1970s energy crisis

Key periods

Arab-Israeli conflict

Conflict between Arabs and Israelis in the Middle East has existed since Israel's declaration of independence in 1948, including a number of wars. The Suez Crisis, also known as the Second Arab–Israeli war, was sparked when Israel's southern port of Eilat was blocked by Egypt, which also nationalized the Suez Canal belonging to Anglo-French investors. One of the objectives of the invasion was the removal of President Gamal Abdel Nasser who was aligning with the Soviet Union.

The Six-Day War of 1967 included an Israeli invasion of the Egyptian Sinai Peninsula, which resulted in Egypt's closure of the Suez Canal for eight years. The canal was cleared in 1974 and opened again in 1975 after the 1973 Yom Kippur War, when Egypt tried to take back the Sinai. 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.

Production peaks around 1970

The real price of petroleum was stable in the 1970 timeframe, but there had been 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, Venezuela and the United States in 1970, and Iran in 1974.{{ cite web| title=Petroleum Overview, 1949–2008 | url=http://www.eia.doe.gov/emeu/aer/txt/stb0501.xls | publisher=U.S. Department of Energy | access-date=2 October 2009| archive-url= https://web.archive.org/web/20091003045505/http://www.eia.doe.gov/emeu/aer/txt/stb0501.xls| archive-date= 3 October 2009 | url-status= live}}{{cite web | url=http://abc.net.au/4corners/special_eds/20060710/ | title=ABC TV's Four Corners | publisher=Australian Broadcasting Company | access-date=2 October 2009| archive-url= https://web.archive.org/web/20091014133913/http://www.abc.net.au/4corners/special_eds/20060710/| archive-date= 14 October 2009 | url-status= live cite web| url=http://www.energiekrise.de/e/documents/2003/International-Summer-School-Salzburg-2002.pdf |title=Future world oil supply |page=11 |publisher=L-B-Systemtechnik |date=January 2003 |author1=Zittel, Werner |author2=Schindler, Jörg |access-date=2 November 2009 |url-status=dead |archive-url=https://web.archive.org/web/20110718235517/http://www.energiekrise.de/e/documents/2003/International-Summer-School-Salzburg-2002.pdf |archive-date=July 18, 2011

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 dependent on foreign suppliers for this key resource.

1973 oil crisis

Main article: 1973 oil crisis

The 1973 oil crisis was a direct consequence 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" given 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-event, and only from a few countries, towards a few countries.

The embargo was never effective from Saudi Arabia towards the US, as reported by James E. Akins in interview at 24:10 in the documentary "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. Lawrence Rocks and Richard Runyon captured the unfolding of these events at the time in The Energy 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. OAPEC declared it would limit or stop oil shipments to the United States and other countries if they supported Israel in the conflict. With the US actions seen 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 end of the embargo with successful US efforts to create peace in the Middle East, which complicated the situation. To address these developments, the Nixon Administration began parallel negotiations with both Arab oil producers to end 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 Henry Kissinger had negotiated an Israeli troop withdrawal from parts of the Sinai. The promise of a negotiated settlement between Israel and Syria was sufficient to convince Arab oil producers to lift the embargo in March 1974. By May, Israel agreed to withdraw from the Golan Heights.

Independently, 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 recent failure of negotiations with the major Western oil companies earlier in the month.

For the most part, industrialized economies relied on crude oil, and OPEC was a major supplier. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic activity. However, the causality stated by this theory is often questioned. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression to have a persistent economic effect.

1979 energy crisis

Main article: 1979 oil crisis

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 inconsistent and at a lower volume, forcing prices to go up. Saudi Arabia and other OPEC nations, under the presidency of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 percent. However, a widespread panic resulted, driving the price far higher than would be expected under normal circumstances.

In 1980, following the Iraqi invasion of Iran, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well.

After 1980, oil prices began a decline as other countries began to fill the production shortfalls from Iran and Iraq.

