Category: Oil Crisis

The Fall of Detroit and the Role of the Oil Crisis of 1973 in It

The city of Detroit, Michigan is considered to be one of the most dangerous cities in the world. Surprisingly, Detroit was not always a dangerous city, in fact, Detroit was once looked upon as the most desirable place to live in the United States of America. In the mid-20th century, Detroit was said to be the most powerful, uprising city in America. This was due to the preeminent role that Detroit played in the motor industry at the time. Detroit was once home to the headquarters and manufacturing plants of the most successful American automobile companies in the US, such as Ford, General Motors, and Chrysler. Following World War II and the Great Depression, the cities noticeable economic growth made Detroit an appealing place to reside. This was due to the high paying jobs, benefits and a presumed sustainable future. The economic and demographic depletion that Detroit faced following the decline of the American auto sector is a historic series of events that all began when German and Japanese cars were easily imported and sold in the United States. The downfall that the city of Detroit faced all began when the demand for domestic cars drastically decreased. The city’s economy collapsed, leaving many citizens jobless and resulting in an extreme increase in Detroit’s crime rate.

In the early 1900s, the headquarters of Ford, General Motors and Chrysler automobiles were created and located in Detroit, Michigan. Thanks to Henry Ford’s invention of the assembly line, mass production was brought into the country and Detroit’s economy grew to be very strong. The demand for American vehicles was at an all-time high, so each automobile company was extremely successful. Soon enough, the population in Detroit quickly increased, because unlike its surrounding areas, Detroit was a strong, upcoming American city with many presumed stable job opportunities. Detroit’s prime was during the period that followed the Great Depression when many families were looking to relocate to a safe city where they could fit into a sustainable middle class. It’s no surprise how populated the city became. The new generation of baby boomers helped Detroit grow demographically stronger by the day. During this time Detroit was even considered to be the city with the brightest economic future in the world. The main problem Detroit faced during this time was that the success of the entire city was dependent primarily on the success of the auto industry. Issues arose as time passed and technology in the auto industry advanced. Life in Detroit began changing when the auto industry started using automation to replace labor. Automation enabled jobs that required physical labor to be replaced with advanced forms of technology and machinery, resulting in thousands of lost jobs in the industry. This harmed all residents of Detroit because the increasing rates of unemployment were correlating with a high increase in crime rate in the city. People who lost their jobs were turning to criminal activity, and doing so became more common amongst residents throughout the entire city.

The major fall of Detroit began in 1973 when a gasoline crisis occurred. This was a major fall for the city because the gasoline crisis enabled Japan and other foreign car-manufacturing countries to take such a large portion of business from the American auto industry. The oil crisis began once a ban of trade took place that stopped the importation of oil into America from countries that were a part of the 12 members of OPEC (Organization of the Petroleum Exporting Countries). The embargo ruled that America will no longer receive oil by trade involving OPEC; leaving America with no other choice but to import oil from other sources and countries that they did not have previous trade agreements with. Overnight the price of oil in the United States increased by 400%, leaving American residents in an unfortunate, frantic and unsettling situation. Eventually, the embargo did come to an end and was resolved one year later in 1974. Oil prices were eventually reduced but stood at an increased rate of 170% from the original cost of oil before the trade agreement that was passed. People in the city of Detroit were shocked but had to adapt to the sudden financial changes. The extreme increase in gas prices encouraged people to rethink the design of their cars to cut down on their car expenses.

Suddenly, all drivers were drawn towards newly designed foreign cars that were smaller and known for being much more fuel-efficient. The economy in Detroit was seriously impacted because of this, as people were encouraged to specifically shop away from all American automobile companies. Unfortunately, these automobile companies that lost business were the backbone of Detroit’s success, future aspirations, and economic security. Daily life in Detroit’s automobile industry quickly changed as foreign companies such as Nissan, Subaru, Toyota, and Honda became very popular in America. A drastic loss of income for American car manufacturers correlated with a high increase in sales amongst other international automobile retailers. During this time even advertisements in the American media were directing people towards buying foreign cars, continuously encouraging buyers to ‘switch to save’, implying that people will save money by switching the brand of car that they drive. Citizens, distraught about the raised gas prices, did what they had to do to save their hard-earned money, and they switched car brands.

Today Detroit is known primarily for the extreme demographic depletion that occurred in recent decades. The population in Detroit currently stands at 677,000 citizens, which is less than half of what it was 60 years ago at this time (Population of Detroit 2019 (2018, July 9)). The population in the city has fallen from an all-time high of 1,850,000 people to the current 677,000 residents, which shows that over one million people left the city of Detroit. The extreme drop in population shows how many people chose to relocate out of Detroit, which happened after people lost their jobs, the city fell into debt and the crime rate increased.

Today the city is well known for the urban decay that has left the city of Detroit as a ‘ghost town’ and a ‘shadow of its former self’ (Williamson, M. 2014, December 15). Seeing that so many people fled the city of Detroit, many areas are currently abandoned, unmaintained and have unfortunately become home to where criminal and gang-related activities take place. The crime rate in Detroit has skyrocketed and is only increasing by the day (The Detroit News, Sept. 2018) When considering the crime rate in such a small city like Detroit is devastating. In 2017, 49% of all reported crimes were incidents of homicide caused by gun violence (Hunter, G. 2019). “Higher levels of firearm density increased the risk of homicide in the city” (David Mcdowall. 1991). Many areas of Detroit, where a functioning society once stood, are now only memories of the past. Today the city lies in ruins and many parts of Detroit are nothing but abandoned, decaying remains of the past. “Growing literature has long proclaimed the city of Detroit to be dead” (William K. Tabb. 2015). Although Detroit is still alive, and home to many broken down, low-income areas with high rates of unemployment and no help provided by the city or government. It is presumed that the city will stay this way, since Detroit is currently bankrupt and in debt, meaning that there is no allocated money that can be used towards demolition, let alone funds to help rebuild the city. Ultimately, Detroit has been left as is and is an undesirable place to live, with many parts of the city being in an inhabitable state.

When the city of Detroit filed for bankruptcy in 2013, it was recognized on a global scale. Detroit had the largest bankruptcy filing in the history of the United States, the city was in debt for twenty-million dollars at the time that bankruptcy was filed. In previous years, the entire state of Alabama held the title for the largest bankruptcy filing in the United States. That changed two years later, when Detroit’s $20 million debt surpassed Alabama’s $4 million debt filed in 2011. One city was five times further into debt than an entire state and that is all due to the decline of the auto industry. The city that was once considered to be the richest in America had been depleted of their economic strength and an extreme increase in crime rate was upon them. A city that was once home to all future aspirations of America has become a prime example of what economic loss can do to a city and the citizens who live there.

In conclusion, the decline of the auto sector in Detroit negatively impacted the city and Detroit has not been able to regain their lost strength. The city that was once an economic powerhouse and automotive hub of North America has tragically been rid of all financial strength and stability. This is a prime example of how a single unfortunate event, such as the 1973 Oil Crisis, can have catastrophic effects on an economy for the future near and long.

Works Cited

1. Population of Detroit 2019 (2018, July 9). Retrieved from https://uspopulation2019.com/population-of-detroit-2019.html
2. Williamson, M. (2014, December 15). Detriot: Decline and Fall of the Motor City. Retrieved froM https://eandt.theiet.org/content/articles/2014/12/detriot-decline-and-fall-of-the-motor-city
3. Admin (2018, February 20). Detroit – A City Being Abandoned. Retrieved from http://www.worldabandoned.com/detroit
4. MacDonald, C., & Hunter, G. (2018, September 24). Detroit Ranks as 2nd Most Violent Big City. Retrieved from https://www.detroitnews.com/story/news/2018/09/24/detroit-second-most-violent-city-fbi/1408465002/
5. William K. Tabb. (2015) If Detroit Is Dead, Some Things Need to Be Said at the Funeral. Journal of Urban Affairs 37:1, pages 11-12.
6. David Mcdowall. (1991). Firearm Availability and Homicide Rates in Detroit. Pages 1065-1011. In Social Forces (4th ed., Vol. 69).
7. Hunter, G. (2019, July 19). Detroit Shootings, Homicides Heat Up with Temperatures. Retrieved from https://www.detroitnews.com/story/news/local/detroit-city/2019/07/19/detroit-shootings-homicides-heat-up-temperatures/1775915001/

An Analysis of the Likelihood of a Second Oil Embargo and America’s Preparedness for It

The world’s economy is dependent on the availability of crude oil, which supplies the fuels needed for the transportation of labor, raw material, and most importantly final goods. Not only does oil fuel our economy, but it also yields over six thousand useful products, including fertilizers, plastic, and rubber. The Organization of Arab Petroleum Exporting Countries (OAPEC) supplies 42.4% of the international demand for crude oil, while also accounting for 43.52% of the world’s proven oil reserves or 724.71 billion barrels (The World Fact Book, 2018). In 1973 the OAPEC realized the true economic and political power that it possessed, leading to the coining of the term “oil weapon”. The OAPEC declared an oil embargo on all countries that supported Israel in the Yom Kippur War. It did so by implementing monthly oil production cuts with the condition that Israeli forces exit occupied Arab lands taken in the six-day war (Graf, 2012). These measures lead to oil prices skyrocketing in the USA from $3 to $12 per barrel (Canadian Broadcasting Corporation, 2006), which translates to $17 and $61 respectively in today’s market. This is due to the fact that it was cheaper to import oil into the USA than it was extract it locally; therefore, the USA was highly dependent on imports from the Gulf to satisfy its demands. According to Roy Licklieder’s 1988 book, ‘Political Power and the Arab Oil Weapon’, the oil embargo led to high inflation rates in Western Europe and the U.S, but the shortage of oil was not enough to change the policies of these countries when it came to the Arab-Israeli conflict. Hence, the 1973 oil embargo ended after March 1974 and was deemed a failure. With the US being more and more involved in the Arab world and having the final say in most of its recent major decisions, can oil, also known as ‘black gold’ due its high profitability, be used as an efficient political and economic weapon against the US? Practically, a second oil embargo would have little to no effect on the USA, due to the political friction between the OAPEC nations created by previous and current US governments and their economic policies that focus on varying oil sourcing and finding innovative energy sources.

Background Information

After the oil embargo of 1973, the prices of foreign oil were still at an all-time high in the US. The Ford administration tried to deal with this issue by tariffing imported oil to stimulate domestic production. Oddly enough, the same administration imposed high taxes on domestic oil producers which lead to employees being laid off and increases in domestic oil prices. After the Ford administration came the Carter administration, which approached the matter from a different perspective; President Carter believed that if US citizen demand for oil products decreased, suppliers would have to lower their proposed prices. He tried to achieve this goal by calling for Americans to be more conservative with their use of gasoline heating oil. Just like Ford’s plans, Carter’s ended up in failure. Carter’s administration did not anticipate the significance of oil in modern day life; domestic production did not pick up, oil prices remained high, and Americans were unable to cut consumption by the same rate of price increase, proving the inelasticity of oil prices.

Post-Carter Domestic Energy Policies

Since the end of Carter’s presidency in 1981, US governments have applied appropriate domestic policies to ensure the independence of its economy from OAPEC’s ‘oil weapon’ or any other organization that possesses similar capabilities. By cutting taxes and eliminating price controls, US governments created a greater incentive for American oil producers to increase production. Since oil wells are limited, the US had to invest in new and innovative ways to supply domestic oil; by investing capital into hydraulic fracking, it was able to access new type of reserves, shale rocks. This technology was available long ago and its resources were available for extraction, but before 1990 it was still too expensive to extract crude oil using fracking. The US government also invested in new infrastructure such as the Strategic Petroleum Reserve and the Trans-Alaska Pipeline. The Strategic Petroleum Reserve holds 115,600,000 m3 of crude oil, meaning that the US can supply its citizens with oil products under normal consumption rates for 90 days in case of a national emergency where no oil is available through local extraction or import. In addition, the Trans-Alaska Pipeline system led to an increase in oil production in Alaska as it was easier now to transport oil to the mainland. The American government has been conducting ongoing research to find new oil wells and reserves. Reserves were estimated to be 24 billion barrels in 1993 and increased to 36 billion barrels in 2013 (US Energy Information Administration, 2013). Taking into consideration the increasing demand for oil, it is remarkable that the US was able to meet this demand while increasing its oil reserves over the past 20 years. Forty-six new oil fields were discovered since 1973 namely the Shenzi field, Atlantis oil field, and the Sugarkane field, which are major contributors to the oil supply. The previously mentioned steps have ensured the US’s self-sufficiency, which has freed it from any political pressure that could be inflicted upon it.

Sustainable Trading Relationships

Although the US is self-sufficient, it still imports oil from foreign countries. The reasons behind this are multifaceted. The import of oil produced in foreign countries remains cheaper than local production. As the US imports foreign oil, it increases it reserves and at the same time diminishes that of the countries it imports from. It is important to note that the US only deals with countries with which it has long and solid relationships. In 2017 oil from neighboring Canada constituted 38.3% of all US oil imports, while only 19.7% of the total 3.702 billion imported barrels where from OAPEC nations. This means that only 3.5% of the total US oil demand is supplied by OAPEC nations (USEIA, 2017) and it shows that the US has improved its foreign policies to create sustainable trade relationships with allied countries. The US has dealt with its domestic and foreign struggles allowing for effective control over oil pricing and quantities.

