The 1973 oil embargo by OPEC nations and its effects of the economic development of the United States

The 1973 oil embargo by OPEC nations and its effects of the economic development of the United States

Introduction

The US economy in 1970s experienced a series of economic problems such as high rates of unemployment and frequent financial difficulties.  Successive US government under presidents Nixon, Ford and Jimmy Carter attempted different economic remedies but were largely unsuccessful. One of the main contributors to the devastating economic challenges facing the US economy was oil production in the Middle East (Blanchard 373). By 1970, the US was at its peak in oil production. However, during the decade the country witnessed a dramatic reduction in oil production while oil consumption continues to increase. To offset its limited production the country through an agreement with the organization of Petroleum exporting Countries (OPEC) began importing oil from the Middle East (Herrera 472). This economic decision meant that the OPEC countries were in control over energy consumption in the US and by extension part of the country’s economy. In 1973, the OPEC states raised oil prices drastically straining the US economy and that of other western nations. The main objective of this paper is to evaluate the 1973 oil embargo by OPEC states and its effects on the US economy.

Reasons for the 1973 oil embargo

At the peak of its oil production in 1970s, the US under President Nixon decided that it was in the best interest of the country to withdraw from the international gold standard. This eliminated the requirement that the US dollar had to be backed by gold when engaging in international trade (Blanchard 373). This is important in understanding the oil embargo of 1970s because during this period, the dollar was the strongest currency in the world and it formed the reference point for all international transactions and pricings. The price of a barrel of oil in OPEC was calculated off the value of the dollar (Herrera 474). The decision by the US government to eliminate the dollar from the gold standards means that the value of the currency was fluid and the OPEC member states experiences losses in terms of their net profits.

In reaction to the actions by the American government, OPEC changes the value of an oil barrel to gold from US dollar. The effect of this action was in the significant rise in the cost of an oil barrel for the US government. One of the largest setbacks to the US economy in terms of oil importation was the beginning of the Arab-Israeli war in 1973. Egyptian and Syrian attacks against Israel characterized the Yom Kippur war (Herrera 475). Israel was a creation of the western powers in Arab land following the Second World War These powers through the US government declined the desire by the Arab nations to allow the collapse of Israel. The US government and the western nations through Operation Nickel Grass delivered military and economic assistance to Israel to fight against the Arab nations. The decision by the western powers to support Israel led to an authorization of an oil embargo by OPEC, devastating to the US economy (Venditti 60).

Effects of supply shock on the US economy

A rise in inflation and the rates of unemployment in the United States were some of the major effects of OPEC oil embargo in the United States. Despite these challenges, Americans also faced problems related to rationing of gas considering that congress decided to regulate the amount of gas that the American consumers could purchase as a way of conserving oil and reducing the amount of oil imports for OPEC (Blanchard 375). This meant that American consumers could only acquire gas if their number plates had an even number, then he would be allowed to obtain gas on even number days in the calendar while those with odd numbers on their number plates were allowed to acquire gas on odd number days. Despite the noble nature of this approach to the regulation of gas consumption, most of the oil and gas station had limited products to sell to the consumers. This resulted in long queues at the gasoline pumps with limited assurance that all the consumers would acquire gas (Herrera 475).

The cost of consumer products in the US increased. This is because most commonly used products by consumers in the country were derived from oil. Products such as plastic, rubber, paper, wax, and chemicals were resulting from the manipulation of oil. This explains why the consumer population in the US during the oil embargo period experienced influences of prices on all the oil products without corresponding increase in their income (Blanchard 375).

After the beginning of the embargo against western nations, the oil price of a barrel rose by about 70% of its initial price. The United States purchased oil at approximately $5 per barrel. This may seek m relatively low compared to the contemporary society where the US purchases an oil barrel at $100 (Herrera 475). An understanding of the possible effects of this price is only possible when it is perceived from the low wages and salaries that characterized economies in the 1970s. As the US continues with its support for Israel against the Arab nations, OPEC reduced its oil production rates in response to the embargo. Limited supply of oil led to a sharp increase of a barrel of oil to $12 by the end of 1974 (Herrera 477). The 1973 oil embargo was considered as a strain to the US economy considering that the country had become heavily dependent on imported oil for the operationalization of its industry. Attempts by the US government to end the embargo were an indication of a complex shift in the global financial balance of power to the oil producing state. A possible effect of this shift activated a swerve in the attempts by the US government to address foreign policy issues from long-term dependence on oil imports for economic operations (Venditti 66).

