What was 1973 oil crisis

Hammes, David, and Douglas T. Merrill, Karen. Reich, Bernard. Romer, Christina, and David Romer. Arthur F. Burns Chairman. Current Fed leaders. Classroom resources About this site Our authors Related resources. Oil Shock of —74 October —January From the vantage point of policymakers in the Federal Reserve, an oil embargo by Arab producers against the U.

Sign reading "Gas shortage! Prices remained at higher levels even after the embargo ended in March A review of the history of oil prices reveals they've never been the same since. The chart below tracks both nominal and inflation-adjusted oil prices since Since the embargo, OPEC has continued to use its influence to manage oil prices. In , President Richard Nixon prompted the embargo when he decided to take the United States off of the gold standard. As a result, countries could no longer redeem U.

With this action, Nixon went against the Bretton Woods Agreement. 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. 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 considered pricing oil in gold , instead of dollars, to keep revenue from disappearing. Egypt, Syria, and Israel declared a truce on October 25, OPEC continued the embargo until March The oil embargo is widely blamed for causing the recession. They included Nixon's wage-price controls and the Federal Reserve's stop-go monetary policy.

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. Early in the war, the U. The embargo shocked the oil market and created a shortage in supply. The embargoed nations were able to get oil companies to sell them oil from other sources however, the mass confusion resulting from the normal supply translated into a sharp rise in prices.

Oil traders and companies having to shift supply lines and resources lead to large transport and transaction costs which played into the already high price resulting from the shortage. Additionally, it took time to sort out new sources which meant the hole left by the embargo was not filled immediately. The embargo was a shift in global political and economic power as now the OPEC countries largely centered in the Middle-East could influence powerful nations such as the UK and U. S by manipulating oil supplies.

OPEC is an international cartel. The governments of the OPEC countries agreed to coordinate with petroleum firms both state owned and private in order to manipulate the worldwide oil supply and therefore the price of oil. OPEC has always had trouble cooperating, the 12 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.

In the instance of the embargo the embargoes nations were able to reconfigure their supply lines to keep the oil flowing despite a short-term drop in supply and rise in prices. The ability to find other sources limited the effects of the embargo to the short term. That outlook— one that saw government as the solution to national crises— resulted in a dramatic expansion of government intervention, especially as liberals in Congress advanced policies to place price controls on oil and create the Department of Energy DOE as a massive new government agency.

The problem of shortages caused by international events was new, but the political solutions— from price controls to rationing to antitrust initiatives to break up Big Oil— were old. Washington was stuck in the past. Our mission at Marketplace is to raise the economic intelligence of the country.

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