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1983 Oil Crisis

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Dean Anderson

on 17 September 2010

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Transcript of 1983 Oil Crisis

1973 OIL CRISIS Arab Israeli Conflict Israel
56% of the land established today as Israel, the homeland of the Jewish community, was formerly known as the Arab country of Palestine. This land was granted to Israel at the end of WWII. The Conflict
Since the granting of the land, the Arabic community has been enraged that the Palestinian land had been taken to create Israel, and refuses to acknowledge it as an independent state. The Arabs have since launched efforts through multiple wars and attacks to recapture the land that they felt was rightfully theirs. This has become known as the Arab Israeli conflict. Background Information OPEC Organization of the Petroleum Exporting Countries OPEC consisted of thirteen nations, including seven Arab countries but also other major petroleum-exporting countries in the developing world like Venezuela. It had been formed on September 17, 1960 to protest pressure by major oil companies to reduce oil prices and payments to producers. At first it had operated as an informal bargaining unit for the sale of oil by Third World nations. It confined its activities to gaining a larger share of the revenues produced by Western oil companies and greater control over the levels of production. However, in the early 1970s it began to display its strength. END OF BRETTON WOODS The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. It set up a system of rules, institutions, and procedures to regulate the international monetary system. On August 15, 1971, the United States pulled out of the Bretton Woods Agreement taking the US off the Gold Exchange Standard (whereby only the value of the US dollar had been pegged to the price of gold and all other currencies were pegged to the US dollar), allowing the dollar to "float". -Industrialized nations followed suit with their respective currencies.

-In anticipation of the fluctuation of currencies, industrialized nations also increased their reserves (printing money) in amounts far greater than ever before resulting in a depreciation of the value of the US dollar, as well as the other currencies of the world.

-Because oil was priced in dollars, this meant that oil producers were receiving less real income for the same price.

-In the years after 1971, OPEC was slow to readjust prices to reflect this depreciation. OPEC ministers had not developed the institutional mechanisms to update prices rapidly enough to keep up with changing market conditions, so their real incomes lagged for several years. The substantial price increases of 1973-74 largely caught up their incomes. YOM KIPPUR WAR On October 6, 1973, Arabic nations, Syria and Egypt started the Yom Kippur War by launching a military attack on Israeli occupied territories that were captured in the 1967 Six Day War. They attacked Israel on its holiest holiday, Yom Kippur. This was a new round in the Arab-Israeli conflict. -On October 12, 1973, President Richard Nixon authorized Operation Nickel Grass, an overt strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt. OPEC END OF BRETTON WOODS AGREEMENT YOM KIPPUR WAR THE 1973 OIL EMBARGO On October 16, 1973, OPEC announced a decision to raise the posted price of oil by 70%, to $5.11 per barrel. The following day, oil ministers agreed to the embargo, a cut in production by five percent from September's output, and to continue to cut production over time in five percent increments until their economic and political objectives were met. October 19, US President Richard Nixon requested Congress to appropriate $2.2billion in emergency aid to Israel triggering a collective OPEC response. At a meeting in Kuwait October 20, the OPEC oil-producing countries proclaimed the oil boycott that provided for curbs on their oil exports to various consumer countries and a total embargo on oil deliveries to the United States as a “principal hostile country.” This control of a vital commodity became known as the “oil weapon.” Economic Effects Microeconomics The graph above demonstrates the oil embargo's cost to society, and how supply lessened due to this. Occurrences of the economic effects Effects were immediate, OPEC forced the oil companies to increase payments drastically and the price of oil quadrupled by 1974 to nearly $12 per barrel. Politicians called for a national gas-rationing program. President Nixon requested gasoline stations to voluntarily not sell gasoline on Saturday nights or Sundays; 90% of owners complied, which resulted in hour-long lines on weekdays. The American Automobile Association recorded that up to twenty percent of the country’s gas stations had no fuel one week during the crisis. Odd-even rationing was implemented; drivers of vehicles with license plates having an odd number as the last digit were allowed to purchase gasoline for their cars only on odd-numbered days of the month, while drivers of vehicles with even-numbered license plates were allowed to purchase fuel only on even-numbered days. In some U.S. states, a three-color flag system was used to denote gasoline availability at service stations. A green flag denoted non-rationed sale of gasoline, a yellow flag denoted restricted and rationed sales, and a red flag denoted that no gasoline was available but the service station was open for other services. To help reduce consumption, in 1974 a national maximum speed limit of 55 mph was imposed through the Emergency Highway Energy Conservation Act. Development of the United States Strategic Petroleum Reserve began in 1975 Led to greater interest in renewable energy and spurred research in solar power and wind power. It also led to greater pressure to exploit North American oil sources, and increased the West's dependence on coal and nuclear power. In 1973, U.S. President Richard Nixon named William E. Simon as the first Administrator of the Federal Energy Office It left many U.S companies searching for new ways to drill for expensive oil, even in the elements of rugged terrain such as in hostile arctic environments. Prompted a call for individuals and businesses to conserve energy, most notably a campaign by the Advertising Council using the tag line "Don't Be Fuelish,” carried out by many newspapers advertisements. State governments requested citizens not put up Christmas lights, with Oregon banning Christmas lighting as well as commercial lighting altogether. After the Corporate Average Fuel Economy standards were enacted by Congress in 1975, the "Big Three" U.S. automakers' began a U.S. Department of Transportation mandated downsizing of existing automobile categories Macroeconomics Many negative externalities resulted from this. Price increases were seen in most areas of the economy. The negative supply shock of the embargo shifted the short-run aggregate supply curve from AS1 to AS2. If the money supply remains unchanged, leaving the aggregate demand curve at AD1, we move to point 1', where output Y1' is below the natural rate level and the price level P1' is higher. Throughout the next ten years the short-run aggregate supply curve shifted back to AS1 due to the Washington Oil summit lifting the embargo and the U.S. government's efforts of stimulating the economy. Occurrences of the economic effects The traditional flow of capital reversed as the oil exporting nations accumulated vast wealth. Much of it was absorbed in massive arms purchases that exacerbated political tensions, particularly in the Middle East. Was a major factor in Japan's economy shifting from oil-intensive industries, and resulted in huge Japanese investments in industries such as electronics. The Japanese automakers also took advantage of this embargo. After they realized what fuel costs were in the United States, they started producing small, more fuel efficient models, which began selling as an alternative to "gas-guzzling" American vehicles of the time. This triggered a drop in American auto sales that lasted into the 1980s. The Western nations' central banks decided to sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo. Long-term effects of the embargo are still being felt. Public suspicion of the oil companies, who were thought to be profiteering or even working with OPEC, continues. Seven of the fifteen top Fortune 500 companies in 1974 were oil companies, with total assets of over $100 billion.
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