reduce demand to the new, lower level of supply. The embargo on oil caused the market price for oil to rise substantially. Government price controls, designed to maintain oil affordability, exacerbated the economic impact by creating shortages. High prices from the embargo were exacerbated by the shortages caused by the price controls, resulting in a series of recessions and high inflation that persisted until the early 1980's.

The price of oil during the embargo.
The price of oil during the embargo.

The graph to the right is based on the nominal -- not real -- price of oil, and so understates prices of more recent years. 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 massive shortages in the US. This exacerbated a recession that had already begun, and led to a global recession through the rest of 1974.

Over the long term, the oil embargo changed the nature of policy in the West toward more exploration and energy conservation. Changes also included a more restrictive monetary policy that was better at fighting inflation.


  • August 23, 1973 - 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.
  • 15 September 1973 - The Organization of Petroleum Exporting Countries (OPEC) declares a negotiating front, consisting of the 6 Persian Gulf States, to pressure for price increases and an end to support of Israel, based on the 1971 Tehran agreement.
  • 6 October - Egypt and Syria attack Israel on Yom Kippur, starting the fourth Arab-Israeli War, the Yom Kippur War.
  • 8 October–10 - OPEC negotiations with oil companies to revise the 1971 Tehran price agreement fail.
  • 16 October - Saudi Arabia, Iran, Iraq, United Arab Emirates, Kuwait, and Qatar unilaterally raise posted prices by 17% to $3.65 a barrel and announce production cuts.
  • 23 October–28 - The Arab oil embargo is extended to the Netherlands.
  • 5 November - Arab producers announce a 25% output cut. A further five percent cut is threatened.
  • 23 November - The Arab embargo is extended to Portugal, Rhodesia, and South Africa.
  • 27 November - U.S. President Richard Nixon signs the Emergency Petroleum Allocation Act authorizing price, production, allocation and marketing controls.
  • 9 December - Arab oil ministers agree a further five percent cut for non-friendly countries for January 1974.
  • 25 December - Arab oil ministers cancel the five percent output cut for January. Saudi oil minister Yamani promises a 10% OPEC production rise.
  • 7 January–9, 1974 - OPEC decides to freeze prices until April 1.
  • 11 February - U.S. Secretary of State Henry Kissinger unveils the Project Independence plan to make U.S. energy independent.
  • 12 February–14 - Progress in Arab-Israeli disengagement brings discussion of oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia.
  • 17 March - Arab oil ministers, with the exception of Libya, announce the end of the embargo against the United States.

Price controls and rationing

U.S. gas rationing stamps, printed in 1974
U.S. gas rationing stamps, printed in 1974

The crisis was further exacerbated by government price controls in the United States, which limited the price of "old oil" (that already 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 scarcity. The rule had been intended to promote oil exploration. This scarcity was dealt with by rationing of gasoline (which occurred in many countries), with motorists facing long lines at gas stations.

In the U.S., drivers of vehicles with license plates having an odd number as the last digit were allowed to purchase gasoline for their cars only on 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. The rule did not apply on the 31st day of those months containing 31 days, or on February 29 in leap years — the latter never came into play, as the restrictions had been abolished by 1976.

Conservation and reduction in demand

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.
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. To conserve gasoline, the National Maximum Speed Law imposed a nationwide 55 mph (89 km/h) speed limit which ended up lasting 12 years, for reasons mostly unrelated to the oil crisis. 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.

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 later date being adopted to address the aforementioned issue. 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 emblazoned with the slogan "Last Out, Lights Out: Don't Be Fuelish".

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 were a thing of the past. Before the mass production of automatic overdrive transmissions and electronic fuel injection, the traditional FR (front engine/rear wheel drive) layout was being phased out for the more efficient and/or integrated FF (front engine/front wheel drive), starting with compact cars. Using the Volkswagen Rabbit as the archetype, much of Detroit went FF after 1980 in response to CAFE's 27.5  MPG mandate. Vehicles such as the Ford Fairmont were short-lived in the early 1980s.

Downsizing automobiles might have been considered profitable; however, the smaller size affected safety regulations. Some consider the product liability cases against the Ford Pinto during the late 1970s the result of automakers failing to take user safety into consideration. As full-sized vehicles were being phased out and/or downsized, light truck/van conversions (which later evolved into modern-day sport utility and crossover vehicles) were deemed as viable replacements.

Search for alternatives

The energy crisis led to greater interest in renewable energy, especially wood fuel and spurred research in solar power and wind power. It also led to greater pressure to exploit North American oil sources, and increased the West's dependence on coal and nuclear power.

