The oil embargo of 1973 was one of the most significant events regarding the United States macroeconomy. This event was a refusal of Arab countries to sell oil to pro-Israeli countries. The embargo began on October 17, 1973, when the Organization of Arab Petroleum Exporting Countries, or OAPEC, declared they would immediately cut oil production by 5 percent and will continue until Israel withdrew from the West Bank, Gaza, and Jerusalem. Saudi Arabia and Kuwait soon followed when they announced even more production cuts.
Soon after, most Petroleum Exporting members also announced they would stop selling oil to the United States until America discontinued support for Israel during the Yom Kippur War (Taylor). The oil embargo lasted for five months, ending on March 17, 1974. There are differing viewpoints regarding the cause of the oil crisis but the impact the embargo had on the United States economy was severe and was a prime example of an important event in history regarding macroeconomic issues. Many people put the blame on OPEC and the Arab countries for starting the oil crisis.
This is due to the fact that they announced their plans for an embargo on October 17, 1973. On October 6, 1973, the Jewish holy day of Yom Kippur, Egypt and Syria carried out a surprise attack against Israel with some assistance from the Soviet Union. The Israelis seemed as if they were going to be defeated but on October 14, 1973, U. S. President Richard M. Nixon responded by ordering a massive airlift of weapons and supplies to Israel, which continued for a full month ( ). Nations of the Middle East were unhappy with the United States’ involvement in the Yom Kippur War. To protest U.
S. support of Israel, most of the petroleum-producing nations of the Middle East cut production by five percent (955 ). Some countries completely cut off oil supplies to the United States, which then led to a negative supply shock. According to Krugman and Wells, “The cause of the supply shock was political turmoil in the Middle East – the Arab – the Israeli War of 1973 – that disrupted world oil supplies and sent oil prices skyrocketing” (Krugman 342). Supporters of this view believe oil played a big role in the cause of the embargo, as well as previous recessions in history.
According to Robert Barsky and Lutz Kilian of the Universty of Michigan, “Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth,” (Barsky). The statements made by Barsky and Kilian are evidenced by statistics from the National Bureau of Economic Research, which shows a close statistical relationship between political events in the Middle East and recessions in the United States (Barsky). Many people believe that the oil crisis was not caused merely by the embargo itself.
The advocates of this point of view believe that poor U. S. energy policies also contributed to the cause of the crisis. This was due to twenty years of economic prosperity and a growth in population, which increased demand for raw materials, subsequently leading to inflation. In the United States, inflation and consumer prices were rising at a rate of 8. 5% (Trumbore). According to Jay E. Hakes, an administrator of the Energy Information Administration, “The turmoil started early in 1973, as customers experienced electricity brown outs and rapidly rising prices for fuels and other necessities. Hakes proceeds to state, “Price controls and allocation systems not only failed to resolve these problems, they seemed to aggravate them” (Hakes). Before the embargo occurred, supply and demand issues were leading up to the event. In the Pulitzer Prize winning book, The Prize, author Daniel Yergin comments on the phrase “energy crisis” and the supply problems, which became constant in the early 1970s, when he writes: The central reason was the rapid growth in demand for all forms of energy.
Price controls on oil, imposed by Nixon in 1971 as part of his overall anti-inflation program, were discouraging domestic oil production while stimulating consumption. Natural gas supplies were becoming tighter, primarily because of a regulatory system that controlled prices and could not keep up with changes in markets. The artificially low prices provided little incentive either for new or for conservation (Yergin 590).
Along with prior energy policies, “Changes in the world oil market, in the relationship between producer countries and the oil companies, and in the strategic picture in the Persian Gulf all combined to set the stage for the dramatic price increases of 1974” (Oil). Although the Organization of Arab Petroleum Exporting Countries made the decision for an oil embargo, supporters of this point of view believe the embargo itself was not the cause of the event. The immediate impact of the 1973 oil embargo was brutal and many Americans t that time were hit tremendously hard by the stagflation that occurred in the economy. Severe increases in the price of oil went along with the shortage from the embargo. The price of crude oil rose to almost six times its price at the beginning of 1973. U. S. imports of oil from Arab countries dropped from 1. 2 million barrels per day to 19,000. In addition, the prices of all petroleum products, including gasoline and home heating oil, also increased (955). According to Krugman and Wells, “The U. S. economy experienced severe negative supply shocks following the disruption to world oil supply in 1973” (Krugman).
