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1973-74 Oil Crisis

SUMMARY:

Between October 1973 and January 1974 world oil prices quadrupled. By putting an end to decades of cheap energy, the 1973-74 oil crisis, which was led by Arab members of the Organization of Petroleum Exporting Countries (OPEC), exacerbated the economic difficulties facing many industrialized nations, forced developing countries to finance their energy imports through foreign borrowing, and generated large surpluses for oil-exporters.

DESCRIPTION:

The 1973-74 oil crisis followed years of often acrimonious negotiations between members of the Organization of Petroleum Exporting Countries (OPEC) and Western oil companies over petroleum production and pricing levels. Richard Nixon's decision to take the U.S. off the gold standard in 1971 was of particular importance in contributing to the oil crisis. Because oil prices were denominated in dollars, the devaluation that accompanied the end of the Bretton Woods monetary regime negatively impacted oil exporting countries and led OPEC officials to consider remedial steps, such as pricing oil in gold instead of dollars. Little came of these efforts until October 1973, when Arab members of OPEC, in response to the outbreak of the Yom Kippur War, raised the posted price of crude by 70% and placed an embargo on exports to the U.S. and other nations allied with Israel. Although the fighting ended in late October, OPEC continued to use the "oil weapon" over the coming months. In November oil exporters cut production 25% below September levels, and the following month they doubled the price of crude. By January 1974 world oil prices were four times higher than they had been at the start of the crisis.

Although prices soon stabilized, the oil crisis had a profound impact on the international system. In the first place, the rise in world energy prices generated unprecedented current account surpluses for oil-exporting nations, much of which ended up being deposited in U.S. banks. Through a system that came to be known as "petrodollar recycling" many of these funds were, in turn, lent to oil-importing developing nations to help them finance their energy imports. The oil crisis also exacerbated economic difficulties then facing the industrialized nations of the West. Increased energy prices dampened economic growth and fostered inflation—a combination that came to be known as "stagflation." On the geopolitical front, OPEC's actions inspired developing nations to demand the establishment of a "new international economic order," a series of global economic reforms that included increased foreign aid levels, sovereign debt relief, and preferential trade agreements with industrialized countries. Last but not least, by putting an end to decades of cheap oil the crisis forced industrialized nations to seek ways to curb their energy use. In the U.S. this led to such measures as gas rationing and the adoption of a national 55 mile per hour speed limit.

FURTHER INFORMATION:

G. John Inkenberry, "The The Irony of State Strength: Comparative Responses to the Oil Shocks in the 1970s," International Organization 40 (1986): 105-137.

Roy Licklider, "The Power of Oil: The Arab Oil Weapon and the Netherlands, the United Kingdom, Canada, Japan, and the United States," International Studies Quarterly 32 (1988): 205-226.

Karen R. Merrill, The Oil Crisis of 1973-1974: A Brief History with Documents (Bedford St. Martinís, 2007).

Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (Simon and Schuster, 1991).

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