After decades of abundant oil supply form Arab nations and the growth in the cu imposition of fossil fuel energy, the US was facing increase in oil prices and shortage in fuel. One of the effects was that energy regulation commissions called on the citizens and corporations to implement measures aimed at energy conservation. Some of the measures included closing down of gas station during holidays and refraining from the use of holiday lights in houses (Blanchard 377).

The energy crisis in the United States also affected the automotive industry, which was popular for the production of cars with high rate of consumption of fuel. During this period, the automotive industry in the US was facing competition for the Japanese car manufacturers who were popular for the production of smaller fuel-efficient cars (Hakes 1).

Other than the purchase of smaller and fuel-efficient cars, Americans were compelled to monitor the use of energy in their households was considered as efforts by the public in assisting the government solve the energy crisis that the country was facing (Herrera 477).

Despite the lifting of the oil embargo at the end of 1974, the fuel prices remained higher and the effect of the crisis lingered over the US throughout the 1970s and in early 1980s. Other than price control and the rationing of gasoline, the US government through the transport department introduced a national speed limit and daylight saving time as strategies for regulating the consumption of oil and channeling more of the available oil into matters of economic development (Blanchard 378).

Other than the energy reform policies that the US introduced, the country embarked on domestic oil production and the use of renewable sources of energy as a way of reducing American dependence on fossil fuel energy from Arab nations. These included investment on hydroelectric energy, wind power, and nuclear energy. Despite the efforts, the collapse of oil prices in mid 1980s to relatively acceptable levels led to a reduction in domestic oil production and slowed down progress in implementation of energy efficient measures while increasing foreign importation of oil (Hakes 1).

US government attempt to solve the oil embargo crisis

At the beginning of the embargo, there was an increase in oil prices, which had devastating implications to the US economy. Oil prices per barrel quadrupled imposing higher costs on the consumers and structural changes to the stability of the economy. The OPEC oil embargo coincided with the devaluation of the dollar, which made a global financial recession impending (Blanchard 379). One of the apaches taken by the US was to stockpile oil supplies as short-term cushion of securing itself. The stockpiling was also a long-term strategy against the possibility of higher prices of oil due to limited supply. The high consumption rate of the US however, led it to the need to involve OPEC countries in negotiating an end to the embargo under harsh economic circumstance. The devaluation of the dollar and devastating economic conditions mean that the US could only negotiate as a weaker party seeking an end to the oil crisis.

One of the strategies employed by the US in response to the embargo was the introduction of project independence aimed at the promotion of domestic oil production and consumption. The success of the project was characterized by intense diplomatic activities among its allies and the promotion of a consumer union in charge of developing a strategic depth and the formation of consumer cartels that would regulate oil prices. These efforts were however partially successful in the realization of an end to the embargo considering the high initial costs that the struggling US economy could not sustain (Blanchard 379).

Through the efforts of the US government and its allies, the OPEC oil embargo was concluded in 1974 following the agreements in the Washington Oil Summit. From the summit all the attending states agreed that in the process of pursuing national polices, there was need for every country to ensure the harmonization of the interests of every country as a way of marinating order within the global economic system (Herrera 472). This could only be realized through concerted efforts by all the counties to ensure international cooperation including OPEC. This could accelerate the existence of an improvement in the supply and demand chain hence ameliorating the devastating economic consequences of the embargo. OPEC countries began supplying oil to the United States hence reducing the effects of the oil crisis (Hakes 1).

Difficulties encountered by the United States in solving the Oil embargo crisis

The embargo was considered as a challenging situation for the US government. This is because the American government under President Nixon had to strike a balance between its foreign policy towards the Middle East and the contradictory demands by the Arab governments requiring the withdrawal of its support to Israel (Blanchard 387). The dilemma in this situation was in the desire to promote the existence of the newly created Israeli state and maintain it closer trade relationship with Arab-oil producing states. The United States was one of the parties that supported the creation of Israel in Arab land and this meant that it was its responsibility to protect the nation from any form of attack against its sovereignty. This explains why at the beginning of the Yom Kippur war, the US through the congress provided Israel with economic and military aid against Egypt and Syria. Despite this level of support the US, becoming was experiencing decline in production of domestic oil, an increase in consumption levels, and an increase in the level of dependence on imported oil from OPEC (Hakes 1).

