1970s energy crisis
Encyclopedia
The 1970s energy crisis was a period in which the major industrial countries of the world, particularly the United States
, faced substantial shortages, both perceived and real, of petroleum
. The two worst crises of this period were the 1973 oil crisis
, caused by the Arab Oil Embargo of OAPEC
, and the 1979 energy crisis
, caused by the Iranian Revolution
.
The crisis period, however, began to unfold as a result of events at the end of the 1960s. It was during this time that petroleum production in the United States and some other parts of the world peaked. Subsequently during the 1970s world oil production per capita peaked.
The major industrial centers of the world were forced to contend with escalating issues related to petroleum supply. The fact that Western
countries had to deal with potentially unfriendly sources in the Middle East
and other parts of the world to maintain supply made the situation especially complex.
The crisis led to stagnant economic growth in many countries as oil prices climbed. Though there were genuine issues with supply, part of the run-up in prices resulted from the perception of a crisis. The combination of stagnant growth and price inflation during this era led to the coinage of the term stagflation
.
By the 1980s both the recessions of the 1970s and adjustments in local economies to become more efficient in petroleum usage had controlled demand sufficiently that petroleum prices worldwide began to return to more sustainable levels.
The period was not uniformly negative for all economies. Petroleum-rich countries in the Middle East
benefitted tremendously from increased prices and the slowing production in other areas of the world. Some other countries, such as Norway
, Mexico
, and Venezuela
, benefitted as well. In the United States, the states of Texas
and Alaska
, as well as some other oil-producing areas, experienced major economic booms due to soaring oil prices even as most of the rest of the nation struggled with the stagnant economy. Many of these economic gains, however, came to a halt as prices stabilized and dropped in the 1980s.
During the 1960s petroleum production in some of the world's top producers began to peak. Germany
reached its production peak in 1966, Venezuela
and the United States in 1970, and Iran
in 1974. Canada
's conventional oil production peaked around this same time (though non-conventional production later helped revive Canadian production to some degree). The worldwide production per capita peaked soon afterward.
Though production in other parts of the world was increasing the peaks in these important areas began to put substantial upward pressure on world oil prices. Equally as important control of the oil supply became an increasingly important issue as countries like Germany and the U.S. became increasingly dependent on foreign suppliers for this key resource.
or the OAPEC (consisting of the Arab
members of OPEC
, plus Egypt
and Syria
) proclaimed an oil embargo
"in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war
; it lasted until March 1974. OAPEC declared it would limit or stop oil
shipments to the United States
and other countries if they supported Israel
in the conflict. With the US actions seen as initiating the oil embargo, the long-term possibility of embargo-related high oil prices, disrupted supply and recession, created a strong rift within NATO; both European countries and Japan sought to disassociate themselves from the US Middle East policy. Arab oil producers had also linked the end of the embargo with successful US efforts to create peace in the Middle East, which complicated the situation. To address these developments, the Nixon
Administration began parallel negotiations with both Arab oil producers to end the embargo, and with Egypt
, Syria
, and Israel to arrange an Israeli pull back from the Sinai and the Golan Heights after the fighting stopped. By January 18, 1974, Secretary of State
Henry Kissinger
had negotiated an Israeli troop withdrawal from parts of the Sinai. The promise of a negotiated settlement between Israel and Syria was sufficient to convince Arab oil producers to lift the embargo in March 1974. By May, Israel agreed to withdraw from the Golan Heights.
Independently, the OPEC members agreed to use their leverage over the world price-setting mechanism for oil
to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the recent failure of negotiations with the major Western oil companies earlier in the month.
For the most part, industrialized economies relied on crude oil, and OPEC was their major supplier. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic activity. However, the causality stated by this theory is often questioned. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression
to have a persistent economic effect.
A crisis emerged in the United States
in 1979 during the wake of the Iranian Revolution
. Amid massive protests, the Shah of Iran
, Mohammad Reza Pahlavi
, fled his country in early 1979, allowing the Ayatollah
Khomeini
to gain control. The protests shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistent and at a lower volume, forcing prices to go up. Saudi Arabia
and other OPEC
nations, under the presidency of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 percent. However, a widespread panic resulted, driving the price far higher than would be expected under normal circumstances.
In 1980, following the Iraqi invasion of Iran, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well.
