1.3 The fall of the dollar

U.S. economic policies were a salient concern to OPEC-member states. Oil, especially from the Middle East, was paid for in United States dollars, at prices fixed in dollars.

U.S. President Richard Nixon inherited an economy in which growth was already sluggish, in which inflation was already troubling. By the summer of 1971, the president was under strong public pressure to act decisively to end the dilemma of rising prices and general economic stagnation (see " stagflation"). Nixon thus released the dollar from the fluctuating gold standard that had controlled its worth since the signing of the Bretton Woods pact at the end of World War II, allowing its value to fall in world markets. The United States suspended convertibility of the dollar on August 15, 1971; the dollar was devalued by 8 percent 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 dollar went along with a fall in the price in dollars for oil. 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 who saw the wealth under their lands being reduced and their assets growing in a currency that was worth significantly less than it had been worth just quite 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 United States and its allies, combined with the West's pro-Israeli stance in the Middle East, angered the Arab nations in OPEC.

1.4 The Yom Kippur War

U.S. President Richard Nixon and Israeli Prime Minister Golda Meir meeting on November 1, 1973. Nixon's National Security Advisor Henry Kissinger can be seen in the background.

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. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States, Western Europe, and Japan. 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. As it turned out, the West could not continue to increase its energy use 5 percent 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 percent, 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 10 times more."" ¹

2 Economic effects of the embargo

The effects of the embargo were immediate. OPEC forced the oil companies to increase payments drastically. The price of oil quadrupled by 1974 to nearly $12 per 42 US gallon barrel (75 $/m³). OPEC-member states in the developing world withheld the prospect of nationalization of the companies holdings in their countries. The noncommunist industrial world saw sudden inflation and economic recession. Moreover, it underscored the interdependence of the world societies and economies.

The shock produced chaos in the West. New York Stock Exchange shares lost $97 billion in value in six weeks. The retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. With the onset of the embargo, U.S. imports of oil from the Arab countries dropped from 1.2 million barrels (190,000 m³) a day to a mere 19,000 barrels (3,000 m³). Daily consumption dropped by 6.1 percent from September to February, and by the summer of 1974, by 7 percent as the United States suffered its first fuel shortage since the Second World War.

In the industrialized countries the crisis was for the most part borne by the unemployed, the marginalized social groups, certain categories of aging workers, and increasingly, by younger workers. Motorists faced long lines at gas stations; schools and offices in the U.S. often closed down to save on heating oil; factories cut production and laid off workers.

Rationing of gasoline occurred in many countries. For example, in the United States, 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).

A few months later, the crisis eased. The embargo was lifted in March 1974 after negotiations at the Washington Conference , 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 competitive position of the dollar in world markets. No single factor did more to produce the soaring inflation of the 1970s in the United States.

As well, in Australia, heating oil ceased to be considered to be 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 redundant. It also meant that some enterprising individuals designed aftermarket gas-conversion kits that let these heaters burn natural gas or propane.

Overall, Japan fared particularly well in the aftermath of the world energy crisis of the 1970s. Japanese automakers led the way in an ensuing revolution in car manufacturing. The large automobiles of the 1950s and 1960s were replaced by far more compact and energy efficient cars.

2.1 U.S. response

The U.S. government response to the embargo was quick, but of limited effectiveness. A national speed limit of 55 miles per hour was imposed to help reduce consumption. (This, incidentally, was claimed by some to have caused traffic fatalities to drop by 23 percent between 1973 and 1974.) President Nixon named William Simon as an official "energy czar," and in 1977 a cabinet-level Department of Energy was created, which led to the creation of the United States' Strategic Petroleum Reserve. 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.

Year-round Daylight Saving Time was implemented: At 2:00 AM 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 AM 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 (this date being changed to the first Sunday in April in 1987).

The crisis also prompted a call for individuals and businesses to conserve energy - most notably a sophisticated 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.

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).

The energy crisis led to greater interest in renewable energy, especially wood heat 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.

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. The U.S. continues to use energy in amounts out of proportion to its population, U.S. automakers continue to oppose legislation that would force them to increase the fuel efficiency of automobiles (see, e.g., " SUV"), and the U.S. continues to respond to any threat to the supply of oil as a threat to its national security (see, e.g., Persian Gulf War).

3 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. This change further strained the Western alliance system, for the United States, which imported only 12 percent of its oil from the Middle East (compared with 80 percent for the Europeans and over 90 percent 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 equally."

Even Canadian power vis-à-vis the United States was bolstered. During the 1970s exports of Canadian oil and natural gas, upon which large sectors of the U.S. economy depended, rose drastically in price. Canadian Prime Minister Pierre Elliot Trudeau was able to start seeking to undercut U.S. domination of Canadian banks, media, and industry. Trudeau became the first Canadian prime minister to travel to the Soviet Union, signing consultation and trade pacts with the Soviets. For the first time, the Canadians placed strict controls on foreign investment. Hemispheric unity, which the U.S. had long taken for granted, was fragmenting.

The Saudis acquired operating control of Aramco, fully nationalizing it in 1980. As other OPEC nations followed suit, the cartel's income soared. Saudi Arabia, awash with profits, undertook a series of ambitious five-year development plans, of which the most ambitious, begun in 1980, called for the expenditure of $250 billion. Other cartel members also undertook major economic development programs.

For the first time, Third World nations, whose resources, capital, and labor had long been exploited by the industrial powers, had acquired control of a vital commodity, thus reversing the worldwide flow of capital. 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, was reinvested in the West or absorbed in massive arms purchases that exacerbated political tensions, particularly in the Middle East.

4 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 and to make the most expensive oil production facilities less profitable or even unprofitable, exerted pressure toward lowering prices. The world price of oil, which had reached a peak in 1979, at more than $80 a barrel (503 $/m³), decreased during the early 1980s to $38 a barrel (239 $/m³). In real prices oil fell back to pre-1973 levels. Overall, the reduction in price was a windfall for the oil-consuming nations (Japan, the consuming nations of Europe and of the Third World especially).

At the same time, the drop in prices represented a serious problem for oil-producing countries in Northern Europe and in the Persian Gulf region. And for a handful of heavily populated, impoverished countries whose economies were largely dependent on oil—including Mexico, Nigeria, Algeria, and Libya—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 [1] 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 rejected as unlikely.[2]

5 Footnotes

¹ Quoted in Walter LaFeber, Russia, America, and the Cold War (New York, 2002), p. 292.

6 Related articles

• energy crisis
• 1979 energy crisis
• 1990 energy crisis
• 2004 energy crisis
• Hubbert peak
• speed limit

1973

Economic history

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