Direct Military Intervention and Weapon Sales in the Middle East

Finally, the US dismantled the ‘oil weapon’ by using different methods to gain political control over rogue middle eastern countries and the raw material available there. One of these methods was the direct military intervention in Iraq. The military intervention was advertised to the public as an act of conserving the freedom of the Iraqi and American people. According to President George W. Bush, the invasion was necessary due to the fact that Iraq possessed weapons of mass destruction and the Iraqi Dictator, Saddam Hussein, was oppressing the Iraqi people. Although it was true that Saddam Hussein did oppress certain ethnic and religious groups in Iraq namely the Kurds and Shi’as; the main claim of Iraq holding weapons of mass destruction turned out to be false. Researches and specialists later revealed that the true motives behind this invasion was to increase US influence in the region and to acquire control over Iraqi oil. The negative effects of the invasion can still be seen today. Iraq, a raw material-rich country, with the fifth largest proven oil reserves in the world, finds itself in a ‘civil war’ to this day while oil extraction continues unregulated and oil floods out of the country. The US also enhances its political presence, and consequently its control over foreign oil, through foreign policies that include interfering in regional conflicts. For example, in the Saudi-Yamani war, where America sided with the Saudis, has proven useful to increase weapon sales in the region. Most recently, the Trump administration signed a ten-year deal that could amount to over 350 billion dollars with Saudi Arabia for weapons and ammunition (The Independent, 2017). Deals of this magnitude have left the Saud government with a notable debt owed to the US. Such deals do not come without conditions for their use, ensuring that US affairs are not affected. The US has also taken several opportunities to spread military bases all over the Middle East and North Africa to strengthen its military dominance. There are a total of twenty-six US military bases, strategically positioned for quick military intervention (bases in Iraq, Jordan, and Saudi Arabia) and the blockade of important naval passageways (bases in UAE, Djibouti, and Egypt). It is clear that the US has established powerful political and military control over this region, and has therefore established control over several of its resources including its oil.

Brief Overview of Opposing Position

Some see that an oil embargo would cause high inflation in US oil prices and that US relations with OAPEC nations are not as stable as they seem. Although OAPEC oil does not constitute a major part of US oil supply (3.5%), even a small change in oil supply to the US can cause an inflation due to the inelasticity of oil pricing as explained previously. Furthermore, the Strategic Oil Reserves have never been tested in a real-life situation and a major concern is that the oil stored there is still in its original form and is not ready for direct consumption. In addition, the oil market is unpredictable over the years prices have changed in an unexpected manner. Arab supply of oil is reliant on various factors other than the direct supply of the product to the US, meaning that an oil embargo should not be limited to the US but its allies and even the world. Later such a strategy might become more effective, since other major suppliers in the market are refusing to increase supply such as Venezuela. Moreover, a revolution or a coup in one or more of the OAPEC nations is always imminent, for in the past eight years there have been more than six revolutions in Arab countries. This is due to the fact that the region is an unstable one, with unpredictable changes occurring on a daily basis, taking Iran as an example we can see how change in power after the 1979 Islamic revolution led to 180° shift in Iranian-American relations.

Limitations

The major supplier figures dealing with crude oil supply and demand is the Central Investigation Agency’s World Factbook. With the website’s search engine being down for the last few months, collection of data and statistics concerned with oil imports and exports was very hard to find, and when found came from secondary sources. Another drawback is the fact that there is no data on oil exports to the US by country before 1980. This particular data is very important to further support my second argument which states that the US has better trading partners when it comes to oil.

Conclusion

To sum up, the US has taken the necessary actions to ensure its self-sufficiency and chosen its oil suppliers well enough that it has freed itself from Gulf oil dependency. At the same time with so much political and military power in the Middle East, a second oil embargo seems unlikely mainly because US political influence is deeply involved with the governments of biggest oil producers (Saudi Arabia, UAE and Iraq) and that an oil embargo would not be of the interest of OAPEC nations due to the sever political and economic backlash that they would face from such a decision. The only way OAPEC nations can be in a position of political strength is if they find common grounds upon which they can built just like in 1973. A lot of variables, including social, religious, economic, and political variables, need to be accounted for before such complex ideas can be implemented. Hopefully our young Arab generation can take advantage of our natural resources to put the Arab world back on the map.

References

1. Graf, R. (2012). Making Use of the ‘Oil Weapon’: Western Industrialized Countries and Arab Petropolitics in 1973-1974. Diplomatic History. 36(1), 185-208. doi: 10.1111/j.1467-7709.2011.01014.x.
2. Licklider, R.E. (1982). The Failure of the Arab Oil Weapon in 1973–1974. Comparative Strategy. 3(4), 365-380. doi: 10.1080/01495938208402648
3. Canadian Broadcasting Corporation. (2006, April 18). The Price of Oil – In Context. [News Article] 42_crawl. Internet Archive in the Wayback Machine, San Francisco, CA. Retrieved from https://web.archive.org/web/20070609145246/http://www.cbc.ca/news/background/oil/
4. Central Intelligence Agency. (2018). Crude Oil. The World Factbook. Retrieved from https://www.cia.gov/library/publications/resources/the-world-factbook/fields/264.html
5. Renner, M. (2003, January 1). Post-Sadam Iraq: Linchpin of a New Oil Order. Foreign Policy In Focus. Retrieved from https://fpif.org/post-saddam_iraq_linchpin_of_a_new_oil_order/
6. Sampathkumar, M. (2017, May 17). Donald Trump to Announce $350bn Arms Deal with Saudi Arabia – One of the Largest in History. The Independent, Retrieved from https://www.independent.co.uk/news/world/americas/us-politics/trump-saudi-arabia-arms-deal-sale-arab-nato-gulf-states-a7741836.html
7. U.S. Energy Information Administration. (2015). Top 100 U.S. Oil and Gas Fields. Washington, DC: U.S. Department of Energy. Retrieved from https://www.eia.gov/naturalgas/crudeoilreserves/top100/pdf/top100.pdf