After 1980, oil prices began a decline as production in Iran/Iraq stabilized and returned to normal.
and 1979 energy crises
had caused petroleum prices to peak in 1980 at over US$
35 per barrel (US$ in today's dollars). Following these events slowing industrial economies and stabilization of supply and demand caused prices to begin falling in the 1980s. The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the 1973 and 1979 energy crises) and the energy conservation spurred by high fuel prices. The inflation
adjusted real 2004 dollar value of oil fell from an average of $78.2 per barrel in 1981 to an average of $26.8 in 1986.
In June 1981, The New York Times
stated an "Oil glut! ... is here" and Time Magazine stated: "the world temporarily floats in a glut of oil," though the next week a New York Times article warned that the word "glut" was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-energy crisis levels. This sentiment was echoed in November 1981, when the CEO of Exxon Corp also characterized the glut as a temporary surplus, and that the word "glut" was an example of "our American penchant for exaggerated language." He wrote that the main cause of the glut was declining consumption. In the United States, Europe and Japan, oil consumption had fallen 13% from 1979 to 1981, due to "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters," continuing a trend begun during the 1973 price increases.
After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.
, where high unemployment
coincided with high inflation
.
Other causes that contributed to the recession included the Vietnam War
, which turned out costly for the United States of America and the fall of the Bretton Woods system
. The emergence of newly industrialized countries
rose competition in the metal industry, triggering a steel crisis
, where industrial core areas in North America and Europe were forced to re-structure. The 1973-1974 stock market crash made the recession evident.
According to the National Bureau of Economic Research
, the recession in the United States lasted from November 1973 to March 1975. Although the economy was expanding from 1975 to the first recession of the early 1980s
, which began in January 1980, inflation remained extremely high for the rest of the decade.
During this recession, the Gross Domestic Product
of the United States fell 3.2 percent. Though the recession ended in March 1975, the unemployment rate did not peak for several months. In May 1975, the rate reached its height for the cycle of 9 percent. (Only two cycles have higher peaks than this, the current cycle, where the unemployment rate is currently 9.7% in the United States and the Early 1980s recession
where unemployment peaked at 10.8% in November and December 1982.)
The recession also lasted from 1973–75 in the United Kingdom
. The GDP declined by 3.9% or 3.37% depending on the source. It took 14 quarters for the UK's GDP to recover to that at the start of recession.
and some other predominantly Muslim
countries. The animosity between the Arabs and the Israelis became a global issue during the 1970s. The Yom Kippur War
of 1973, with the supplying of Israel by its Western allies while some Arab states received Soviet supplies, made this one of the most internationally threatening confrontations of the period.
The large oil discoveries in the Middle East
and southwestern Asia, and the peaking of production in some of the more industrialized areas of the world gave some Muslim countries unique leverage in the world, beginning in the 1960s. The 1973 and 1979 crises, in particular, were demonstrations of the new power that these countries had found. The United States and other countries were forced to become more involved in the conflicts between these states and Israel leading to peace initiatives such as the Camp David Accords
.
of the Bretton Woods Accord
and taking the U.S. off the established Gold Exchange Standard in 1971. With that standard, only the value of the U.S. dollar was pegged to the price of gold and all other currencies were pegged to the U.S. dollar. The change resulted in instability in world currencies and depreciation
of the value of the U.S. dollar, as well as other currencies, and decreasing real revenues for OPEC whose producers still priced oil in dollars.
OPEC was slow to adjust to the situation but finally made the decision to price oil against gold. Frustrated negotiations between OPEC and the major oil companies
to revise the oil price agreement as well as the ongoing Middle East conflicts continued to stall OPEC's efforts at stabilization through this era.
crude oil increased 250 percent. Though all states felt the effects of the stock market crash and related national economic problems, the economic benefits of increased oil revenue in the Oil Patch states generally offset much of this.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, faced substantial shortages, both perceived and real, of petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
. The two worst crises of this period were the 1973 oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
, caused by the Arab Oil Embargo of OAPEC
Organization of Arab Petroleum Exporting Countries
The Organization of Arab Petroleum Exporting Countries is a multi-governmental organization headquartered in Kuwait which coordinates energy policies between oil–producing Arab nations, and whose main purpose is developmental.-History:...
, and the 1979 energy crisis
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
, caused by the Iranian Revolution
Iranian Revolution
The Iranian Revolution refers to events involving the overthrow of Iran's monarchy under Shah Mohammad Reza Pahlavi and its replacement with an Islamic republic under Ayatollah Ruhollah Khomeini, the leader of the...
