1973 oil crisis: Encyclopedia II - 1973 oil crisis - Origins of the 1973 world oil shock

1973 oil crisis - Origins of the 1973 world oil shock

1973 oil crisis - World competition over resources

The Arab-Israeli conflict triggered an energy crisis in the making. Before the embargo, the industrialized West, especially the United States, had taken cheap and plentiful petroleum for granted. (Indeed, the form American cities took after World War II - with expansive suburbs full of detached, single-family homes - depended on the automobile as the principal means of transportation - a form that consumes oil en masse as fuel.) Between 1945 and the late 1970s, the West and Japan consumed more oil and minerals than had been used in all previous recorded history. Oil consumption in the United States had more than doubled between 1950 and 1974. With only 6 % of the world's population, the U.S. was consuming 33 % of the world's energy. At the same time, America's economy accounted for a quarter of total global production, meaning US workers were over 4 times more productive than the global average. This is because of their advanced industrial sector, which accounts for the bulk (over 5 times the global average), of energy usage.

U.S. economic policies had an important effect on the crisis. While the OPEC boycott was an immediate trigger, historians increasingly see roots in American economic policies.

Oil, especially from the Middle East, was paid for in United States dollars (aka petrodollars), at prices fixed in dollars. U.S. President Richard Nixon had inherited an economy in which growth was already sluggish, in which inflation was already troubling. By the summer of 1971, the president was under strong public pressure to act decisively to end the dilemma of rising prices and general economic stagnation (see "stagflation"). On August 15, 1971, Nixon ended the convertibility of the US dollar into gold, thereby ending the Bretton Woods system that had been in place since the end of World War II, allowing its value to fall in world markets. The United States suspended convertibility of the dollar on August 15, 1971; the dollar was devalued by 8 % in relation to gold in December 1971, and devalued again in 1973.

The devaluation resulted in increased world economic and political uncertainty. Concurrently, in the early 1970s, the fall in the dollar went along with a fall in the price in dollars for oil. This improved the situation of U.S. industrialists in relation to European and Japanese competition. But the de-valorization, and then devaluation, of the dollar crystallized the unease of raw materials producers in the Third World who saw the wealth under their lands being reduced and their assets growing in a currency that was worth significantly less than it had been worth just quite recently. This set the stage for the struggle for control of the world's natural resources and for a more favorable sharing of the value of these resources between the rich countries and the oil-exporting nations of OPEC.

OPEC devised a strategy of counter-penetration, whereby it hoped to make industrial economies that relied heavily on oil imports vulnerable to Third World pressures. Dwindling foreign aid from the United States and its allies, combined with the West's pro-Israeli stance in the Middle East, angered the Arab nations in OPEC.

1973 oil crisis - Founding of OPEC

OPEC consisted of thirteen nations, including seven Arab countries but also other major petroleum-exporting countries in the developing world like Iran and Venezuela. It had been formed on September 17, 1960 to protest pressure by major oil companies (mostly owned by U.S., British, and Dutch nationals) to reduce oil prices and payments to producers. At first it had operated as an informal bargaining unit for the sale of oil by Third World nations. It confined its activities to gaining a larger share of the revenues produced by Western oil companies and greater control over the levels of production. However, in the early 1970s it began to display its strength.

1973 oil crisis - The Yom Kippur War

The persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC from a mere cartel into a formidable political force. After the Six Day War of 1967 the Arab members of OPEC formed a separate, overlapping group (Organization of Arab Petroleum Exporting Countries) for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the latter grouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposed the 1973 oil embargo against the United States, Western Europe, and Japan. By the early 1970s the great Western oil conglomerates suddenly faced a unified bloc of producers.

As mentioned, the Arab-Israeli conflict triggered a crisis already in the making. The West could not continue to increase its energy use 5 % annually, pay low oil prices, yet sell inflation-priced goods to the petroleum producers in the Third World. This was stressed by the Shah of Iran, whose nation was the world's second-largest exporter of oil and the closest ally of the United States in the Middle East at the time. "Of course [the world price of oil] is going to rise," the Shah told the New York Times in 1973. "Certainly! And how...; You [Western nations] increased the price of wheat you sell us by 300 %, and the same for sugar and cement...; You buy our crude oil and sell it back to us, redefined as petrochemicals, at a hundred times the price you've paid to us...; It's only fair that, from now on, you should pay more for oil. Let's say 10 times more."²

Adapted from the Wikipedia article "Origins of the 1973 world oil shock", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki