oil crisis

What was the 1970's oil crisis?

On October 5, 1973, the Yom Kippur War began following an attack by Syria and Egypt on Israel. When western countries like the United States showed support for Israel, Arab oil exporting nations placed embargos on these nations. The Arab nations cut production by 5 million barrels a day and despite other nations increasing their production, a net loss of 4 million barrels a day occurred throughout March of 1974. In response to this decreased supply, OPEC raised crude oil prices from their 1972 level of $3 a barrel to $12 a barrel in 1974. Oil prices remained at the $12-13 level until the Iranian revolution between November 1978 and June 1979, which resulted in the loss of 2-2.5 million barrels of oil a day. When Iraq invaded Iran in September 1980, both countries had a combined output of 1 million barrels a day and these huge production losses doubled oil prices from $14 in 1978 to $35 a barrel in 1981.

The reason for these huge price increases was due not only to reduced supply, but to United States energy policies that placed price controls on domestically produced oil. The price control caused consumers to pay 50% more for imported oil. During the 1973-1974 period the policy kept oil prices for U.S. consumers below world market prices. While this was beneficial in the short run, it had disastrous consequences by the time of the Iranian revolution and Iraq invasion when oil prices doubled. If the United States had not had price controls, they would have faced higher oil prices during 1973-1974, and as a result, oil consumption would have declined. This reduced dependence on foreign oil would have lessened the impact of price increases that occured during 1979-1980. In actuality, because price controls allowed consumers to continue buying gasoline at normal prices consumers did little to decrease their demand for oil, even with gas rationing instituted in December 1973 because of the Saudi Arabia export ban. With demand unchanged, the removal of price controls coupled with the doubling of oil prices in 1978 greatly impacted consumers who had been used to low gas costs.

Annual Average Crude Oil Prices ($/barrel), Average Nominal Price:

1971-1980:

Image: JPG
Excel File: XLS

Annual Average Crude Oil Prices ($/barrel), 2005 Inflation Adjusted:

1971-1980:

Image: JPG
Excel File: XLS

Sources:
Williams, James. 2005. "Oil Price History and Analysis". WTRG Economics.