Top 10 Facts about The OPEC Oil Price Shock of 1973

President Richard Nixon. Photo by Oliver F. Atkins. Wikimedia Commons

Top 10 Facts about The OPEC Oil Price Shock of 1973

 The 1973 energy crisis, also known as the OPEC Oil Price Shock, was a time of increasing energy costs and fuel shortages precipitated by an oil embargo of Arab oil-producing countries.

When President Richard Nixon of the United States asked for $2.2 billion to defend Israel in the Yom Kippur War on October 19, 1973, OPEC nations reduced oil production and imposed an embargo on oil exports to the United States.

Even after the embargo was removed, the price of oil remained high even though it only lasted until January 1974.

Although the oil embargo was lifted in the early part of 1974, it is widely believed that the shock served as a prelude to the stagflation and rapid inflationary pressures that developed in the middle to late 1970s.

The top 10 facts about the OPEC oil price shock of 1973 include the following.

1. Targets of the Oil Embargo Were Countries That Backed Israel During the Yom Kippur War

Yom Kippur War. Photo by Bamahane. Wikimedia Commons

Countries that had backed Israel during the Yom Kippur War were the focus of the oil embargo.

These countries included the United States, the United Kingdom, Canada, Japan and the Netherlands with Portugal, Rhodesia (Now Zimbabwe) and South Africa being included later.

The oil embargo was approved on October 19^th 1973, after the then president of the United States Richard Nixon decided to provide Israel with arms and $2.2 billion in emergency aid in support of the Yom Kippur War.

The Yom Kippur War, also known as the 1973 Arab-Israeli War was fought between Israel and a coalition of Arab states led by Egypt and Syria from October 6 to 25, 1973.

The majority of fighting between the two sides took place in the Sinai Peninsula and the Golan Heights, both occupied by Israel in 1967, with some fighting also taking place in African Egypt and northern Israel.

Egypt’s initial goal in the war was to gain a foothold on the Suez Canal’s eastern bank and then use this position to negotiate the return of the rest of the Sinai Peninsula then occupied by Israel.

2. The Oil Embargo Led to Unprecedented Increase in Oil Prices

Mohammad Reza Pahlavi. Photo by Royal Court of Iran. Wikimedia Commons

The oil embargo precipitated an oil crisis, or “shock,” with numerous short- and long-term implications for global politics and the global economy.

It was later dubbed the “first oil shock,” and it was followed by the 1979 oil crisis, which was dubbed the “second oil shock.”

The 1979 oil crisis was precipitated by a revolution which led to the removal from power of Mohammad Reza Pahlavi, the Shah of Iran, and his wife Farah Pahlavi.

Prior to the embargo, a barrel of oil cost around $2.90, quadrupling to $11.65 per barrel by January 1974 globally, or roughly $18 to $72.50 per barrel in 2022 dollars.

However, due to the oil embargo, prices in the United States were significantly higher which led to high inflation rates in the country.

The embargo caused the price of regular gasoline in the United States to rise from an average of 39 cents per gallon prior to the crisis to 53 cents in 1974. In less than a year, this represented an increase of about 36%.

Along with higher gas prices, shortages also resulted in rationing at gas stations and long lines of vehicles waiting to fill up.

Customers experienced psychological fear as a result, trying to stockpile gasoline and associated goods, which made the situation even worse.

3. The Oil Embargo Led to Steep Oil Output Production Cuts

OPEC International Seminar, Vienna. Photo by Bundesministerium für Europa, Integration und Äußeres. Wikimedia Commons

A series of drastic production cutbacks were implemented after the Arab Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo in 1973.

The oil embargo effectively stopped the export of Arab crude oil to the United States, the United Kingdom, Canada, Japan, and the Netherlands in additional to several other countries both in Europe and Southern Africa

The United States didn’t have much extra capacity to increase production in order to replace Arab oil.

The time and money required to find fresh reserves and open new wells could have taken years, even with soaring oil prices.

4. The Oil Embargo Was Much More the Outcome of a Long-Standing Duel

Texaco. Photo by Robert Yarnall Richie. Wikimedia Commons

While the 1973 use of oil as a weapon contributed to OPEC’s embargo, there were other factors which contributed to the oil embargo as well.

For starters, there had been a protracted conflict between the governments of countries that produced oil and the powerful American oil companies such as Texaco and Mobil among others over dominance of the world oil market.

