What was the energy crisis of 1973?
The energy crisis of 1973, also known as the oil shock of 1973-1974, was a period of soaring energy prices and fuel shortages resulting from an embargo imposed by Arab oil-producing countries in response to US support for Israel during the Yom Kippur War. Meanwhile, the price of a barrel of oil has increased nearly fourfold in less than a year.
The embargo was lifted in early 1974, but the shock is widely seen as a precursor to the rapid inflationary pressures and stagflation seen in the mid to late 1970s. The 1973 oil embargo was only a of the many complicating factors that led to a decade of high inflation and stagflation in the United States in the 1970s.
A second energy crisis broke out in 1979 following the Iranian revolution and the overthrow of the Shah of Iran.
Key points to remember
- The energy crisis of 1973 was an oil shock that caused energy prices to skyrocket and lead to fuel shortages in America.
- The crisis is the result of Arab oil-producing countries, known as OPEC, refusing to sell crude to the United States.
- Arab oil-producing countries launched the embargo in response to US support for Israel during the Yom Kippur War in 1973.
- OPEC lifted its embargo in March 1974, but it caused economic damage in the United States and around the world.
- Economists now agree that the embargo was just one of many factors that led to high inflation and stagnation during the 1970s in the United States and elsewhere.
Understanding the energy crisis of 1973
On October 19, 1973, following President Richard Nixon’s decision to provide Israel with $2.2 billion in emergency aid to support the Yom Kippur War, the Arab Organization of the Petroleum Exporting Countries (OPEC ) approved an oil embargo on the United States. This effectively halted Arab crude oil exports to the United States, followed by a series of steep production cuts.
Prior to the embargo, a barrel of oil was trading at around $2.90, quadrupling to $11.65 per barrel in January 1974 (from around $18 to $72.50 per barrel in 2022 dollars). This led to an increase in the price of regular gasoline in the United States from an average of 39 cents per gallon before the crisis to 53 cents in 1974, an increase of about 36% in less than a year. Along with rising prices at the pump, shortages ensued, leading to rationing at gas stations and long lines of cars waiting to be filled. It also caused psychological panic among consumers, who sought to hoard gasoline and related products, further aggravating the situation.
In terms of replacing Arab oil, the United States had little excess capacity to boost production. Even with rising oil prices, the time and capital required to discover new deposits and bring new wells online can take years.
Eventually, OPEC lifted its embargo in March 1974; however, rising oil prices persisted, leading to high inflation.
While the OPEC embargo was partly a use of oil as a weapon in the 1973 Arab-Israeli conflict, much more than it was the culmination of a long-running duel between oil-exporting nations and American oil companies, whose ultimate stake was control of the international oil market.
As with most economic events, the energy crisis of 1973 and the inflation that followed were the result of several factors, not just American support for Israel in the face of its enemies. On the one hand, there had been a decades-long struggle between the governments of oil-producing countries and the major American oil conglomerates for control of the world oil market. Until the 1970s, OPEC (which was not formed until 1960) had kept a relatively low profile, negotiating mainly with international oil companies for better terms for its member countries. OPEC, however, saw the Yom Kippur War as a way to advertise its geopolitical power and deal a blow to the American oil giants.
Inflation, too, was not caused solely by high energy prices. The United States was already seeing commodity prices rise at a rate of about 10% per year starting in 1970, and inflation was on the Federal Reserve’s radar of things to watch closely even before 1973. Of course, the oil embargo only made things worse and accelerated the rate of global inflation.
Then-Fed Chairman Arthur Burns argued in 1979 that this period of high inflation was the result of the confluence of several external forces in addition to the embargo, including “the loose financing of the war in Vietnam, the devaluations of the dollar in 1971 and 1973, the global economic boom of 1972-73, crop failures and the resulting spike in world food prices in 1974-75, and the extraordinary increases in oil prices and the sharp deceleration in productivity.
In addition to high inflation, caused in part by the energy crisis of 1973, the US economy also stagnated. This led to an unusual situation of rising prices accompanied by an economic recession, known as “stagflation”. Economists previously predicted that when the economy turns sour, high unemployment should translate into lower prices, not rising prices (i.e., as modeled by the Phillips curve) . The 1970s proved this theory and the Phillips curve was wrong.
In the aftermath of the energy crisis, some began to argue that high oil prices were driving up transportation and manufacturing costs, even as people were laid off in large numbers. Critics of this hypothesis, however, point out that other periods of inflation or recession since have not been accompanied by an oil shock (although this could still happen given the Russian invasion of Ukraine in 2022).
Why did Arab countries ban oil exports to the United States in 1973?
Oil-producing Arab countries viewed American political and economic support for Israel during the 1973 Yom Kippur War as siding with their enemy and sought a punitive response. OPEC also saw it as a way to exert influence over Western oil companies.
What were the long-term consequences of the energy crisis of 1973?
Despite the embargo lasting only a few months, high oil and energy prices persisted throughout the 1970s. The ripple effects of this included the start of a national speed limit of 55 mph, considered the most fuel-efficient speed for automobiles at the time to reduce national oil consumption. Another unusual consequence was the two-year extension of daylight saving time in the United States from 1974 to 1975, which the Nixon administration said saved 150,000 barrels of oil in heating costs. during the winter months.
Of course, rising energy prices contributed to the high inflation and subsequent stagflation of the 1970s, but also helped to shift America’s energy dependence somewhat away from OPEC. In fact, several laws were passed in the mid-1970s to bolster domestic oil production and to establish the Strategic Petroleum Reserves in 1975 to store emergency supplies. The crisis also sparked an early interest in environmentalism.
Which sector of American employment has grown sharply since the oil crisis of 1973?
Service jobs increased dramatically following the energy crises of the 1970s, and can be traced to the 1973 crisis. Almost all job growth during the 1970s occurred outside the manufacturing sector. While total manufacturing employment in 1980 was almost identical to its 1973 level, the number of jobs for production workers fell by 5%. What has increased in this sector are the jobs of managers, professionals and supervisors. Moreover, most of the employment growth in the 1970s occurred in low-wage sectors, primarily in service industries.