The Oil Crisis

Timeline

1973 – 1974

Causes of the oil crisis

The oil crisis of 1973 was a significant economic event with profound global implications. It was initiated by the Organization of Arab Petroleum Exporting Countries (OAPEC) decision to impose an oil embargo against nations perceived as supporting Israel during the Fourth Arab–Israeli War. In particular, oil exports to the United States, Japan, and Western Europe, which together consumed more than half the world’s energy, were prohibited. After it was implemented, the embargo caused an oil crisis, or “shock”, with many short- and long-term effects on the global economy and politics.

Another key factor that contributed to the oil crisis was the introduction of the ‘New Economic Policy’ by U.S. President Nixon on August 15, 1971, which severed the link between the U.S. dollar and gold. Since the new policy took effect, the U.S. dollar value was no longer tied to a fixed asset like gold but was now subject to market forces, which led to the devaluation of the U.S. dollar, directly affecting oil-exporting countries, whose oil revenues were denominated in dollars and pushing them to increase oil prices to recoup these losses.

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Consequences

Economic impact

After the oil embargo initiation, oil prices first doubled, then quadrupled within a few months. For instance, the price of oil rose from around $3 per barrel to nearly $12 per barrel by March 1974. The steep rise in oil prices imposed skyrocketing costs on consumers and led to widespread inflationary pressures across many economies. The combination of high oil prices and inflation contributed to economic recessions in many countries, particularly in the Western economies, which had grown increasingly dependent on foreign oil.

Shift in Energy Policies

The oil crisis prompted many countries to reassess their economic policies. Governments introduced measures to conserve energy including the creation of the Strategic Petroleum Reserve in the U.S. in November 1973, promoting energy efficiency such as a national 55-mile-per-hour speed limit on U.S. highways, and diversifying energy sources away from oil. It also spurred investments in alternative energy technologies such as solar,  wind, and hydroelectric power.

Geopolitical Shifts

The crisis demonstrated the significant influence OPEC and major oil-producing nations could wield over global oil markets. This led to changes in geopolitical strategies and increased attention to energy security issues among oil-importing countries.

Environmental Awareness

While not an immediate consequence, the oil crisis contributed to heightened awareness of environmental issues associated with fossil fuel consumption. This awareness eventually influenced policies promoting sustainable energy sources.

References

Federal Reserve History n.d., Oil Shock of 1973–74, Federal Reserve History, available at <https://www.federalreservehistory.org/essays/oil-shock-of-1973-74>

Office Of The Historian n.d., Oil Embargo, 1973–1974, Office Of The Historian, available at <https://history.state.gov/milestones/1969-1976/oil-embargo>.

Steven, K n.d., Oil crisis, Britannica Money, available at <https://www.britannica.com/money/oil-crisis>.

Zhao, H 2019, Chapter Four – Energy Crisis: “Natural Disaster” and “Man-Made Calamity”, The Economics and Politics of China’s Energy Security Transition, 1st ed, London: Academic Press, pp. 65-98, ISBN 9780128151525, available at <https://doi.org/10.1016/B978-0-12-815152-5.00004-X>.