1973-1974 Oil Embargo
The oil embargo of 1973 was one of the most significant events regarding the United States macroeconomy. This event was a refusal of Arab countries to sell oil to pro-Israeli countries. The embargo began on October 17, 1973, when the Organization of Arab Petroleum Exporting Countries, or OAPEC, declared they would immediately cut oil production by 5 percent and will continue until Israel withdrew from the West Bank, Gaza, and Jerusalem. Saudi Arabia and Kuwait soon followed when they announced even more production cuts. Soon after, most Petroleum Exporting members also announced they would stop selling oil to the United States until America discontinued support for Israel during the Yom Kippur War (Taylor). The oil embargo lasted for five months, ending on March 17, 1974. There are differing viewpoints regarding the cause of the oil crisis but the impact the embargo had on the United States economy was severe and was a prime example of an important event in history regarding macroeconomic issues. Many people put the blame on OPEC and the Arab countries for starting the oil crisis. This is due to the fact that they announced their plans for an embargo on October 17, 1973. On October 6, 1973, the Jewish holy day of Yom Kippur, Egypt and Syria carried out a surprise attack against Israel with some assistance from the Soviet Union. The Israelis seemed as if they were going to be defeated but on October 14, 1973, U.S. President Richard M. Nixon responded by ordering a massive airlift of weapons and supplies to Israel, which continued for a full month ( ). Nations of the Middle East were unhappy with the United States’ involvement in the Yom Kippur War. To protest U.S. support of Israel, most of the petroleum-producing nations of the Middle East cut production by five percent (955 ). Some countries completely cut off oil supplies to the United States, which then led to a negative supply shock. According to Krugman and Wells, “The cause of the supply shock was political turmoil in the Middle East – the Arab – the Israeli War of 1973 – that disrupted world oil supplies and sent oil prices skyrocketing” (Krugman 342). Supporters of this view believe oil played a big role in the cause of the embargo, as well as previous recessions in history. According to Robert Barsky and Lutz Kilian of the Universty of Michigan, “Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth,” (Barsky). The statements made by Barsky and Kilian are evidenced by statistics from the National Bureau of Economic Research, which shows a close statistical relationship between political events in the Middle East and recessions in the United States (Barsky). Many people believe that the oil crisis was not caused merely by the embargo itself. The advocates of this point of view believe that poor U.S. energy policies also contributed to the cause of the crisis. This was due to twenty years of economic prosperity and a growth in population, which increased demand for raw materials, subsequently leading to inflation. In the United States, inflation and consumer prices were rising at a rate of 8.5% (Trumbore). According to Jay E. Hakes, an administrator of the Energy Information Administration, “The turmoil started early in 1973, as customers experienced electricity brown outs and rapidly rising prices for fuels and other necessities.” Hakes proceeds to state, “Price controls and allocation systems not only failed to resolve these problems, they seemed to aggravate them” (Hakes). Before the embargo occurred, supply and demand issues were leading up to the event. In the Pulitzer Prize winning book, The Prize, author Daniel Yergin comments on the phrase “energy crisis” and the supply problems, which became constant in the early 1970s, when he writes: The central reason was the rapid growth in demand for all forms of energy. Price...
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