Our world has been defined by many economic events over the past few years, however, one that often slips the public’s mind is the OPEC Oil Price Shock of 1973, more famously known as the 1973 oil crisis (or first oil shock). This event shook the world and exposed never-seen-before cracks in our world economy. This article seeks to break down this event into a digestible read so that readers can understand one of the world’s greatest economic events.
In a time when the world was rapidly industrialising, oil became a highly valued commodity. In the 1920s, oil accounted for one-fifth of America’s total energy use. And by the 1940s, this number increased to one-third. By the 70s, the domestic output for oil could not keep up with the increased demand for oil, which was now being used for electricity, transportation, heating homes and other domestic and commercial usage.
By the late 50s, the USA became dependent on oil being imported from other countries. Slowly, the Middle-East and its low-cost oil extraction technologies became popular. Companies turned to import international, Middle-Eastern oil despite high tariffs as that would yield higher profits.
The OPEC, or the Organization of Petroleum Exporting Countries, had five founding members — Venezuela, Iraq, Saudi Arabia, Iran and Kuwait. If you read the news or know even a little about the market for oil, then these five countries may ring a bell: they were the largest oil exporters at the time. The number of countries slowly increased as more and more nations joined the OPEC as profitable oil producers.
In 1971, a key decision was made — President Richard Nixon would withdraw from the 1944 Bretton Woods agreement and thus pull the USA off the gold standard (setting a precedent for many other nations to come). The unexpected nature of this decision plummeted the value of dollar. This deeply impacted the OPEC countries as they were dependent on the value of the US dollar for their oil pricing. Hence, their oil revenue (which accounted for the majority of their government revenue) began to fall with the dollar.
The graph above demonstrates how the imported costs for oil drastically surged during the OPEC price shock.
This resulted in what became a global economic recession from 1973 to 1975. Domestic oil producers in the USA were operating at their full capacity but were still unable to keep up with demand. Simultaneously, prices became extremely volatile, thus impacting industries that depended on oil and households.
Furthermore, higher oil prices led to high gas prices that resulted in consumers having less disposable income and fewer investments. The life of a daily consumer around the world had changed drastically and consumers had stopped buying or spending.
However, this embargo eventually gave rise to OPEC’s power of becoming a cartel — a form of collusive oligopoly. By raising and lowering supply, OPEC is now able to stabilise the price of oil. The predominance of the organisation is still highly prevalent today.