Up until the 1970s, OPEC had a low profile, mostly negotiating with global oil companies to improve conditions for its member nations.

However, OPEC viewed the Yom Kippur War as an opportunity to hit back at the American oil conglomerates and also demonstrate its geopolitical influence.

5. The Oil Prices Increase Was Not the Only Factor That Caused Inflation in The West

Arthur Burns -Federal Reserve Board Chairman & Vice President -Nelson A. Rockefeller. Photo by Unknown. Wikimedia Commons

High energy prices were not the sole factor contributing to inflation.

Since 1970, the price of commodities has risen in the United States at a rate of about 10% annually, and inflation has been on the Federal Reserve’s radar as something to watch closely since before 1973.

 Naturally, the oil embargo further worsened the situation and accelerated the rate of general inflation.

In 1979, Arthur Burns, the chairman of the Federal Reserve at the time, argued that in addition to the embargo, that period of high inflation was caused by a confluence of a number of external factors.

Some of the external factors included “the loose financing of the Vietnam war, the devaluations of the dollar in 1971 and 1973, the worldwide economic boom of 1972–73, the crop failures and subsequent surge in world food prices in 1973–74.

6. The United States Economy Stagnated During the Crisis

The 1973 oil crisis contributed to rising prices as well as the U.S. economy’s stagnation.

Stagflation, a state when prices increase while the economy is in a downturn, resulted from this.

Prior to the current economic downturn, economists had projected that high unemployment would result in lower prices rather than increases.

The Phillips curve and this theory were both disproved in the 1970s.

During the energy crisis, some people claimed that high oil prices increased the cost of industry and transportation, even while many people were losing their jobs.

However, detractors of this theory pointed out that previous inflationary or recessionary times that happened afterwards did not include an oil shock. 

7. The Far-Reaching Consequences of The Oil Embargo Persisted Even After It Ended

Richard Nixon. Photo by Unknown author or not provided. Wikimedia Commons

Even though the embargo only lasted a few months, the 1970s were marked by persistently high oil and energy costs.

As a result, a 55-mph national speed limit was instituted, which was regarded to be the most fuel-efficient speed for cars at the time.

This helped cut down on the country’s oil consumption.

The Nixon government asserted that the two-year extension of daylight-saving time in the U.S. from 1974 to 1975 resulted in a reduction in heating expenditures of 150,000 barrels of oil during the winter.

8. The Crisis Helped Shift United States Reliance on OPEC For Its Fuel Needs

Higher oil costs undoubtedly contributed to the 1970s’ high inflation and stagflation, but they also helped shift the U.S.’s reliance on OPEC as a source of energy.

In fact, a number of regulations supporting domestic oil production were approved in the middle of the 1970s.

In 1975 the strategic petroleum reserves were established to store emergency supplies. A fresh interest in environmentalism was also awakened by the crisis.

9. Jobs in The Services Sector Rose Substantially Following the Crisis

Following the 1970s energy crises, there was a significant increase in service jobs, which may have been influenced by the 1973 crisis.

Almost all of the 1970s’ employment growth occurred outside of industry.

Although there were nearly the same number of manufacturing positions in 1980 as there were in 1973, there were 5% fewer jobs for production workers.

Jobs for managers, experts, and supervisors did rise in this industry. Additionally, the majority of the 1970s’ job growth was in low-wage industries, primarily in the service sector.

10. The Oil Embargo Came at The Most Inopportune Time for The United States

The U.S industrial facilities were running at about full capacity in the middle of 1973, and many essential industrial materials were in critically limited supply.

Wholesale prices of industrial commodities were already increasing at a rate of more than 10% annually.

The absence of further production capacity in the U.S. oil industry made it difficult for the sector to supply the market with more oil in the case of a shortage in addition to these cost pressures.

 Prices had to rise as a result of the American oil industry’s inability to boost supply in response to OPEC’s cut in oil production.

The price hikes OPEC imposed were significantly impacted by the early 1970s currency devaluation.

Because the price of oil was expressed in terms of dollars, the OPEC countries’ income from their oil actually declined as a result of the declining value of the dollar.

OPEC countries started pricing their oil in gold rather than dollars in line with the Bretton Woods Accord, which established the metal’s price at $35.