OPEC and the 1970s Oil Crisis

Oil is very important because it is used to produce many goods and mostly used in heating and transport. This is why the supply of oil is in the hands of a small number of producers who are based in countries where oil reserves are found. These countries get together and agree on the quantity of oil to produce and the price to charge. According to Mankiw et al., (2019), a group of firms acting in unison is called a cartel. They further explained that a cartel must agree not only on the total level of production but also on the amount produced by each member. This is the essence of an ‘oligopolistic’ market. An oligopoly is a market with limited competition in which a few producers control the majority of the market share and typically produce a similar/homogenous product (Lipsey and Chrystal, 2007). An example of a cartel and an oligopolistic market is the ‘Organization of Petroleum Exporting Countries’, abbreviated as OPEC.

The Organization of Petroleum Exporting Countries (OPEC)

OPEC is an intergovernmental organization of 14 nations, founded in Baghdad in 1960, by the best 5 member countries namely; Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (Wikipedia.org). OPEC aims at coordinating and unifying the petroleum policies of its member countries and ensure the stabilization of oil markets so that they can efficiently supply oil to consumers (opec.org). OPEC decisions play a prominent role in the global oil market and international relations. Economist often cite OPEC as an example of a cartel that cooperates to reduce market competition, but Mankiw et al. (2019) argued that often, it is not possible to form cartels and earn monopoly profits. This is because there can be squabbling among members on how to divide the profits and this leads to disagreements/conflicts. At various times, OPEC members have had conflicts over their production costs, political circumstances, export capacities and reserves.

Causes of the 1970s Oil Crisis

Profit Maximization

In 1971, the US abandoned the gold exchange standard and because oil was priced in dollars, oil producers’ income decreased. In order to increase their profits, OPEC members increased their oil prices. As stated by Mankiw (2019), OPEC has always had trouble cooperating. The countries are not always able to coordinate policies to ensure their control over the market due to a large number of political and economic factors hence others sold at different prices.

Quantitative Easing

Other nations increased their reserves by expanding their money supplies in greater amounts and this led to depreciation of the dollar as well. Quantitative easing is a monetary policy in which a central bank purchases government security in order to increase the money supply (Lipsey and Chrystal, 2007). Also, OPEC was slow to readjust the prices to reflect the depreciation. This led to expensive imports and it increased the cost of production and consumer price levels.

Low Supply of Oil and High Demand of Oil

In October of 1973, the Arab members of OPEC placed an embargo on the U.S. in response to its support of Israel and the Yom Kippur War (marketplace.org). The result was an oil shortage across the country. Since OPEC has the power to manage oil supply around the world, the supply and demand of oil puts pressure on prices to change. Mankiw et al. (2019) described this as ‘stagflation’ which is a period of falling output and rising prices. Due to the oil shortage, the supply curve shifts to the left from S1 to S2. The economy moves from point A to point B. This resulted in stagnation as the output (oil) falls from Y 1 to Y2 and the price level rises from P1 to P2.

Higher Prices and Inflation

The direct relationship between oil and inflation was evident in the 1970s, when the cost of oil rose from a nominal price of $3 before the 1973 oil crisis to around $40 during the 1979 oil crisis. This helped cause the consumer price index (CPI), a key measure of inflation, to more than double to 86.30 by the end of 1980 from 41.20 in early 1972 (opec.org). The price of oil and inflation are often seen as being connected in a cause-and-effect relationship. As oil prices move up, inflation follows in the same direction. Cost-push inflation caused by rising oil prices presents a dilemma to policymakers (Mankiw, 2019). Higher inflation usually requires higher interest rates to keep inflation on target.

Conclusion

In conclusion, the 1970 crisis was caused by political factors and not economic factors. This took a short-period of time and OPEC rose by the end of the 1970s. These effects are complex but of short duration therefore, OPEC did not lose its dominant power completely. Today, OPEC still has the control of oil pricing around the world, and despite the ongoing conflicts in the middle east; it is still operating as a great producer of oil.

