The Energy Crisis

The Energy Crisis

In the 1960s, the Organization of Petroleum Exporting Countries (OPEC)A cooperative formed in 1960 by oil-exporting nations whose members seek ways to maximize profits related to oil exports. OPEC demonstrated its power in the 1970s with a series of boycotts against the West that led to a severe energy crisis and increased price for oil. Most OPEC members are located in the Middle East, but other members include Venezuela, Angola, Nigeria, and Ecuador. was created as an economic alliance that hoped to work collectively to regulate the global oil market. Oil-producing nations such as Venezuela, Iran, Iraq, Kuwait, and Saudi Arabia believed that the tremendous postwar demand for oil did not match its price, which had remained fairly constant in real dollars for nearly a century. However, OPEC’s initial efforts to restrict production stumbled because these nations were so dependent on oil exports for their livelihood—the very factor that had kept supplies high and prices low. The only way to increase the price of oil, OPEC founders recognized, was to reverse the present power structure and make nations that imported oil dependent on the nations that produced oil, rather than the other way around. The challenge was to convince all oil-exporting nations, especially those of the predominantly Arabic Middle East, to restrict production simultaneously.

A failed invasion of Israel by several of oil-producing nations in 1973 spurred the unity OPEC leaders had been hoping for. In response to the West’s support of Israel in the Yom Kippur WarOctober 1973 invasion by Egypt and Syria of the Sinai Peninsula and Golan Heights along their disputed border with Israel. These territories were formerly held by Egypt and Syria, but had been occupied by Israel after Israel repelled a similar invasion in 1967. With Western aid, Israel once again defeated Egypt and Syria., OPEC’s Arabic member states voted to impose an embargo on the United States and Western Europe in October. The war itself was a continuation of the Israeli-Palestinian conflict, as Egypt and Syria reinvaded Israel in hopes of taking back territory it had lost in previous wars. The United States and Western Europe responded with military aid that assisted Israel in its successful defense. This Western intervention resulted in a coordinated effort by religious and secular leaders throughout the Arabic world to force the West to abandon Israel, with the method being the refusal to sell oil to any ally of Israel.

The embargo was not simply about ethnic and religious conflict. For many years, the members of OPEC and even the US-installed shah of Iran had complained that Western nations charged inflated prices for the food and manufactured goods they exported to the Middle East while the oil they purchased remained constant despite growing demand. These complaints were especially relevant in 1973 given recent inflation. The price of Western goods had doubled even as the price the West paid for oil remained about the same.

In the first two decades after World War II, Americans had grown accustomed to the idea that their nation dictated the economic, political, and military terms that other nations (outside of the Soviet sphere) abided by. The oil embargo challenged this confidence and caused an energy crisis that affected all Americans instantly. Fuel prices quadrupled after the start of the embargo in October 1973. An estimated one in five gas stations simply ran out of fuel altogether during the peak of the crisis the following spring. Recognizing that the gulf between supply and demand was so great that the price might continue its upward spiral, the government limited the amount of oil each state received and began printing fuel ration coupons similar to those used in World War II. Although the embargo ended before the federal rationing program took effect, states passed regulations limiting the number of days consumers could purchase fuel. For example, many states utilized a system where a digit in a consumer’s license plate determined what days they could purchase gasoline. Speed limits were reduced to fifty-five miles per hour or less, and even NASCAR reduced the distance of its races to conserve fuel.

Figure 12.8

Thousands of service stations simply ran out of fuel during the 1973 energy crisis, including this cleverly named service station.

The US economy was damaged but not disabled by the embargo because domestic oil production still accounted for 70 percent of the nation’s consumption in the early 1970s. In addition, domestic production quickly increased once price controls were released, permitting US oil companies to sell their product at market prices, which were substantially higher than the rate the government had set. However, many Western European nations depended almost entirely on the Middle East for oil. North Atlantic Treaty Organization (NATO) members were beginning to reconsider their relationship to Israel, demonstrating the limits of US authority over its own NATO allies. In response, the United States offered millions in aid payments to Israel in exchange for an agreement to withdraw from several areas that were claimed by its Arabic neighbors.

From the perspective of these Arabic nations, the embargo demonstrated that oil could be used to further political objectives. However, business and political leaders in Saudi Arabia and other nations were more impressed by the rapid increase in the price of oil. Saudi Arabia decided to resume sales to the West in the spring of 1974 to take advantage of the dramatic price increase. Other Arab nations likewise placed profits ahead of politics, easing the embargo on nations that still supported Israel. However, the price of oil remained near its 1973 highs because OPEC successfully restricted production and maintained the artificially high price after the initial embargo. Oil did not return to its pre-1973 price (adjusted for inflation) until the 1980s and 1990s when global production increased and the end of the Cold War promoted freer trade. During these later decades, OPEC struggled to dictate production quotas to its members, several of which were at war with one another and in desperate need of revenue.