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1970s Crude Oil Shock

1970s Crude Oil Shock

The 1970s were an interesting time for the United States economy and the rest of the world by extension. Bretton Woods had just ended in 1971, and with that came an abandonment of both the gold standard and fixed exchange rates. For crude oil, it meant that the real price of a barrel had dropped. Most countries (the US included) expanded their money supplies to protect from currency volatility in these new and uncertain times.

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These changes offered many economic challenges. For crude oil, it meant that the real price had dropped—to the newly inflated currency. This bothered OPEC and caused them to take an active role in the pricing of oil. From the post World War II period, the oil price had risen by a small percentage each year, as you would expect with regular inflation. Now that inflation had been driven upwards, OPEC decided the price of crude ought to match that. 

Adjusting the prices was sensible but would prove damaging. The 1971 Tehran Price Agreement was meant to settle this, though it proved to be ineffective. The obstacle was that there were no organized mechanisms for updating the price of crude oil at a more rapid rate to match market conditions, and there were many reasons for suppliers and producers to argue over the price.

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The Consequences of Rising Crude Oil Prices

Along with the need for the price adjustments came intense geopolitical problems. Tensions reached a maximum when Richard Nixon requested US funds to send a large aid package to Israel. There was also a shipment of supplies that angered Arab nations. The OPEC countries launched an embargo on nations that they saw as supporters of Israel in the 1973 Arab-Israeli war, including the United States, Canada, Japan, the UK, and others. 

This embargo and the price increases globally, wrought mayhem on the economy and many people’s daily lives. There were gas shortages in many places in the US, and costs soared for transportation and many production types. During 1973-1974 the price of a barrel of crude oil skyrocketed, from around $3 per barrel to $12. 

While the OPEC countries largely failed to change geopolitical policies, their embargo was a powerful move. It lasted until early 1974, or about 5 months total. The price of gas rose over 40% around the time of the embargo. Henry Kissinger negotiated a Syrian disengagement in May 1974, which helped relieve tension significantly. Things started to return to normal, but the stock market crash from this crude oil shock and inflation pressures would continue until late 1974.