Oil Embargo

views updated

Oil embargo

The year of 1973 marks one of the most important turning points in the history of the twentieth century. Prior to 1973, the world had become accustomed to a plentiful supply of inexpensive fossil fuels : coal , petroleum , and natural gas . Developed nations had built economies that depended not just on these fossil fuels, but also on their relatively low cost. Patterns of urban growth in the United States, to take just one example, reflected the fact that the average person could easily afford to drive her automobile many miles a day. The average price of a barrel of oil in 1973, for example, was $2.70 and the average cost of gasoline at the pump about 35¢ a gallon.

A number of factors combined in 1973, however, to change this picture dramatically. The most obvious of those factors was a decision made by the Arab members of the Organization of Petroleum Exporting Countries (OPEC) to cut back on its export of petroleum to many nations of the world. The reason given for this decision was the support given by the United States to Israel during the 18-day war with Syria and Egypt. The action, taken on October 18, 1973, reduced the direct flow of oil from the Arab states to the United States to zero.

OPEC had been established in 1960 by a Venezuelan oil man Juan Perez Alfonso. An extremely conservative businessman who rode a bicycle and read by candlelight to save energy, Perez Alfonso saw OPEC as an organization that could encourage energy conservation throughout the world.

His objectives were certainly achieved in some places as a result of the 1973 embargo. Americans, along with citizens of other developed nations, found themselves waiting in long lines to buy gasoline, turning their thermostats down to 60°, and learning how to live with less energy in general.

The embargo also had a devastating effect on national economies. In the United States, inflation climbed to more than 10 percent a year, an enormous trade deficit developed, and interest rates climbed to the high teens. Elsewhere, a global recession began.

By the time the embargo ended in March 1974, oil prices had climbed to nearly $12 a barrel, an increase of 330 percent. Gasoline prices had also begun to climb, reaching 57% a gallon by 1975, 86¢ a gallon by 1979, and $1.19 a gallon by 1980.

The embargo caused developed nations to rethink their dependence on fossil fuels. Research on alternative energy sources such as wind, tides, geothermal, and solar energy suddenly attained a new importance. The United States government responded to the new era of expensive energy by formulating an entirely new energy policy expressed in such legislation as the Energy Policy and Conservation Act of 1976, the Energy Conservation and Production Act of 1976, the Energy Reorganization Act of 1974, and the National Energy Act of 1978.

Interestingly enough, the OPEC embargo had impacts that were relatively little known and discussed at the time. For example, the United States was importing only about 7 percent of its oil from Arab nations in 1973. Yet, almost as soon as the embargo was announced, prices at the gasoline pump began to rise. Such a fast response is, at first, difficult to understand since "old," cheap oil was still on its way from the Middle East and was still being processed, shipped and stored by petroleum companies.

The embargo must also be understood, therefore, as an opportunity for which oil companies had been looking to increase their prices and profits. In the years preceding the embargo, these companies had been feeling increased pressures from domestic environmental groups to cut back on drilling in sensitive areas. They were also losing business to small, independent competitors.

The embargo afforded the companies an opportunity to turn this situation around and once more increase profitability, which they did. In the one year following the embargo, for example, the seven largest oil companies reported profits from 40–85%. Two years after the embargo, one of these companies (Exxon) became the nation's richest corporation, with revenues of $45.1 billion.

Neither have the long term effects of the embargo been what observers in 1973 might have expected. In 1990 the United States imports a larger percentage of its oil from Arab OPEC members than it did in 1973. And the enthusiasm for alternative energy sources of the 1970s has largely diminished.

[David E. Newton ]