65
to other countries that supported Israel, including the Netherlands, Portugal, and
South Africa (Yergin 1991). The OPEC members of the embargo instituted a series
of production cuts resulting in shortages that nearly quadrupled the global price of
oil from $2.90 a barrel in October 1973 to $11.65 a barrel by January 1974.
Disagreements within OPEC about whether or not America had “learned its lesson”
resulted in the official lifting of the oil embargo in March 1974, but the higher petroleum prices remained in place for many decades to come (Merrill 2007).
The price increases instituted by OPEC were complicated by the devaluation of
the dollar that had occurred in the early 1970s. This was at a time around the end of
the Vietnam War when the economy of the United States was experiencing stagnant
growth along with monetary inflation. The combination, known as “stagflation”
went against most economic theories, because in an economic slowdown with less
disposable income the demand for products should have dropped, resulting in steady
or falling prices. Instead, prices continued to climb for complicated and poorlyunderstood reasons, requiring more dollars to purchase the same items, and causing
the value of each individual dollar to be less.
Domestic inflation meant that U.S. dollars continuously lost value on global markets. Since the earliest days of petroleum production, the price of oil had been traditionally indexed to the U.S. dollar in cost per barrel, and the falling value of the
dollar substantially reduced the amount of revenue that OPEC nations were obtaining from their oil exports. As a result, the OPEC cartel boosted the cost of oil, and
began pricing it in grams of gold instead of U.S. dollars (Hammes and Wills 2005).
OPEC had been created in Baghdad, Iraq in September 1960 by five oil- exporting
nations: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (https://www.opec.org/
opec_web/en/; accessed 8/23/2019). Other countries that joined the five founding
members include Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria,
Ecuador, Angola, Gabon, Equatorial Guinea, and Congo, although some of these
have come and gone. OPEC has been headquartered in Vienna, Austria, since
September 1965. Their stated goal is to coordinate petroleum policies among the
member nations to secure “fair and stable” prices for petroleum producers. The
objective of these policies is to provide an “efficient, economic and regular” supply
of petroleum to consuming nations. This eerily echoes the goals promoted by the
Standard Oil Trust half a century earlier under John D. Rockefeller.
One of those “consuming nations” was the United States of America. U.S. oil
imports had increased significantly since the 1960s, and by 1973 were averaging
about 5–6 million barrels per day. However, daily domestic petroleum consumption
was about 17 million barrels per day, so imports only made up about 30–35% of the
total. In 1973, about half of the imported oil originated in OPEC countries, while the
other half came from non-OPEC sources. Thus, even if all OPEC member countries
had been willing to go along with a total oil embargo against the U.S. (and not all of
them did), it would only have cut supplies by about 15%. The actual reduction in
petroleum supplies was closer to 10%, yet this precipitated one of the greatest crises
in American history (source: USEIA webpages and data).
4.1 The Yom Kippur War and OPEC Embargo
to other countries that supported Israel, including the Netherlands, Portugal, and
South Africa (Yergin 1991). The OPEC members of the embargo instituted a series
of production cuts resulting in shortages that nearly quadrupled the global price of
oil from $2.90 a barrel in October 1973 to $11.65 a barrel by January 1974.
Disagreements within OPEC about whether or not America had “learned its lesson”
resulted in the official lifting of the oil embargo in March 1974, but the higher petroleum prices remained in place for many decades to come (Merrill 2007).
The price increases instituted by OPEC were complicated by the devaluation of
the dollar that had occurred in the early 1970s. This was at a time around the end of
the Vietnam War when the economy of the United States was experiencing stagnant
growth along with monetary inflation. The combination, known as “stagflation”
went against most economic theories, because in an economic slowdown with less
disposable income the demand for products should have dropped, resulting in steady
or falling prices. Instead, prices continued to climb for complicated and poorlyunderstood reasons, requiring more dollars to purchase the same items, and causing
the value of each individual dollar to be less.
Domestic inflation meant that U.S. dollars continuously lost value on global markets. Since the earliest days of petroleum production, the price of oil had been traditionally indexed to the U.S. dollar in cost per barrel, and the falling value of the
dollar substantially reduced the amount of revenue that OPEC nations were obtaining from their oil exports. As a result, the OPEC cartel boosted the cost of oil, and
began pricing it in grams of gold instead of U.S. dollars (Hammes and Wills 2005).
OPEC had been created in Baghdad, Iraq in September 1960 by five oil- exporting
nations: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (https://www.opec.org/
opec_web/en/; accessed 8/23/2019). Other countries that joined the five founding
members include Qatar, Indonesia, Libya, United Arab Emirates, Algeria, Nigeria,
Ecuador, Angola, Gabon, Equatorial Guinea, and Congo, although some of these
have come and gone. OPEC has been headquartered in Vienna, Austria, since
September 1965. Their stated goal is to coordinate petroleum policies among the
member nations to secure “fair and stable” prices for petroleum producers. The
objective of these policies is to provide an “efficient, economic and regular” supply
of petroleum to consuming nations. This eerily echoes the goals promoted by the
Standard Oil Trust half a century earlier under John D. Rockefeller.
One of those “consuming nations” was the United States of America. U.S. oil
imports had increased significantly since the 1960s, and by 1973 were averaging
about 5–6 million barrels per day. However, daily domestic petroleum consumption
was about 17 million barrels per day, so imports only made up about 30–35% of the
total. In 1973, about half of the imported oil originated in OPEC countries, while the
other half came from non-OPEC sources. Thus, even if all OPEC member countries
had been willing to go along with a total oil embargo against the U.S. (and not all of
them did), it would only have cut supplies by about 15%. The actual reduction in
petroleum supplies was closer to 10%, yet this precipitated one of the greatest crises
in American history (source: USEIA webpages and data).
4.1 The Yom Kippur War and OPEC Embargo