.
The crisis period, however, began to unfold as a result of events at the end of the 1960s. It was during this time that petroleum production in the United States and some other parts of the world peaked. Subsequently during the 1970s world oil production per capita peaked.
The major industrial centers of the world were forced to contend with escalating issues related to petroleum supply. The fact that Western
Western world
The Western world, also known as the West and the Occident , is a term referring to the countries of Western Europe , the countries of the Americas, as well all countries of Northern and Central Europe, Australia and New Zealand...
countries had to deal with potentially unfriendly sources in the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
and other parts of the world to maintain supply made the situation especially complex.
The crisis led to stagnant economic growth in many countries as oil prices climbed. Though there were genuine issues with supply, part of the run-up in prices resulted from the perception of a crisis. The combination of stagnant growth and price inflation during this era led to the coinage of the term stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
.
By the 1980s both the recessions of the 1970s and adjustments in local economies to become more efficient in petroleum usage had controlled demand sufficiently that petroleum prices worldwide began to return to more sustainable levels.
The period was not uniformly negative for all economies. Petroleum-rich countries in the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
benefitted tremendously from increased prices and the slowing production in other areas of the world. Some other countries, such as Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
, and Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
, benefitted as well. In the United States, the states of Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
and Alaska
Alaska
Alaska is the largest state in the United States by area. It is situated in the northwest extremity of the North American continent, with Canada to the east, the Arctic Ocean to the north, and the Pacific Ocean to the west and south, with Russia further west across the Bering Strait...
, as well as some other oil-producing areas, experienced major economic booms due to soaring oil prices even as most of the rest of the nation struggled with the stagnant economy. Many of these economic gains, however, came to a halt as prices stabilized and dropped in the 1980s.
Production peaks around 1970
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
reached its production peak in 1966, Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
and the United States in 1970, and Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
in 1974. Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
's conventional oil production peaked around this same time (though non-conventional production later helped revive Canadian production to some degree). The worldwide production per capita peaked soon afterward.
Though production in other parts of the world was increasing the peaks in these important areas began to put substantial upward pressure on world oil prices. Equally as important control of the oil supply became an increasingly important issue as countries like Germany and the U.S. became increasingly dependent on foreign suppliers for this key resource.
1973 oil crisis
In October 1973, the members of Organization of Arab Petroleum Exporting CountriesOrganization of Arab Petroleum Exporting Countries
The Organization of Arab Petroleum Exporting Countries is a multi-governmental organization headquartered in Kuwait which coordinates energy policies between oil–producing Arab nations, and whose main purpose is developmental.-History:...
or the OAPEC (consisting of the Arab
Arab
Arab people, also known as Arabs , are a panethnicity primarily living in the Arab world, which is located in Western Asia and North Africa. They are identified as such on one or more of genealogical, linguistic, or cultural grounds, with tribal affiliations, and intra-tribal relationships playing...
members of OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
, plus Egypt
Egypt
Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...
and Syria
Syria
Syria , officially the Syrian Arab Republic , is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the West, Turkey to the north, Iraq to the east, Jordan to the south, and Israel to the southwest....
) proclaimed an oil embargo
Embargo
An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is...
"in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war
Yom Kippur War
The Yom Kippur War, Ramadan War or October War , also known as the 1973 Arab-Israeli War and the Fourth Arab-Israeli War, was fought from October 6 to 25, 1973, between Israel and a coalition of Arab states led by Egypt and Syria...
; it lasted until March 1974. OAPEC declared it would limit or stop oil
Oil
An oil is any substance that is liquid at ambient temperatures and does not mix with water but may mix with other oils and organic solvents. This general definition includes vegetable oils, volatile essential oils, petrochemical oils, and synthetic oils....
shipments to the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and other countries if they supported Israel
Israel
The State of Israel is a parliamentary republic located in the Middle East, along the eastern shore of the Mediterranean Sea...
in the conflict. With the US actions seen as initiating the oil embargo, the long-term possibility of embargo-related high oil prices, disrupted supply and recession, created a strong rift within NATO; both European countries and Japan sought to disassociate themselves from the US Middle East policy. Arab oil producers had also linked the end of the embargo with successful US efforts to create peace in the Middle East, which complicated the situation. To address these developments, the Nixon
Richard Nixon
Richard Milhous Nixon was the 37th President of the United States, serving from 1969 to 1974. The only president to resign the office, Nixon had previously served as a US representative and senator from California and as the 36th Vice President of the United States from 1953 to 1961 under...
