The 1970s ergy crisis occurred wh the Western world, particularly the United States, Canada, Western Europe, Australia, and New Zealand, faced substantial petroleum shortages as well as elevated prices. The two worst crises of this period were the 1973 oil crisis and the 1979 ergy crisis, wh, respectively, the Yom Kippur War and the Iranian Revolution triggered interruptions in Middle Eastern oil exports.
The crisis began to unfold as petroleum production in the United States and some other parts of the world peaked in the late 1960s and early 1970s.
The major industrial cters of the world were forced to contd with escalating issues related to petroleum supply. Western countries relied on the resources of countries in the Middle East and other parts of the world. The crisis led to stagnant economic growth in many countries as oil prices surged.
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Although there were guine concerns with supply, part of the run-up in prices resulted from the perception of a crisis. The combination of stagnant growth and price inflation during this era led to the coinage of the term stagflation.
By the 1980s, both the recessions of the 1970s and adjustmts in local economies to become more efficit in petroleum usage, controlled demand sufficitly for petroleum prices worldwide to return to more sustainable levels.
The period was not uniformly negative for all economies. Petroleum-rich countries in the Middle East befited from increased prices and the slowing production in other areas of the world. Some other countries, such as Norway, Mexico, and Vezuela, befited as well. In the United States, Texas and Alaska, as well as some other oil-producing areas, expericed major economic booms due to soaring oil prices ev as most of the rest of the nation struggled with the stagnant economy. Many of these economic gains, however, came to a halt as prices stabilized and dropped in the 1980s.
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Ever since Israel declared indepdce in 1948 there was conflict betwe Arabs and Israelis in the Middle East, including a number of wars. The Suez Crisis, also known as the Second Arab–Israeli war, was sparked by Israel's southern port of Eilat being blocked by Egypt, which also nationalized the Suez Canal belonging to Anglo-Frch investors. One of the objectives of the invasion was the removal of Presidt Gamal Abdel Nasser who was aligning with the Soviet Union.
The Six-Day War of 1967 included an Israeli invasion of the Egyptian Sinai Pinsula, which resulted in Egypt closing the Suez Canal for eight years. The canal was cleared in 1974 and oped again in 1975
OAPEC countries cut production of oil and placed an embargo on oil exports to the United States after Richard Nixon requested $2.2 billion to support Israel in the war. Nevertheless, the embargo lasted only until January 1974, though the price of oil remained high afterwards.
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The real price of petroleum was stable in the 1970 timeframe, but there had be a sharp increase in American imports, putting a strain on American balance of trade, alongside other developed nations. During the 1960s, petroleum production in some of the world's top producers with extraction technology at the time began to peak. West Germany reached its production peak in 1966, Vezuela and the United States in 1970, and Iran in 1974.
Although production in other parts of the world was increasing, the peaks in these regions began to put substantial upward pressure on world oil prices. Equally as important, control of the oil supply became an increasingly important problem as countries like West Germany and the U.S. became increasingly depdt on foreign suppliers for this key resource.
The 1973 oil crisis is a direct consequce of the US production peak in late 1960 and the beginning of 1971 (and shortages, especially for heating oil, started from there). The embargo as described below is the practical name giv to the crisis. For the main Arab producers, the embargo allowed them to show to the Arab street that they were doing something for the Palestinians. In real market terms (number of barrels) the embargo was almost a non-evt, and only from a few countries, towards a few countries.
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The Embargo was never effective from Saudi Arabia towards the US, as reported by James E. Akins in interview at 24:10 in the documtary la face cachée du pétrole part 2.
Akins, who audited US capacity for Nixon after US peak, was US ambassador in Saudi Arabia at that time. Lawrce Rocks and Richard Runyon captured the unfolding of these evts at the time in The ergy Crisis book.
In October 1973, the members of Organization of Arab Petroleum Exporting Countries or the OAPEC (consisting of the Arab members of OPEC) proclaimed an oil embargo in response to the U.S. decision to re-supply the Israeli military during the Yom Kippur war; it lasted until March 1974.
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OAPEC declared it would limit or stop oil shipmts to the United States and other countries if they supported Israel in the conflict. With the US actions se as initiating the oil embargo, the long-term possibility of embargo-related high oil prices, disrupted supply and recession, created a strong rift within NATO; both European countries and Japan sought to disassociate themselves from the US Middle East policy. Arab oil producers had also linked the d of the embargo with successful US efforts to create peace in the Middle East, which complicated the situation. To address these developmts, the Nixon Administration began parallel negotiations with both Arab oil producers to d the embargo, and with Egypt, Syria, and Israel to arrange an Israeli pull back from the Sinai and the Golan Heights after the fighting stopped. By January 18, 1974, Secretary of State Hry Kissinger had negotiated an Israeli troop withdrawal from parts of the Sinai. The promise of a negotiated settlemt betwe Israel and Syria was sufficit to convince Arab oil producers to lift the embargo in March 1974. By May, Israel agreed to withdraw from the Golan Heights.
Graph of oil prices from 1861 to 2007, showing a sharp increase in 1973, and again in 1979. The orange line is adjusted for inflation.
Indepdtly, the OPEC members agreed to use their leverage over the world price-setting mechanism for oil to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the rect failure of negotiations with the major Western oil companies earlier in the month.
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Because of the dramatic inflation expericed during this period, a popular economic theory has be that these price increases were to blame, as being suppressive of economic activity. However, the causality stated by this theory is oft questioned.
The targeted countries responded with a wide variety of new, and mostly permant, initiatives to contain their further depdcy. The 1973 oil price shock, along with the 1973–1974 stock market crash, have be regarded as the first evt since the Great Depression to have a persistt economic effect.
A crisis emerged in the United States in 1979 during the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979, allowing the Ayatollah Khomeini to gain control. The protests shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistt and at a lower volume, forcing prices to go up. Saudi Arabia and other OPEC nations, under the presidcy of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 perct.
Oil Shock Of 1973–74
In 1980, following the Iraqi invasion of Iran, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well.
The 1973 and 1979 ergy crisis had caused petroleum prices to peak in 1980 at over US$35 per barrel (US$124 in today's dollars). Following these evts slowing industrial economies and stabilization of supply and demand caused prices to begin falling in the 1980s.
The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the 1973 and 1979 ergy crises) and the ergy conservation spurred by high fuel prices.
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The inflation adjusted real 2004 dollar value of oil fell from an average of $78.2 per barrel in 1981 to an average of $26.8 in 1986.
Though the next week a New York Times article warned that the word glut was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-ergy crisis levels.
This stimt was echoed in November 1981, wh the CEO of Exxon also characterized the glut as a temporary surplus, and that the word glut was an example of our American pchant for exaggerated language. He wrote that the main cause of the glut was declining consumption. In the United States, Europe and Japan, oil consumption had fall 13% from 1979 to 1981, due to in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters, continuing a trd begun during the 1973 price increases.
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After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with
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