There were also challenges arising from the Cold war between the US and the Soviet Union. The US government had to ensure the maintenance of its sphere of influence in Asia. It was also necessary for the American government to ensure the protection of its interests within the Middle East and this explains why both Israel and OPEC were important in ensuring dominance of the US within the region. The strain in its trade relationship with Saudi Arabia following its response to the Yom Kippur war was an indication of the need by the US to reconcile its support as a counterbalance to the increasing influence of the Soviet Union in the Middle East (Blanchard 383).

The strategies developed by the United States as part of solutions to the oil embargo crisis was to regulate fuel consumption among its citizens. Inasmuch as these strategies were essential in the reduction of oil consumption rate, there was need for more oil to operationalize the industries in the US, which were essential for the realization of the country’s economic growth (Hakes 2). There was therefore a difficulty in ensuring an effective balance between the needs of the consumers and those of the industries within the American economy (Herrera 479).

The decision by the US government to exclude the dollar from the standard gold also presented challenges to the US in relation to its ability to control oil prices. Initially, the dollar was used as the global currency in the determination of oil prices. However, upon withdrawal from the gold standard, the OPEC countries also removed the dollar and began using the standard gold in the determination of international oil prices. This was considered as relatively expensive for the US government considering the higher price of oil. Through the removal of the dollar it became relatively difficult for the US to control international oil market prices hence during the negotiation process the OPEC countries had more leverage hence determine the end result of the polices comprising any form of negotiation with the United states. The oil embargo on the 1970s was therefore a demonstration of the changes made in the petroleum order in terms of the loss in the power of the US to set international oil prices (Herrera 488)

The process of negotiating for an end to the embargo was not only an economic challenge but also a political one to the United States. This is because, even after the end of the Israeli-Arab Yom Kippur war, the oil crisis continued. This was because the OPEC states were not only concerned with the prevailing stalemate in Israel but also with the recapturing of territories acquired by Israel in the 1967 war. This explains why even after the end of the war, OPEC states still extended their program on oil production reduction that was designed to ensure that the US and its allies adopted a more pro-Arab approach to handling the Israeli stalemate (Hakes 2).

The oil crisis brought with it ideological and policy related challenges considering that the embargo necessitated an inter-European discussion on matters related to the development of workable and stainable energy polices. There were attempt among the European Economic Community member states to pursue a collective discussing with the OPEC. This led to the development of rifts with the nations classified as hostile to the Arab countries such as Netherlands and the US with other EEC member states (Herrera 483). The ECC states excluded the Netherlands to minimize the possibility of threatening an award of favorable terms of trade. The resistance threatened this rift between the US and its international allies such as Britain by the British government to for the development of a common energy policy considering that such strategies could undermine its ability to exercise its control over northern seal oil resources. In additional challenges were in the inability of the US to convince the Japanese government not to adopt the pro-Arab polices and this would increase the differences between the two states in terms of policy alignments and the realization of common developmental goals (Hakes 2).

Conclusion

After decades of abundant oil supply form Arab nations and the growth in the cu imposition of fossil fuel energy, the US was facing increase in oil prices and shortage in fuel. One of the largest setbacks to the US economy in terms of oil importation was the beginning of the Arab-Israeli war in 1973. Egyptian and Syrian attacks against Israel characterized the Yom Kippur war. The decision by the western powers to support Israel led to an authorization of an oil embargo by OPEC, devastating to the US economy. There were also challenges arising from the Cold war between the US and the Soviet Union. It was necessary for the American government to ensure the protection of its interests within the Middle East and this explains why both Israel and OPEC were important in ensuring dominance of the US within the region. The oil crisis brought with it ideological and policy related challenges considering that the embargo necessitated an inter-European discussion on matters related to the development of workable and stainable energy polices.

References

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