Administration began parallel negotiations with both Arab oil producers to end the embargo, and with Egypt
Egypt
Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...
, Syria
Syria
Syria , officially the Syrian Arab Republic , is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the West, Turkey to the north, Iraq to the east, Jordan to the south, and Israel to the southwest....
, and Israel to arrange an Israeli pull back from the Sinai and the Golan Heights after the fighting stopped. By January 18, 1974, Secretary of State
United States Secretary of State
The United States Secretary of State is the head of the United States Department of State, concerned with foreign affairs. The Secretary is a member of the Cabinet and the highest-ranking cabinet secretary both in line of succession and order of precedence...
Henry Kissinger
Henry Kissinger
Heinz Alfred "Henry" Kissinger is a German-born American academic, political scientist, diplomat, and businessman. He is a recipient of the Nobel Peace Prize. He served as National Security Advisor and later concurrently as Secretary of State in the administrations of Presidents Richard Nixon and...
had negotiated an Israeli troop withdrawal from parts of the Sinai. The promise of a negotiated settlement between Israel and Syria was sufficient to convince Arab oil producers to lift the embargo in March 1974. By May, Israel agreed to withdraw from the Golan Heights.
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the recent failure of negotiations with the major Western oil companies earlier in the month.
For the most part, industrialized economies relied on crude oil, and OPEC was their major supplier. Because of the dramatic inflation experienced during this period, a popular economic theory has been that these price increases were to blame, as being suppressive of economic activity. However, the causality stated by this theory is often questioned. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. The 1973 "oil price shock", along with the 1973–1974 stock market crash, have been regarded as the first event since the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
to have a persistent economic effect.
1979 energy crisis
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
in 1979 during the wake of the Iranian Revolution
Iranian Revolution
The Iranian Revolution refers to events involving the overthrow of Iran's monarchy under Shah Mohammad Reza Pahlavi and its replacement with an Islamic republic under Ayatollah Ruhollah Khomeini, the leader of the...
. Amid massive protests, the Shah of Iran
Pahlavi dynasty
The Pahlavi dynasty consisted of two Iranian/Persian monarchs, father and son Reza Shah Pahlavi and Mohammad Reza Shah Pahlavi The Pahlavi dynasty consisted of two Iranian/Persian monarchs, father and son Reza Shah Pahlavi (reg. 1925–1941) and Mohammad Reza Shah Pahlavi The Pahlavi dynasty ...
, Mohammad Reza Pahlavi
Mohammad Reza Pahlavi
Mohammad Rezā Shāh Pahlavi, Shah of Iran, Shah of Persia , ruled Iran from 16 September 1941 until his overthrow by the Iranian Revolution on 11 February 1979...
, fled his country in early 1979, allowing the Ayatollah
Ayatollah
Ayatollah is a high ranking title given to Usuli Twelver Shī‘ah clerics. Those who carry the title are experts in Islamic studies such as jurisprudence, ethics, and philosophy and usually teach in Islamic seminaries. The next lower clerical rank is Hojatoleslam wal-muslemin...
Khomeini
Ruhollah Khomeini
Grand Ayatollah Sayyed Ruhollah Musavi Khomeini was an Iranian religious leader and politician, and leader of the 1979 Iranian Revolution which saw the overthrow of Mohammad Reza Pahlavi, the Shah of Iran...
to gain control. The protests shattered the Iranian oil sector. While the new regime resumed oil exports, it was inconsistent and at a lower volume, forcing prices to go up. Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
and other OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
nations, under the presidency of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 percent. However, a widespread panic resulted, driving the price far higher than would be expected under normal circumstances.
In 1980, following the Iraqi invasion of Iran, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well.
After 1980, oil prices began a decline as production in Iran/Iraq stabilized and returned to normal.
1980s oil glut
The 19731973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
and 1979 energy crises
1979 energy crisis
The 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
had caused petroleum prices to peak in 1980 at over US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
35 per barrel (US$ in today's dollars). Following these events slowing industrial economies and stabilization of supply and demand caused prices to begin falling in the 1980s. The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the 1973 and 1979 energy crises) and the energy conservation spurred by high fuel prices. The inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
adjusted real 2004 dollar value of oil fell from an average of $78.2 per barrel in 1981 to an average of $26.8 in 1986.