References

1. N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin. (2019). Business Economics (3rd ed). Cengage Learning EMEA; United Kingdom.
2. Richard Lipsey and Alec Chrystal. (2007). Economics. (11th ed). Oxford University Press Inc., New York.
3. https://www.opec.org/opec_web/en/
4. http://ec.europa.eu/competition/sectors/energy/oil/oil_en.html
5. https://www.marketplace.org/2016/05/31/economy/how-oil-shortage-1970s-shaped-todays-economic-policy

Consequences of the Oil Crisis of 2008 for the Gold Countries

Economic crisis is a circumstance in which the economy of nation encounters an unexpected downturn brought on by a financial crisis. The economy confronting a financial emergency and experiencing a falling GDP, an evaporating of liquidity and rising prices due to deflation. An economic crisis can appear as a recession or a depression.

Our planet experienced many crises, such as the Great Depression in 1930’s which is known as the mother of all financial crisis and lasted about 10 years, some of other crisis such as the 1970 also the 2000 recession and then the 2008 crisis is considered one of the greatest financial crises since the greatest depression. The 2008 crisis have impacted different nations and economies, especially the gold countries. The 2008 shock struck the prices of oil around the world. Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates are nations that since 2008 were greatly impacted by this strike which was caused by the fall of oil price. These nations experienced slowdown of growth, falling revenue of export and budget deficit. This essay will discuss how oil which is considered a blessing turned into a double-edged factor, especially this essay will focus on the consequences of oil crisis of the gold countries and the procedures which was adopted by them to control the negative impact.

Growth in energy use during the 20th century is unprecedented and increasing of oil supply is supporter to that growth. At the same time the falling of oil price helped create parallel development. Oil has become the world most important source of energy since the mid 1950’s mainly providing vitality to control industry, heating for homes and give fuel to vehicles and planes to carry products and individuals everywhere throughout the world.

When it comes to oil production, GCC countries are the biggest supplies as 50% of world reserves are located there, furthermore Saudi Arabia have 22% of the world reserve and typically considered to be the relevant actor in the global oil industry (by Joe Bahamas, KAS Energy Security Fellow). In 2000, Saudi Arabia economy grew by 5.6% and by 2008, the GDP reached 6.3% due to largely rise of oil prices (Rubina Vohra). When Saudi Arabia economy grew also it increased their spending on other industries, in the same period, Kuwait experienced economic growth due the rise of oil prices resulting in an increase of GDP from 4.7% in 2000 to 6% in 2007. In addition, Qatar experienced an economic growth, and its GDP grew from 3.9% in 2000 to 18% in 2007. UAE benefited also from the rise of oil and gas sector and still accounts more than 25%, it is very important to note that its highest growth rate recorded was 32.7% in 2006 due to sharp increase in price. This rise helped to increase investment and many sectors benefited from the rise such as real estate, construction and trade (Emirates 24/7). So, EAU depends on petrodollars as its main source of income and any fall of oil price will have an impact on its oil economy.

Bahrain and Oman also benefited from the highest price of oil. Bahrain GDP grew by 7% In 2000 and in 2007 it grew by 8.3%, this growth of economy is followed by high budget revenue. Lastly Oman experienced an increase of GDP by 6.5% in 2000 to 8.2% in 2007. In general, all these countries have benefited from oil, some invested in better infrastructure, some in construction and building stadiums, and others focused on decreasing unemployment.

After all the above stated, the world economy has experienced a huge shock, this period marked a huge drop of oil. Oil prices dropped from 144.29 in July 2008 to 33.7 5 months later, and since gold countries benefit from oil and since oil takes large place in their economic growth, they experienced sharp decline in their GDP from 2008-2009. More especially, the recession caused a decrease in the demand of oil, most of these counties reduced their spending and couldn’t provide their citizens subsidies and reduce their sponsorship and social spending.

According to the International Monetary Fund latest estimates, KSA recorded a fiscal deficit of up to 3.1% of GDP and marked a decline from surplus of 22.8% of GDP in 2008 (Hassan Hakiman, Wednesday February, 2009). Kuwait has suffered from the fall of oil prices which impacted several sectors including the real estate, made the companies from doing business in residential sector which prevented banks from offering financial support for real estate market (Essays, November 2018). Qatar has been impacted by the fall of oil price; it has experienced a deficit of 6% of its GDP which forced its government to put on hold all projects of construction in relation with football stadiums. The UAE also experienced a budget deficit in 2009/10 of 17.7% to 3.1% of its GDP due to oil price. During this period UAE was working on many projects related to construction and real estate investment, so when the market crashed, the country was facing difficult financial issues that forced the government to temporarily forfeit all the ongoing economy’s planning affairs. Lastly, Bahrain and Oman, both experienced a budget deficit in 2009 with Bahrain budget deficit being 9.8% of its GDP, while Oman was 3.7% of its GDP. Both countries have largely struggled to deal with the fall of oil prices due to the lack of economy’s diversity.

