OPEC Oil Embargo

Causes and Effects of the 1973 Oil Crisis

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 Photo by Owen Franken / Corbis via Getty Images

The Organization of the Petroleum Exporting Countries (OPEC) oil embargo was a decision to stop exporting oil to the United States. On Oct. 19, 1973, the 12 OPEC members agreed to the embargo. Over the next six months, oil prices quadrupled. Prices remained at higher levels even after the embargo ended in March 1974.

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.

Key Takeaways

  • The OPEC oil embargo was an event where the 12 countries that made up OPEC at the time stopped selling oil to the United States.
  • The embargo sent gas prices through the roof. Between 1973 and 1974, prices more than quadrupled.
  • The embargo contributed to stagflation.
  • In response to the 1973 oil crisis, the United States took steps to become increasingly energy independent.

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.

For OPEC, the last straw came when the United States supported Israel against Egypt in the Yom Kippur War.

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.

Fed officials learned through the history of U.S recessions that they had to manage businesses' expectations of inflation. Since then, Fed officials have been consistent in their actions. More importantly, they clearly signal their intentions well ahead of time.

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.

Frequently Asked Questions (FAQs)

How did the United States respond to the OPEC oil embargo?

Congress created the Strategic Petroleum Reserve to supply at least 90 days of oil in case of another embargo. It also reduced the national speed limit to 55 miles per hour to conserve gas. Nixon instituted daylight savings time year-round for 1974 and 1975.

When did the OPEC oil embargo end?

The embargo was officially lifted in March 1974, when OPEC nations could not agree on how long to continue it. However, oil prices did not begin to fall until the following decade.

Article Sources

  1. U.S. Department of State. "Oil Embargo, 1973–1974."

  2. U.S. Energy Information Administration. "What Drives Crude Oil Prices: Supply OPEC."

  3. OPEC. "OPEC Share of World Crude Oil Reserves, 2018."

  4. Federal Reserve History. "Oil Shock of 1973–74."

  5. History. "Yom Kippur War."

  6. Board of Governors of the Federal Reserve System. "Historical Approaches to Monetary Policy."

  7. OPEC. "OPEC's Role and the Challenges We Face in the Petroleum Industry."

  8. Office of Fossil Energy and Carbon Management. "Strategic Petroleum Reserve."

  9. The American Presidency Project. "Statement on Signing the Emergency Daylight Saving Time Energy Conservation Act of 1973."