In June 1981, The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
stated an "Oil glut! ... is here" and Time Magazine stated: "the world temporarily floats in a glut of oil," though the next week a New York Times article warned that the word "glut" was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-energy crisis levels. This sentiment was echoed in November 1981, when the CEO of Exxon Corp also characterized the glut as a temporary surplus, and that the word "glut" was an example of "our American penchant for exaggerated language." He wrote that the main cause of the glut was declining consumption. In the United States, Europe and Japan, oil consumption had fallen 13% from 1979 to 1981, due to "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters," continuing a trend begun during the 1973 price increases.
After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.
Recession
The decade of the 1970s was a period of limited economic growth due in part to the energy crises of that decade. Though the mid decade was the worst period for the United States the economy was generally weak until the 1980s. The period marked the end of the general post-World War II economic boom. It differed from many previous recessions as being a stagflationStagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
, where high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
coincided with high inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
.
Other causes that contributed to the recession included the Vietnam War
Vietnam War
The Vietnam War was a Cold War-era military conflict that occurred in Vietnam, Laos, and Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. This war followed the First Indochina War and was fought between North Vietnam, supported by its communist allies, and the government of...
, which turned out costly for the United States of America and the fall of the Bretton Woods system
Bretton Woods system
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...
. The emergence of newly industrialized countries
Newly industrialized countries
The category of newly industrialized country is a socioeconomic classification applied to several countries around the world by political scientists and economists....
rose competition in the metal industry, triggering a steel crisis
Steel crisis
The steel crisis was a recession in the global steel market during the 1970s recession, following the end of the post-World War II economic boom and the 1973 oil crisis....
, where industrial core areas in North America and Europe were forced to re-structure. The 1973-1974 stock market crash made the recession evident.
According to the National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
, the recession in the United States lasted from November 1973 to March 1975. Although the economy was expanding from 1975 to the first recession of the early 1980s
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...
, which began in January 1980, inflation remained extremely high for the rest of the decade.
During this recession, the Gross Domestic Product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
of the United States fell 3.2 percent. Though the recession ended in March 1975, the unemployment rate did not peak for several months. In May 1975, the rate reached its height for the cycle of 9 percent. (Only two cycles have higher peaks than this, the current cycle, where the unemployment rate is currently 9.7% in the United States and the Early 1980s recession
Early 1980s recession
The early 1980s recession describes the severe global economic recession affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited recession relatively early, but high unemployment would continue to affect other OECD nations through at least 1985...
where unemployment peaked at 10.8% in November and December 1982.)
The recession also lasted from 1973–75 in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. The GDP declined by 3.9% or 3.37% depending on the source. It took 14 quarters for the UK's GDP to recover to that at the start of recession.
Strategic petroleum reserves
As a result of the 1973 crisis many nations created strategic petroleum reserves (SPRs), crude oil inventories (or stockpiles) held by the governments of particular countries or private industry, for the purpose of providing economic and national security during an energy crisis. According to the United States Energy Information Administration, approximately 4.1 Goilbbl of oil are held in strategic reserves, of which 1.4 billion is government-controlled. The remainder is held by private industry. At the moment the US Strategic Petroleum Reserve is one of the largest strategic reserves, with much of the remainder held by the other 26 members of the International Energy Agency. Recently, other non-IEA countries have begun creating their own strategic petroleum reserves, with China being the largest of these new reserves. Since current consumption levels are neighboring 0.1 Goilbbl/day, in the case of a dramatic worldwide drop in oil field output as suggested by some peak oil analysts, the strategic petroleum reserves are unlikely to last for more than a few months.Middle East
Since Israel's declaration of independence in 1948 this state has found itself in nearly continual conflict with the Arab worldArab world
The Arab world refers to Arabic-speaking states, territories and populations in North Africa, Western Asia and elsewhere.The standard definition of the Arab world comprises the 22 states and territories of the Arab League stretching from the Atlantic Ocean in the west to the Arabian Sea in the...
and some other predominantly Muslim
Muslim
A Muslim, also spelled Moslem, is an adherent of Islam, a monotheistic, Abrahamic religion based on the Quran, which Muslims consider the verbatim word of God as revealed to prophet Muhammad. "Muslim" is the Arabic term for "submitter" .Muslims believe that God is one and incomparable...
countries. The animosity between the Arabs and the Israelis became a global issue during the 1970s. The Yom Kippur War
Yom Kippur War
The Yom Kippur War, Ramadan War or October War , also known as the 1973 Arab-Israeli War and the Fourth Arab-Israeli War, was fought from October 6 to 25, 1973, between Israel and a coalition of Arab states led by Egypt and Syria...
of 1973, with the supplying of Israel by its Western allies while some Arab states received Soviet supplies, made this one of the most internationally threatening confrontations of the period.