1980s oil glut

Main article: 1980s oil glut

The 1973 and 1979 energy crisis had caused petroleum prices to peak in 1980 at over US$35 per barrel (US$ in today's dollars). Following these events 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 energy crises) and the energy conservation spurred by high fuel prices.{{cite news

In June 1981, The New York Times stated an "Oil glut! ... is here" | access-date= 1 November 2009}} and Time Magazine stated: "the world temporarily floats in a glut of oil", | archive-url=https://archive.today/20130105001239/http://www.time.com/time/printout/0,8816,950550,00.html | url-status=dead | archive-date=January 5, 2013 | access-date= 1 November 2009}} 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-energy crisis levels.{{cite news

After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.

Effects

Recession

Main article: 1973–75 recession

The U.S. reported a negative economic growth during the period concerning the 1970s and it remained weak till the 1980s as the post World War II economic boom drew to a close. But it was a different type of recession as it was a scenario of stagflation which is a rare economic consequence.

Other causes that contributed to the recession included the Vietnam War, which turned out costly for the United States and the fall of the Bretton Woods system. The emergence of newly industrialized countries rose competition in the metal industry, triggering a steel crisis, where industrial core areas in North America and Europe were forced to re-structure. The 1973–1974 stock market crash made the recession evident.

According to the National Bureau of Economic Research, the U.S. economy slid into a recession during the period of 1973–75. Inflation levels remained high even when an economic expansion took place afterwards.

During this recession, the Gross Domestic Product of the United States fell 3.2%. Although the recession ended in March 1975, the unemployment rate did not peak for several months. In May 1975, the rate reached its height for the cycle of 9%.

The recession also lasted from 1973 to 1975 in the United Kingdom. The GDP declined by 3.9% or 3.37% depending on the source. It took 14 quarters for the UK's GDP to recover to that at the start of recession.

Emergence of new oil producers

High oil prices in the 1970s induced investment in oil production by non-OPEC countries, particularly for reserves with a higher cost of production. These included Prudhoe Bay in Alaska, the North Sea offshore fields of the United Kingdom and Norway, the Cantarell offshore field of Mexico, and oil sands in Canada.

Strategic petroleum reserves

Main article: Global strategic petroleum reserves

As a result of the 1973 crisis many nations created strategic petroleum reserves (SPRs), crude oil inventories (or stockpiles) held by the governments of particular countries or private industry, for the purpose of providing economic and national security during an energy crisis. The International Energy Agency (IEA) was formed in the wake of this crisis and currently comprises 31 member countries. According to the IEA, approximately 4.1 Goilbbl of oil are held in strategic reserves by the member countries, of which 1.4 Goilbbl is government-controlled. The remainder is held by private industry. These reserves are intended to be equivalent to at least 90 days of net imports. At the moment the U.S. Strategic Petroleum Reserve is one of the largest government-owned reserves, with a capacity of up to 713.5 Moilbbl.

Recently, other non-IEA countries have begun creating their own strategic petroleum reserves, with China being the second largest overall and the largest non-IEA country.

Middle East

Since Israel's declaration of independence in 1948 this state has found itself in nearly continual conflict with the Arab world and some other predominantly Muslim countries. The animosity between the Arabs and the Israelis became a global issue during the 1970s. The Yom Kippur War of 1973, with the supplying of Israel by its Western allies while some Arab states received Soviet supplies, made this one of the most internationally threatening confrontations of the period.

The large oil discoveries in the Middle East gave some Muslim countries unique leverage in the world, beginning in the 1960s. The 1973 and 1979 crises, in particular, were demonstrations of the new power that these countries had found. The United States and other countries were forced to become more involved in the conflicts between these states and Israel.

OPEC

One of the first challenges OPEC faced in the 1970s was the United States' unilaterally pulling out of the Bretton Woods Accord and taking the U.S. off the established Gold Exchange Standard in 1971. The change resulted in instability in world currencies and depreciation of the value of the U.S. dollar, as well as other currencies. The revenues of OPEC also took a hit since they priced oil in dollars.

Finally OPEC started pricing oil against gold to combat the situation. But OPEC still struggled to maintain stability in the region as the negotiations between them and other Western oil companies bore little to no positive results.

"Oil Patch"

The major oil-producing regions of the U.S.—Texas, Oklahoma, Louisiana, Colorado, Wyoming, and Alaska—benefited greatly from the price inflation of the 1970s as did the U.S. oil industry in general. Oil prices generally increased throughout the decade; between 1978 and 1980 the price of West Texas Intermediate crude oil increased 250 percent. Although all states felt the effects of the stock market crash and related national economic problems, the economic benefits of increased oil revenue in the Oil Patch states generally offset much of this.

