Since the embargo, OPEC has continued to use its influence to manage oil prices. As of 2022, OPEC produces about 40% of the world’s oil supply and controls 60% of oil exports. In 2018, OPEC countries retained 79.4% of the world’s proven oil reserves.
Causes of the 1973 Oil Crisis
Two actions by the U.S. administration caused OPEC to launch the oil embargo: when Nixon took the U.S. off the gold standard and when the U.S. ordered military aid to Israel during its conflict with Egypt and Syria.
Leaving the Gold Standard
In 1971, President Richard Nixon prompted the embargo when he decided to take the United States off the gold standard. As a result, countries could no longer redeem U.S. dollars in their foreign exchange reserves for gold. With this action, Nixon went against the 1944 Bretton Woods Agreement, which pegged the dollar to the price of gold. His move sent the price of gold skyrocketing. The history of the gold standard reveals this was inevitable. But Nixon’s action was so sudden and unexpected that it also sent the value of the dollar down. The plummeting value of the dollar hurt OPEC countries. They depend on the petrodollar for their government revenues. Their oil contracts were priced in U.S. dollars. That meant their revenue fell along with the dollar. The cost of imports that were denominated in other currencies stayed the same or rose. OPEC even tried pricing oil in gold, instead of dollars, to keep revenue from disappearing.
Military Aid for Israel
On Oct. 19, 1973, Nixon requested $2.2 billion from Congress in emergency military aid for Israel. The Arab members of OPEC responded by halting oil exports to the United States and other Israeli allies. Egypt, Syria, and Israel declared a truce on Oct. 25, 1973. OPEC continued the embargo until March 1974. By then, oil prices had skyrocketed from $2.90 per barrel to $11.65 per barrel.
Effects of the 1973 Oil Crisis
The oil embargo is widely blamed for causing the 1973-1975 recession. U.S. government policies helped cause the recession and the stagflation that accompanied it. They included Nixon’s wage-price controls and the Federal Reserve’s stop-go monetary policy.
Lost Jobs
Wage-price controls forced companies to keep wages high, which meant businesses laid off workers to reduce costs. At the same time, they couldn’t lower prices to stimulate demand. It had fallen when people lost their jobs.
High Prices
To make matters worse, the Fed raised and lowered interest rates so many times that businesses were unable to plan for the future. As a result, companies kept prices high which worsened inflation. They were afraid to hire new workers, worsening the recession.
Lower Consumer Confidence
The oil embargo aggravated inflation by raising oil prices. It came at a vulnerable time for the U.S. economy. Domestic oil producers were running at full capacity. They were unable to produce more oil to make up the slack. Furthermore, non-OPEC oil production had declined as a percentage of world output. It also worsened the recession. First, higher gas prices meant consumers had less money to spend on other goods and services. This lowered demand. It also weakened consumer confidence. People were forced to change habits, making it feel like a crisis that the government tried unsuccessfully to resolve. This lack of confidence made people spend less. For example, drivers were forced to wait in lines that often snaked around the block. They woke up before dawn or waited until dusk to avoid the lines. Gas stations posted color-coded signs: green when gas was available, yellow when it was rationed, and red when it was gone. States introduced odd-even rationing: drivers with license plates ending with odd numbers could get gas on odd-numbered days.
How Oil Prices Have Changed Since the Crisis
A review of the history of oil prices reveals they’ve never been the same since the 1973 oil crisis. The chart below tracks both nominal and inflation-adjusted oil prices since 1946. During the OPEC oil embargo, inflation-adjusted oil prices went up from $27.17 per barrel (bbl) in October 1973 to $60.81 per barrel (bbl) in March 1974. The oil embargo gave OPEC new power to achieve its goal of managing the world’s oil supply and keeping prices stable. By raising and lowering supply, OPEC tries to stabilize the price of oil. If the price drops too low, they would be selling their finite commodity too cheap. If too high, the development of shale oil would look attractive.