The large oil discoveries in the Middle East
Middle East
The Middle East is a region that encompasses Western Asia and Northern Africa. It is often used as a synonym for Near East, in opposition to Far East...
and southwestern Asia, and the peaking of production in some of the more industrialized areas of the world gave some Muslim countries unique leverage in the world, beginning in the 1960s. The 1973 and 1979 crises, in particular, were demonstrations of the new power that these countries had found. The United States and other countries were forced to become more involved in the conflicts between these states and Israel leading to peace initiatives such as the Camp David Accords
Camp David Accords
The Camp David Accords were signed by Egyptian President Anwar El Sadat and Israeli Prime Minister Menachem Begin on September 17, 1978, following thirteen days of secret negotiations at Camp David. The two framework agreements were signed at the White House, and were witnessed by United States...
.
OPEC
One of the first challenges OPEC faced in the 1970s was the United States' unilaterally pulling outNixon Shock
The Nixon Shock was a series of economic measures taken by U.S. President Richard Nixon in 1971 including unilaterally cancelling the direct convertibility of the United States dollar to gold that essentially ended the existing Bretton Woods system of international financial exchange.-Background:By...
of the Bretton Woods Accord
Bretton Woods system
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...
and taking the U.S. off the established Gold Exchange Standard in 1971. With that standard, only the value of the U.S. dollar was pegged to the price of gold and all other currencies were pegged to the U.S. dollar. The change resulted in instability in world currencies and depreciation
Depreciation (currency)
Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears...
of the value of the U.S. dollar, as well as other currencies, and decreasing real revenues for OPEC whose producers still priced oil in dollars.
OPEC was slow to adjust to the situation but finally made the decision to price oil against gold. Frustrated negotiations between OPEC and the major oil companies
Seven Sisters (oil companies)
The "Seven Sisters" was a term coined in the 1950s by businessman Enrico Mattei, then-head of the Italian state oil company Eni, to describe the seven oil companies which formed the "Consortium for Iran" and dominated the global petroleum industry from the mid-1940s to the 1970s...
to revise the oil price agreement as well as the ongoing Middle East conflicts continued to stall OPEC's efforts at stabilization through this era.
"Oil Patch"
The major oil-producing regions of the U.S.—Texas, Oklahoma, Louisiana, Colorado, Wyoming, and Alaska—benefited greatly from the price inflation of the 1970s as did the U.S. oil industry in general. Oil prices generally increased throughout the decade; between 1978 and 1980 the price of West Texas IntermediateWest Texas Intermediate
West Texas Intermediate , also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. It is a light and sweet crude oil...
crude oil increased 250 percent. Though all states felt the effects of the stock market crash and related national economic problems, the economic benefits of increased oil revenue in the Oil Patch states generally offset much of this.
See also
- Energy crisisEnergy crisisAn energy crisis is any great bottleneck in the supply of energy resources to an economy. In popular literature though, it often refers to one of the energy sources used at a certain time and place, particularly those that supply national electricity grids or serve as fuel for vehicles...
- 1973 oil crisis1973 oil crisisThe 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
- 1973–75 recession1973–75 recessionThe 1973–75 recession in the United States or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the general post-World War II economic boom. It differed from many previous recessions as being a stagflation, where high unemployment...
- 1979 energy crisis1979 energy crisisThe 1979 oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil...
- 1979 world oil market chronology1979 world oil market chronology*January: First emergency Crude Oil Buy-Sell Program allocations.*January 16: Shah leaves Iran on vacation, never to return. Bakhtiar government established by the Shah to preside until unrest subsides....
- 1980s oil glut1980s oil glutThe 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s Energy Crisis. The world price of oil, which had peaked in 1980 at over US$35 per barrel , fell in 1986 from $27 to below $10...
- 1990 spike in the price of oil
- Hubbert peak theoryHubbert peak theoryThe Hubbert peak theory posits that for any given geographical area, from an individual oil-producing region to the planet as a whole, the rate of petroleum production tends to follow a bell-shaped curve...