The 1970s energy crisis was a period in which the economies of the major
industrial countries of the world, particularly the United States, Canada,
Western Europe, Japan, Australia, and New Zealand were heavily affected and
faced substantial petroleum shortages, real and perceived, as well as elevated
prices. The two worst crises of this period were the 1973 oil crisis and the
1979 energy crisis, caused by interruptions in exports from the Middle
East, for example in 1979 due to the Iranian Revolution.
The crisis period began to unfold as a result of events at the end of the
1960s. It was during this time that petroleum production in major producers
like the United States and some other parts of the world peaked. Subsequent to
the Seventies, world oil production per capita peaked.
The major industrial centers of the world were forced to contend with
escalating issues related to petroleum supply. Western countries relied on the
resources of potentially unfriendly countries in the Middle East and other
parts of the world. The crisis led to stagnant economic
growth in many countries as oil prices climbed. Though there were genuine
concerns with supply, part of the run-up in prices resulted from the perception
of a crisis. The combination of stagnant growth and price inflation during this
era led to the coinage of the term stagflation.
By the 1980s, both the recessions of the 1970s and adjustments in local economies
to become more efficient in petroleum usage, controlled demand sufficiently
enough for petroleum prices worldwide to return to more sustainable levels.
The period was not uniformly negative for all economies. Petroleum-rich
countries in the Middle East benefited from increased prices and the slowing
production in other areas of the world. Some other countries, such as Norway,
Mexico, and Venezuela, benefited as well. In the United States, Texas and
Alaska, as well as some other oil-producing areas, experienced major
economic booms due to soaring oil prices even as most of the rest of the nation
struggled with the stagnant economy. Many of these economic gains, however,
came to a halt as prices stabilized and dropped in the 1980s.
Key periods = Production peaks around 1970 =
During the 1960s petroleum production in some of the world's top producers began
to peak. Germany reached its production peak in 1966, Venezuela and the United
States in 1970, and Iran in 1974. Canada's conventional oil production
peaked around this same time. The worldwide production per capita peaked
soon afterward. Though 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 Germany and the U.S.
became increasingly dependent on foreign suppliers for this key resource.
= 1973 oil crisis = The 1973 oil crisis is a direct
consequence of the US production peak in late 1970 and the beginning of 1971. The
"embargo" as described below is the "practical name" given to the crisis,
allowing the US to "lie to itself" or hide its production peak towards its
citizens. For the main Arab producers, the "embargo" allowed to show to "the
Arab street" that they were doing something for the Palestinians. In real
market terms the embargo was almost a non-event, and only from a few
countries, towards a few countries. It should also be noted that the
"Embargo" was never effective from Saudi Arabia towards the US, as reported by
James Akins in interview at 24:10 in the documentary "la face cachée du pétrole
part 2". James Akins, who audited US capacity for Nixon after US peak, was US
ambassador in Saudi Arabia at that time. In October 1973, the members of
Organization of Arab Petroleum Exporting Countries or the OAPEC 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 their 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 = 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 production in Iran/Iraq stabilized and returned to normal.
= 1980s oil glut = The 1973 and 1979 energy crisis had
caused petroleum prices to peak in 1980 at over US$35 per barrel. 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 and the energy conservation spurred by high fuel prices. The
inflation adjusted real 2004 dollar value of oil fell from an average of
$78.2 per barrel in 1981 to an average of $26.8 in 1986.
In June 1981, The New York Times stated an "Oil glut! ... is here" and Time
Magazine stated: "the world temporarily floats in a glut of oil," 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. This
sentiment was echoed in November 1981, when the CEO of Exxon Corp also
characterized the glut as a temporary surplus, and that the word "glut" was an
example of "our American penchant for exaggerated language." He wrote that the
main cause of the glut was declining consumption. In the United States,
Europe and Japan, oil consumption had fallen 13% from 1979 to 1981, due to "in
part, in reaction to the very large increases in oil prices by the
Organization of Petroleum Exporting Countries and other oil exporters,"
continuing a trend begun during the 1973 price increases.
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 = The decade of the 1970s was a period of
limited economic growth due in part to the energy crises of that decade. Though
the mid decade was the worst period for the United States the economy was
generally weak until the 1980s. The period marked the end of the general
post-World War II economic boom. It differed from many previous recessions
as being a stagflation, where high unemployment coincided with high
inflation. Other causes that contributed to the
recession included the Vietnam War, which turned out costly for the United
States of America 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 recession in the United States lasted from November 1973
to March 1975. Although the economy was expanding from 1975 to the first
recession of the early 1980s, which began in January 1980, inflation
remained extremely high for the rest of the decade.
During this recession, the Gross Domestic Product of the United States
fell 3.2 percent. Though 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 percent. The recession also lasted from 1973–75
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. = Strategic petroleum reserves =
As a result of the 1973 crisis many nations created strategic petroleum
reserves, crude oil inventories held by the governments of particular countries
or private industry, for the purpose of providing economic and national security
during an energy crisis. According to the United States Energy Information
Administration, approximately 4.1 billion barrels of oil are held in
strategic reserves, of which 1.4 billion is government-controlled. The remainder
is held by private industry. At the moment the US Strategic Petroleum
Reserve is one of the largest strategic reserves, with much of the remainder
held by the other 26 members of the International Energy Agency. Recently,
other non-IEA countries have begun creating their own strategic petroleum
reserves, with China being the largest of these new reserves. Since current
consumption levels are neighboring 0.1 billion barrels/day, in the case of a
dramatic worldwide drop in oil field output as suggested by some peak oil
analysts, the strategic petroleum reserves are unlikely to last for more
than a few months. = 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 and southwestern Asia, and the peaking of production in some of the
more industrialized areas of the world 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 leading to peace
initiatives such as the Camp David Accords.
= 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. With that standard, only the value of the U.S. dollar was pegged to the
price of gold and all other currencies were pegged to the U.S. dollar. The
change resulted in instability in world currencies and depreciation of the value
of the U.S. dollar, as well as other currencies, and decreasing real revenues
for OPEC whose producers still priced oil in dollars.
OPEC was slow to adjust to the situation but finally made the decision to price
oil against gold. Frustrated negotiations between OPEC and the major
oil companies to revise the oil price agreement as well as the ongoing Middle
East conflicts continued to stall OPEC's efforts at stabilization through this
era. = "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. Though 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. See also
Energy crisis 1973 oil crisis
1973–75 recession 1979 energy crisis
1979 world oil market chronology 1980s oil glut
1990 oil price shock Hubbert peak theory
References