Nowadays oil is still the world’s most important single source of energy. The world’s industry is influenced by the cost of energy which, in turn, is influenced by the price of crude oil, taxation and other factors. If the cost of energy goes up, then prices of goods and services will increase, subsequently it will cause lower availability of products, higher transportation’s costs and in turn lower economic growth. The latter will influence negatively the efficiency and productivity of the whole world’s industry. This means that if oil prices go too high or too low there will be unlikely consequences for both oil producers and oil consumers.
This paper analyzes the oil crisis of 1970ies.
The first section concerns the history of the October War (6 – 23 October 1973) that led to the oil embargo, one of the most dramatic events for the world economy. The embargo lasted six months, beginning on 17 October 1973 and ending on 18 March 1974. The second section deals with the impact of the energy crisis on different countries. It caused terrible consequences for the economies of all industrialized countries such as recession, inflation, unemployment, lost economic growth and stagflation. But the essential question is whether the energy crisis was a real shortage or mainly a matter of politics.
Table Of Content
I SECTION
Introduction
The historical background
The “energy crisis” began to emerge
The shift of power
The October War
The oil embargo
The end of the War
II SECTION
The main elements of the embargo
The consequences on the world economy
Who was responsible
Conclusions
Bibliography
I SECTION
Introduction
Nowadays oil is still the world’s most important single source of energy. The world’s industry is influenced by the cost of energy which, in turn, is influenced by the price of crude oil, taxation and other factors. If the cost of energy goes up, then prices of goods and services will increase, subsequently it will cause lower availability of products, higher transportation’s costs and in turn lower economic growth. The latter will influence negatively the efficiency and productivity of the whole world’s industry. This means that if oil prices go too high or too low there will be unlikely consequences for both oil producers and oil consumers.
This paper analyzes the oil crisis of 1970ies.
The first section concerns the history of the October War (6 – 23 October 1973) that led to the oil embargo, one of the most dramatic events for the world economy. The embargo lasted six months, beginning on 17 October 1973 and ending on 18 March 1974.
The second section deals with the impact of the energy crisis on different countries. It caused terrible consequences for the economies of all industrialized countries such as recession, inflation, unemployment, lost economic growth and stagflation.
But the essential question is whether the energy crisis was a real shortage or mainly a matter of politics.
The historical background
The petroleum age began about one hundred years ago when Edwin Drake discovered oil in Pennsylvania in 1859. By then, this resources gained more and more importance in all nations’ energy consumption. For instance, by 1929 petroleum accounted for one – third of United States energy consumption and by 1952 it was two – thirds. Following World War II, oil consumption in Western Europe and Japan rose sharply and by 1970 it represented two – thirds of their energy consumption. More and more major countries and regions in the world were becoming heavily dependent upon imported petrofuels for their vital energy needs. The Oil Crisis of 1973 actually demonstrated to the industrial world its dependence on oil producing countries.
Basically, the argument this paper is dealing with is political, the political need of the Middle East oil producing countries to acquire control over their major source of wealth but exhaustible natural resource that was the very reason for their existence and was not in the hands of their own governments. When oil was discovered and exploited in the Middle East by Western finance, technology and enterprise, the host states were all weak, impoverished and heavily dominated by Western economic and military power. They received modest royalty payments from the oil companies for the oil that was exported. From 1950 onwards a new system of a fifty – fifty division of net profits between the oil companies and the ruler or government of the producing state.
This led to a rapid expansion in exports and increasing revenues for Middle East oil states, but unfortunately for them, it did not altered the power structure of the international oil industry. In fact, up until the beginning of 1970ies the market was dominated by the Big Seven which consisted of five American companies, Exxon, Texaco, Standard of California, Mobil and Gulf; one British company, British Petroleum; and one mixed British - Dutch company, Royal Dutch Shell. Altogether they wielded enormous economic and political power thanks to their ownership of the great majority of the world’s low cost crude oil, particular in the Middle East, combined with the political and military power of their home governments which insured the companies’ retention of this crude oil reserves, as well as their vertical integration into the refining, marketing and transporting of oil.
However, in the 1960s the combination of huge potential oversupply of cheap oil from the middle East and the competition from profit – maximizing newcomers to the international oil industry led to a steady decline in the market price of crude oil while the price of all manufactured goods they imported from the industrialized countries were rising. For example, in Saudi Arabia the purchasing power fell more than 50 per cent. Moreover, the oil producing countries were only receiving a small proportion of the price for which their oil was being sold to the main consuming nations because a large part was levied by to the consumer governments in the form of taxes.
Furthermore, in 1959 the international oil companies suddenly cut the posted price of crude oil in both Venezuela and the Middle East without consulting the governments concerned and did the same one year later. In response to this, representatives of Iraq, Iran, Kuwait, Saudi Arabia and Venezuela created in 1960 the Organization of Petroleum Exporting Countries with the aim of restoring oil prices, demanding that in the future the oil company should consult with them about cuts in prices and, above all, OPEC should succeed in gaining control over the exploitation of their main natural source of wealth.
The “energy crisis” began to emerge
Economic growth usually goes along with the increasing use of oil. World’s industrial economies were growing and oil had become their lifeblood; oil import’s demand was rapidly increasing to the extent that the supply – demand equation had never been so tight. In 1970ies the phrase “energy crisis” began to emerge as part of the American political vocabulary: America was consuming more oil than it could produce from domestic sources and thus demand for all forms of energy was sharply growing. As demand worldwide climbed up against the limit of available supply, market prices exceeded the official posted prices. In order to get this growing gap the exporting countries tried beginning the long – term program to establish their own national oil companies and developing their own body of men with experience and expertise who would be capable of managing those industries. Lybia nationalized 51 per cent of the company operations on 1 september 1973.
The oil market was very hungry: between 1970 and 1973 the market price for crude oil doubled. The exporters’ per – barrel revenues were going up, but the companies’ part of revenues were also increasing which was in sharp contradiction to the objectives and ideology of the exporters’. The companies’ part of the pie was supposed to decline, not to grow.
The shift of power
After Nasser’s death in 1970, the new President of Egypt Anwar Sadat had been trying to succeed in achieving the historical question of the withdrawal of Israelis from all occupied Arab territories; he wanted some kind of stabilization or settlement, but after a couple of years of fruitless discussions and negotiations, he decided to go to war. Ever since 1950ies, members of the Arab world had been talking about using the so called “oil weapon” to reach their economical and political objectives; but the weapon had always been deflected because the Arab oil, while it seemed endlessely abundant, was not the supply of last resort. But at that time the United States, with the depletion of its own oil reserves and with no prospect of any substantial raise in Venezuelan exports, was becoming increasingly dependent on Arab oil for a vital part of its energy supplies; on top of that, Saudi Arabia’s share of world exports had risen rapidly, from 13 percent in 1970 to 21 percent in 1973, and was continuing to rise. Thus the initial rejection of King Faisal of Saudi Arabia to not use the oil weapon (because he thought that politics and oil should not be mixed) could then have changed. There were the incentive and the opportunity for a concerted use of the Arab oil weapon.
In the spring and summer of 1973, King Faisal and other leading Saudis made repeated warnings that it might be used, unless the United States moved closer to the Arab viewpoint and away from Israel. Even Soviet General Secretary Brezhnev, hosted at a summit meeting by President Nixon in June 1973, gave an “informal” warning that the Middle East was soon starting a war, but the United States dismissed all of them.
By September 1973, the security of supply and the impending energy crisis became the most discussed topics: pressure was being felt by all major consumers such as Germany, Japan and United States. The oil market structure was changing and everybody realized the shift of power away from the multinational oil companies towards the oil – exporting countries.
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- Citar trabajo
- David Wieblitz (Autor), Filipo Comazzi (Autor), 2004, The oil crisis in the 1970s and its consequences for the world economy, Múnich, GRIN Verlag, https://www.grin.com/document/58349
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