All these GCC nations reacted differently to the consequences of oil prices. Saudi Arabia committed 373 billion (The World Fact Book, 2016). For social and monetary and advancement extents, and trying to differentiate its business to protect its economy from the effect of falling of oil cost. Kuwait protected itself from the falling of oil price by using programs which required the nation to spare 10% of government income every year for such occasion. Kuwait and Qatar lower subsidies on electricity and water fees to decrease government spending. The UAE reacted by increasing investment in education and job creation to elevate human capital. UAE eliminated subsidies on fuel to help reduce national consumption of oil. Lastly, Bahrain and Oman focused on cutting spending to enhance their economies by focusing more in industrialization and education in private sector.

In general, Saudi Arabia and other countries are paying attention to these challenges more. They are investing large sums in upstream hydrocarbon tasks to get more values from their oil, and try to diverse their economies rather than petroleum product. They additionally made interest in alternative energy to reduce domestic demands for oil and gas, thus freeing up more for export.

Oil has been a blessing for GCC nations, these countries have benefited from the rise of oil prices that help working on many projects relating to construction and real estate investment. Since oil is a main factor and have an impact on GDP’s and current accounts, governments should switch to other policies that allow them to protect their economies of any oil market crash. Oil and gas trading nations are routinely encouraged to differentiate their economies so as to cradle themselves against ware value unpredictability, make new occupations outside the asset area (Michael L. Ross, December 19, 2017). Gulf countries need to reduce their dependence on foreign skills and governments should switch to policies that increase the level of labor skills and be able to benefited from its own labor forces.

References

1. ‘The Global Financial Crisis Impact on Kuwait Economie Essay’. Essays, UK (November, 2018).
2. Santos et al. (2013). Runnimg the Economy. The open university.
3. Arezki, R., & Nabli, M. (2012). Natural Resources, Volatility, and Inclusive Growth: Perspectives from the Middle East and North Africa. International Monetary Fund.
4. Bruno, M., & Jeffrey S., (1985).Economics of Worldwide Stagflation, Harvard University Press: Cambridge Massachusetts.
5. Central Intelligence Agency (CIA), (2016). The World Factbook: Bahrain. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/goes/ba.html (June 7, 2016)
6. Central Intelligence Agency (CIA), (2016). The World Factbook: Kuwait. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/ku.html (June 7, 2016).
7. Central Intelligence Agency (CIA), (2016). The World Factbook: Oman. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/goes/mu.html (June 7, 2016).

The Oil Crisis of 1973-1974: Causes and Effects on the American Economy

The objective of this study is to explain the impact that the 1973-1974 oil crisis, stemming from the countries known as OPEC (Organization of Petroleum Exporting Countries), had on oil prices, the American economy and the world economy. This essay discusses the causes of the oil crisis as well as the extent of the impact on the American economy. Some of the macroeconomic concepts that will be explored are inflation, wage-price controls and monetary policy. It is evident from the findings that the US government made a response to the crisis through wage-price controls and the Federal Reserve’s stop-go monetary policy which in turn worsened the impacts of the embargo. To conclude, I will briefly outline how the oil price shock has changed the United States dependency on oil through rapid growth in renewable and energy efficiency sectors since 1973; this oil price shock shows how one event can affect the globe.

Introduction

The 1973-1974 OPEC oil embargo began during the Yom Kippur Arab-Israeli War in October 1973 in retaliation for the US decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations (www.history.state.gov, 2017). This meant that petroleum export to the targeted nations – the US, the UK, and the Netherlands – were temporarily banned and introduced cuts in oil production which disrupted a decades old oil pricing system, which worsened the embargo’s effects. In 1973, 36% of the world’s oil was supplied by the Middle East countries (Schumacher D., 1985, ‘The 1973 Oil Crisis and Its Aftermath’). Oil from that region was more abundant and cheaper to produce; therefore, this embargo put a huge strain on the US economy that had grown increasingly dependent on foreign oil; the United States consumed one third of the World’s oil at this time (www.khanacademy.org, 2015). This led to major oil shortages and a severe rise in oil prices which created an economic crisis in the US and other developed countries.

Discussion and Analysis

OPEC member countries produce about 42% of the world’s crude oil and control 60% of the total petroleum exports and 72% of proven oil reserves (www.thebalance.com, 2020). As a result of this large market share, OPEC creates a market similar to a monopoly market. Consequently, OPEC’s actions can, and do, influence international oil prices as highlighted through the 1973-1974 oil embargo.

