DST1DEV - Globalisation And Development

OIL CRISIS OF THE 1970s
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Introduction
In 1970s, American oil intake in form of gasoline and other connected products were on
the rise. The USA had domestic oil production companies but their production was on the
decline due to the Arctic drilling controversy which has been there since 1977, American oil
fields are also not rich like Arabian oil fields. This has made the United States depend on
imported oil. Despite this Americans worried little about the spike of oil prices or oil shortages
since policymakers assured them of continued supply of oil from the Arab countries. The
policymaker argued that the Arab countries could not afford to miss the proceeds the United
States contributed to their economies. Despite this being true this attitude was tested in 1973
when the Embargo was imposed. The embargo imposed by the Arab oil giants proved American
policymakers wrong and it was clear that America needed oil more than the Arab countries
needed the revenue from oil sales. This was evident in the stock market, the American Wall
Street and its economy in whole.
In the early 1970s, the world oil consumption was on the rise in form of gasoline and
other oil products. There was a chain of energy crisis between 1970 and 1979 that was led by
Middle East issues but the crucial ones began in 1973 when the Arabian oil producers enforced
an Embargo. The choice to go against America and castigate the west in support of Israel in the
Yom Kipper war against Egypt. The targeted Nations were Canada, Japan, the United Kingdom,
the Netherlands, and the United States. The Embargo was later imposed on South Africa
Rhodesia and Portugal.1
1. Alhajji, A. F. "The Oil Weapon: Past, Present, and Future." Oil & Gas Journal- Oil
and Gas News, Prices, Oil Drilling, Exploration and Production. Last modified 2018.
https://www.ogj.com/articles/print/volume-103/issue-17/general-interest/the-oil-
weapon-past-present-and-future.html.

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As a result of the embargo the prices of crude oil to shoot sky high from three dollars a barrel to
twelve dollars by 1974. The price of petrol was bound to rise to make transport a nightmare and
more expensive. This led to a BRITAIN talk about rationing the coupons left over’s from the
Second World War. This was termed as the first oil shock which was later followed by a second
one in the 1979 crisis. 2
In 1971 president Nixon encouraged the Embargo by deciding to take the United States
off the gold standard. This resulted in other countries not being able to cash the U.S dollars in the
foreign exchange reserves for gold. Nixon did not honor 1944 Bretton woods pact. This move
made the prices of gold skyrocket. The history of Gold standards divulges that this was
unavoidable but Nixon’s deeds were unexpected and so sudden, this sent the value of the dollar
down as expected.3 The condensed worth of the dollar wounded OPEC countries because their
oil deals were valued in US DOLLAR. This meant that their proceeds reduced together with the
dollar. The price of imports that was denominated with further currencies also remained the same
or increased which was disastrous for US bargaining power.4 As a result of OPEC even thought
of pricing oil in Gold to prevent the proceeds from vanishing.
For the OPEC the last straw was when the United States of America resolved to back
Israel against Egypt during the Yom Kippur War. As a result on October 19, 1973, requested 2.2
2. Amadeo, Kimberly. "The Truth About the 1973 Arab Oil Crisis." The Balance. Last
modified August 5, 2015. https://www.thebalance.com/opec-oil-embargo-causes-and-
effects-of-the-crisis-3305806.
3. Baumeister, Christiane, and Lutz Kilian. "Forty years of oil price fluctuations: Why the
price of oil may still surprise us." Journal of Economic Perspectives 30, no. 1 (2016):
139-60.
4 Kilian, Lutz. Oil price volatility: Origins and effects. No. ERSD-2010-02. WTO Staff
Working Paper, 2010.

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billion dollars from Congress to aid crisis military aid for Israel. The Arab members in the OPEC
reacted by stopping their oil imports to the United States of America and other Israeli associates
which included Canada, The Netherlands, the United Kingdom, Portugal, and Rhodesia. This did
not last for long since Egypt, Syria, Israel declared a treaty on October 25, 1973, but the OPEC
did not comply till March 1974. By then oil prices had increased from 2.5 dollars barrel to 11.65
dollars a barrel.
The influence of the embargo were immediate and visible all over the world. The
conservative government led by Ted Health to struggle to cope with inflated food prices caused
by global shortages. This caused an inflation rate of up to 24%. The Labor government governed
by Harold Wilson took power but confronted a failure in proceeds and values of stock market .
5Burial oil a giant in the oil game had to be liberated by the England bank from Bankruptcy due
to the embargo. However, Britain was a distinguished champion during that time as it poured
cash into the North Sea region and this bought them the rights and capacity to be a net exporter.
This period was not good for the country’s already unstable industrial segment since the oil
charges were still up high.6 This hastened the gradual demise of Britain’s dying car industry
which was once a revenue earner due to the extra cost of production which was brought about by
the sudden change of oil prices.
5. Wearing, David. "Forty Years On, the Effects of the 1973-74 Oil Crisis Still Shape British
Foreign Policy in the Middle East." OpenDemocracy. Accessed November 7, 2018.
https://www.opendemocracy.net/ourkingdom/david-wearing/forty-years-on-effects-of-1973-74-
oil-crisis-still-shape-british-foreign-po
6 . BCcampus. "8.10 Oil and Gas and the New West – Canadian History: Post-
Confederation." BC Open Textbooks – Open Textbooks Adapted and Created by BC
Faculty. Last modified 2018. https://opentextbc.ca/postconfederation/chapter/oil-and-
gas-and-the-new-west/.