In Australia, heating oil ceased being considered an appropriate winter heating fuel. This often meant that a lot of oil-fired room heaters that were popular from the late-1950s to the early-1970s were considered outdated. It also meant that some enterprising individuals designed aftermarket gas-conversion kits that let these heaters burn natural gas or propane.

But the initial moves toward more efficient automobiles and alternative sources of energy stalled as oil prices fell and memories of gasoline shortages of 1973 faded.

For the handful of industrialized nations that were net energy exporters the effects of the oil crisis were very different. In Canada the industrial east suffered many of the same problems of the United States. In oil rich Alberta there was a sudden and massive influx of money that quickly made it the richest province in the country. The federal government attempted to correct this imbalance through the creation of the government-owned Petro-Canada and later the National Energy Program. These efforts produced a great deal of anger in the west producing a sentiment of alienation that has remained a central element of Canadian politics to this day. Overall the oil embargo had a sharply negative effect on the Canadian economy. The economic malaise in the United States easily crossed the border and increases in unemployment and stagflation hit Canada as hard as the United States despite Canadian fuel reserves.

The Soviet Union was also a net oil exporter and the increase in the price of oil had an immediate effect on that country. The Soviet economy had stagnated for several years and the increase in the price of oil had a beneficial effect, especially after the bloc's internal terms of trade were adjusted to reflect the increased value of Russian oil. The increase in foreign currency reserves allowed the import of grain and other foodstuffs from abroad, increased production of consumer goods and the ability to keep military spending at its traditional levels. Some historians believe the windfall in oil revenues during this period kept the Soviet Union in existence for a considerably longer period of time than would otherwise have occurred. When in 1991 the Soviet Union was disbanded, the price of oil was at a level of just 12 dollars per barrel.

Macroeconomic effects

The 1973 oil crisis was a major factor in Japan's economy shifting away from oil-intensive industries and resulted in huge Japanese investments in industries like electronics.

The Western nations' central banks 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, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo.

Long-term effects of the embargo are still being felt. Public suspicion of the oil companies, who were thought to be profiteering or even working in collusion with OPEC, continues unabated (seven of the fifteen top Fortune 500 companies in 1974 were oil companies, with total assets of over $100 billion).

Effects on international relations

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 was now starkly 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 U.S.'s subsequent assistance to this government did little in the short-run 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.

Decline of OPEC

Since 1973, OPEC failed to hold on to its preeminent position, and by 1981, its production was surpassed by that of other countries. Additionally, its own member nations were divided among themselves. Saudi Arabia, trying to gain back market share, increased production and caused downward pressure on prices, making high-cost oil production facilities less profitable or even unprofitable. The world price of oil, which had reached a peak in 1979, at more than US$80 a barrel (503 US$/m³) in 2004 dollars, decreased during the early 1980s to US$38 a barrel (239 US$/m³). In real prices, oil briefly fell back to pre-1973 levels. Overall, the reduction in price was a windfall for the oil-consuming nations: United States, Japan, Europe and especially the Third World.

Part of the decline in prices and economic and geopolitical power of OPEC comes from the move away from oil consumption to alternate energy sources. OPEC had relied on the famously limited price sensitivity of oil demand to maintain high consumption, but had underestimated the extent to which other sources of supply would become profitable as the price increased. Electricity generation from nuclear power and natural gas, home heating from natural gas and ethanol blended gasoline all reduced the demand for oil.

At the same time, the drop in prices represented a serious problem for oil-producing countries in Northern Europe and the Persian Gulf region. For a handful of heavily populated, impoverished countries, whose economies were largely dependent on oil — including Mexico, Nigeria, Algeria, and Libya — governments and business leaders failed to prepare for a market reversal, the price drop placed them in wrenching, sometimes desperate situations.

When reduced demand and over-production produced a glut on the world market in the mid-1980s, oil prices plummeted and the cartel lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded frantically, were plunged into near-bankruptcy, and even Saudi Arabian economic power was significantly weakened. The divisions within OPEC made subsequent concerted action more difficult.

Nevertheless, the 1973 oil shock provided dramatic evidence of the potential power of Third World resource suppliers in dealing with the developed world. The vast reserves of the leading Middle East producers guaranteed the region its strategic importance, but the politics of oil still proves dangerous for all concerned to this day..

In thirty-year-old British government documents released in January 2004, it was revealed that the United States considered invading Saudi Arabia and Kuwait during the crisis and seizing the oil fields in those countries. According to the BBC, other possibilities, such as the replacement of Arab rulers by "more amenable" leaders, or a show of force by " gunboat diplomacy," were officially rejected as untenable.

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