Tensions between OPEC members and the US had built up in the years prior to the embargo as a result of actions taken by President Richard M. Nixon in an attempt to boost the sluggish American economy. Nixon ordered the release of the dollar from the gold standard, which had been in place since the end of World War II; the resulting devaluation of the currency led to financial losses to oil-producing countries, whose revenues comprised largely of US dollars (www.britannica.com, 2020). The world became adapted to cheap gasoline and relatively stable prices which led to Western oil consumption more than doubling in the preceding 25 years, contributing to the severity of the crisis. During the 1973 Yom Kippur Arab-Israeli War in efforts to pressure Western countries to force Israel to withdraw from seized lands, Arab members of OPEC announced harsh production cuts and then banned the sale of oil to the United States and the Netherlands.

Over the next 6 months oil prices quadrupled and remained at a higher level after the embargo ended in March 1974; inflation-adjusted oil prices went up from $25.97 per barrel (bbl) in 1973 to $46.35 per barrel (bbl) in 1974 (www.thebalance.com, 2020), an increase of 78.48 percentage points.

Oil prices rapidly increased and remained high after the embargo; the embargo had long lasting effects and changed oil prices forever. In 1981 the price of crude oil cost $36 per barrel; 40 years later it is less than half as high. Meanwhile, prices in general have risen almost 30% (www.fee.org, 2017). The rapid rise in prices imposed socioeconomic impacts such as gas stations introduced color-coded signs for when gas was available. In efforts to conserve gas, states introduced odd-even rationing which meant drivers with license plates ending in even numbers could only get gas on even-numbered days and the national speed limit was also reduced to 55 miles per hour (www.thebalance.com, 2020).

In response to the embargo Nixon enforced wage-price controls which forced companies to keep their wages high resulting in businesses laying off workers to reduce costs which alongside higher production costs of oil reduced aggregate supply in the economy. Aggregate demand had also fallen as unemployment rose resulting in lower disposable income due to higher gas prices. This resulted in a great decrease of marginal productivity of labor. The Federal Reserve had also consistently raised and lowered interest rates making businesses unable to plan for the future. Consequently, cost-push inflation occurred the high levels of inflation were the result of an oil supply shock resulting in increasing the price of gasoline, which drove the prices of everything else in the economy higher.

Monetary policy involves using interest rates and other monetary tools to influence the levels of consumer spending and aggregate demand; it aims to stabilize the economic cycle by keeping inflation low and in turn avoid recessions. The Central Bank can influence the extent to which supply shocks affect inflation, but they face a trade-off. Due to the widespread affect higher oil prices have on goods and services throughout the economy they will tend to generate both inflationary pressures and slower growth (www.federalreservehistory.org, 2013). The Federal Reserve’s subsequent tightening of monetary policy had a much more severe impact than the direct effects of the oil price shock themselves. This led to a period of stagflation which is defined as a period of slow economic growth occurring simultaneously with high rates of inflation. Inflation rates rapidly rose in from 3.21% in 1972 to 11.04% in 1974, an increase of 7.83 percentage points.

Arthur Okun, an economist in the 1960’s created the Misery Index which was equal to the sum of inflation and unemployment rate to provide a snapshot of the US economy. The higher the index, the more is the misery felt by US citizens. It is evident that unemployment and inflation were highest in the years following the OPEC oil embargo which further highlights the long term impacts the oil shock had on the US economy; the Misery Index rose from 9% in 1972 to 20% in 1975, an increase of 11 percentage points. The oil embargo is widely blamed for causing the 1973-1975 recession.

Although the embargo led to a recession in the US economy, there were also some positive effects. High oil prices encouraged a switch to smaller, more fuel-efficient vehicles resulting in Japanese firms such as Toyota and Honda becoming dominant in the UK and further afield (www.theguardian.com, March 2011). The crisis was a major factor in shifting Japan’s economy from oil-intensive industries towards a focus in electronics. If energy levels had continued at 1973 levels, today’s energy use would be over 40% greater than current levels (www.eesi.org, October 2013). Renewable energy e.g. biomass, wind, solar, biofuels have become the fastest growing energy source from supplying next to none of US energy in 1973 to in 2019 supplying 11% of total US energy consumption and about 17% of electricity generation (www.eia.gov, May 2020).

Conclusion

To conclude, the 1973 oil price shock is reported to have shrunk the US economy by approximately 2.5% and the increased unemployment and inflation spun the economy into a severe and extended recession from 1973-1975 (www.csis.org, 2013). It took the US economy several years for economic output and inflation rates to fall to their pre-crisis levels. Capitalist countries have been forced to embark on a process of economic restructuring in response to the 1973 embargo in order to reduce dependency on foreign oil. In 2013, the US were on target to achieve more than 90% energy self-sufficiency. Moreover, energy usage per unit of GDP is less than half the 1970s level (www.csis.org, 2013); thus, proving that the economic restructuring to reduce risk of further oil price shocks has been successful. Subsequently, the effects of the embargo are still being felt today.