References

References

1. (June 2007). "Annual Energy Review 2006, Figure 5.21". U.S. Energy Information Administration, Department of Energy.
2. (1979-02-05). "Oil Squeeze".
3. (2021). "Directed Technical Change as a Response to Natural Resource Scarcity". Journal of Political Economy.
4. (2017). "Essays on the Causes and Dynamic Effects of Oil Price Shocks". University of Utah.
5. (2003). "Macroeconomics: Canadian Edition Updated". Worth Publishers.
6. "The 1956 Suez War".
7. "Interim Agreement between Israel and Egypt (Sinai II) | UN Peacemaker".
8. (April 7, 2021). "The 8 Year Long Blockage of the Suez Canal".
9. (5 June 2023). "Six-Day War".
10. "Oil Shock of 1973–74 | Federal Reserve History".
11. "Frequently Asked Questions (FAQs) - U.S. Energy Information Administration (EIA)".
12. Maugeri, Leonardo. ''[https://books.google.com/books?id=JWmx5uKA6gIC The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource]''. p. 113
13. (5 June 2011). "The hidden face of oil".
14. Smith, William D.. (17 April 1973). "Energy Crisis: Shortages Amid Plenty". The New York Times.
15. [https://history.state.gov/milestones/1969-1976/oil-embargo Oil Embargo, 1973–1974], at [[US State Department]]
16. (2004). "Oil and the Macroeconomy since the 1970s". [[Journal of Economic Perspectives]].
17. (1988). "The Great Crash, the Oil Price Shock and the Unit Root Hypothesis". Econometric Research Program, Princeton University.
18. (26 April 2016). "Monthly Energy Review, April 2016, Figure 11.1a". U.S. Department of Energy.
19. (1979-02-05). "Oil Squeeze".
20. Mouawad, Jad. (2008-03-08). "Oil Prices Pass Record Set in '80s, but Then Recede". [[The New York Times]].
21. [http://cta.ornl.gov/data/tedb26/Spreadsheets/Table10_03.xls Oak Ridge National Lab data]{{dead link. (January 2016)
22. Martha C. White. (January 12, 2009). "This Recession Was Brought to You by the Letters U, V and L". The Big Money.
23. "NBER Business Cycle Expansions and Contractions". NBER.
24. [http://www.bls.gov/cps/ Labor Force Statistics from the Current Population Survey], [[Bureau of Labor Statistics]]. Retrieved on September 19, 2009
25. "Bank of England February 2009 Quarterly inflation report".
26. [http://www.statistics.gov.uk/ Office for National Statistics, IHYQ series, Gross Domestic Product: Quarter on Quarter growth: CVM SA, Seasonally adjusted, Constant 2003 prices, Updated on 23/ 1/2009, retrieved on 17 February 2009] {{webarchive. link. (5 April 2006)
27. ONS GDP ABMI series
28. World Bank. "Commodity Markets Outlook: The Impact of the War in Ukraine on Commodity Markets, April 2022".
29. McNally, Robert. (January 2017). "Crude Volatility: The History and the Future of Boom-Bust Oil Prices". Columbia University Press.
30. (1993-05-26). "All Days". OnePetro.
31. "Commodity Markets: Evolution, Challenges, and Policies".
32. (1999-05-03). "All Days". OnePetro.
33. (2014). "CO2 Emissions from Fuel Combustion: 2014 Ed". International Energy Agency.
34. [[International Energy Agency]]. (12 May 2022). "Oil Stocks of IEA Countries". IEA.
35. (2004-01-01). "Fact Sheet on IEA Oil Stocks and Emergency Response Potential". International Energy Agency.
36. "Office of Petroleum Reserves". US Department of Energy.
37. Upadhyay, Rakesh. (March 29, 2017). "The 5 Biggest Strategic Petroleum Reserves In The World".
38. (Spring 2005). "Black Gold: The End of Bretton Woods and the Oil-Price Shocks of the 1970s". The Independent Review.
39. (8 April 2005). "U.S. Home Prices: Does Bust Always Follow Boom?". Federal Deposit Insurance Corporation.