The negative supply shock from the embargo caused the short-run aggregate supply curve to shift to the left, raised production costs for the oil companies, and reduced the quantity of oil that the companies were willing to supply. This led to difficulties for most Americans. According to Richard Skeen from a personal interview, “It wasn’t until fall that everyone felt the impact. There were gas lines 30 – 45 minutes long and when you got to the gas pump, there could be no gas… I remember everyone started turning to alternative fuels and trading their big vehicles for small vehicles” (Skeen).
The restriction of oil from OAPEC brought immediate changes for many Americans. The United States economy adjusted in response. In the December following the announcement of the embargo, sales of larger cars, or “gas guzzlers,” fell sharply. Some gas stations began limiting sales to each customer, while other gas stations sold only to those who bought other products or services. Airlines were hurting during this time, having to cancel flights and layoff employees (957). The steep increase in price of oil per barrel lead to increases in costs for consumers in the United States.
The 1973 oil embargo also brought long term changes and effects that are still being felt today. Overall, there has been a large increase in the price of oil in the years that followed the crisis. This effect has motivated the Unites State to begin developing large-scale conservation efforts in order to decrease their dependence on oil. In addition, the U. S. has increased domestic exploration to reduce the dependence on foreign oil (Watt). One may say that the embargo of 1973 sparked the turn to alternative fuels that exist today in the United States, and perhaps, the rest of the world.
The announcement from the Organization of Arab Petroleum Exporting Countries to have an oil embargo evidently brought great controversy to the Unites States economy as well as the people of the country. There are conflicting viewpoints with regards to what caused the oil crisis. One may believe the cause of the crisis was because of OPEC and the other Arab countries for staring embargo, due to the United States’ involvement in the Yom Kippur War. There are also many advocates of the viewpoint that claims the embargo itself was not the cause of the crisis and that it only sparked the issue.
These supporters believe that the crisis was due to many years prior to the embargo, which led to poor U. S. energy polices before the event occurred. Regardless of what one may believe was the cause of the event, stagflation occurred in the United States economy after the embargo. The economy faced a severe negative supply shock of oil after the embargo was announced, which in turn led to obvious consequences, as well as changes, for a countless number of Americans.
References
Barsky, Robert, and Lutz Kilian. “Oil and the Macroeconomy Since the 1970’s.” Gekon. Web. 22 Apr. 2011.
<http://www.gekon.net.pl/wp-content/uploads/2007/04/oil- and-the-macroeconomy-since-the-1970s.pdf>.
Hakes, Jay E. “25th Anniversary of the 1973 Oil Embargo.” Energy Information Administration. 3 Sept. 1998. Web. 23 Apr. 2011.
<http://www.eia.doe.gov/emeu/25opec/anniversary.html>.
Krugman, Paul R., and Robin Wells. Macroeconomics. 2nd ed. New York: Worth, 2009. Print.
“Oil Revolution.” The University of Vermont. Web. 22 Apr. 2011.
<http://www.uvm.edu/~fgause/oil_revolution.htm>.
Skeen, Richard. Personal interview. 22 Apr. 2011.
Taylor, Jerry, and Peter Van Doren. “Time to Lay the 1973 Oil Embargo to Rest.” The Cato Institute. 17 Oct. 2003. Web. 24 Apr. 2011.
<http://www.cato.org/pub_display.php?pub_id=3272>.
Trumbore, Brian. “The Arab Oil Embargo of 1973-74.” Buy and Hold. Stocks and News. Web. 23 Apr. 2011.
Watt, Donald A. “Arab Oil Embargo of 1973.” American-Business. Web. 25 Apr. 2011.
<http://american-business.org/2300-arab-oil-embargo-of-1973.html>.
Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Print.
