1973 to 1979
WorldwideThe 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries led by Saudi Arabia proclaimed an oil embargo. The embargo was targeted at nations that supported Israel during the Yom Kippur War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom, and the United States with the embargo also later extended to Portugal, Rhodesia, and South Africa. By the end of the embargo in March 1974, the price of oil had risen nearly 300%, from US$3 per barrel ($19/m3) to nearly $12 per barrel ($75/m3) globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock".
When Richard Nixon became president in 1969, he assigned George Shultz to head a committee to review the Eisenhower-era quota program. Shultz's committee recommended that the quotas be abolished and replaced with tariffs but Nixon decided to keep the quotas due to vigorous political opposition.
In 1963, the Seven Sisters controlled 86% of the oil produced by OPEC countries, but by 1970 the rise of "independent oil companies" had decreased their share to 77%. The entry of three new oil producers—Algeria, Libya, and Nigeria—meant that by 1970, 81 oil companies were doing business in the Middle East.
In the early 1960s Libya, Indonesia and Qatar joined OPEC. OPEC was generally regarded as ineffective until political turbulence in Libya and Iraq strengthened their position in 1970. Additionally, increasing Soviet influence provided oil-producing countries with alternative means of transporting oil to markets.
Arab oil-producing countries had attempted to use oil as leverage to influence political events on two prior occasions—the first was the Suez Crisis in 1956 when the United Kingdom, France, and Israel invaded Egypt. During the conflict, the Syrians sabotaged both the Trans-Arabian Pipeline and the Iraq–Baniyas pipeline, which disrupted the supply of oil to Western Europe. The second instance was when war broke out between Egypt and Israel in 1967, but despite continued Egyptian and Syrian enmity against Israel, the embargo lasted only a few months. Most scholars agree that the 1967 embargo was ineffective.
Libya concludes five weeks of negotiations with Western oil companies in Tripoli on behalf of itself, Saudi Arabia, Algeria, and Iraq. The agreement raises posted prices of oil delivered to the Mediterranean from $2.55 to $3.45 per barrel; provides for a 2.5 percent annual price increase plus inflation allowance; raises the tax rate from a range of 50-58 percent to 60 percent of the posted price.
U.S. Government institutes Phase I price controls. Invoking the powers granted to the president by the Economic Stabilization Act of 1970, President Richard Nixon orders a 90-day nationwide freeze on all wages, prices, salaries, and rents.
In September 1973, President Nixon said, "Oil without a market, as Mr. Mossadegh learned many, many years ago, does not do a country much good", referring to the 1951 nationalization of the Iranian oil industry, but between October 1973 and February 1974 the OPEC countries raised by posted price fourfold to nearly $12. Because oil was priced in dollars, oil producers' real income decreased when the dollar started to float free of the old link to gold. In September 1971, OPEC issued a joint communiqué stating that from then on, they would price oil in terms of a fixed amount of gold.
Iraq nationalizes Iraq Petroleum Company's (IPC) concession owned by British Petroleum, Royal Dutch-Shell, Compagnie Francaise des Petroles, Mobil, and Standard Oil of New Jersey (now Exxon). The concessions were valued at over one billion dollars.
OPEC approves the plan providing for 25 percent government ownership of all Western oil interests operating within Kuwait, Qatar, Abu Dhabi, and Saudi Arabia beginning on January 1, 1973, and rising to 51 percent by January 1, 1983. (Iraq declines to agree.) Agreements were signed on December 21.
Shah of Iran announces that the 1954 operating agreement between a consortium of oil companies and Iran will not be renewed when it expires in 1979. The consortium was formed in 1954 as a means to settle a dispute between a new ministry in Iran and the Anglo-Iranian Oil Company (AIOC). The consortium included Standard Oil of New Jersey, Standard Oil of California, SOCONY-Vacuum, the Texas Company, Gulf, Royal Dutch-Shell, the Compagnie Francaise de Petroles, and the AIOC.
In 1973, Nixon announced the end of the quota system. Between 1970 and 1973 US imports of crude oil had nearly doubled, reaching 6.2 million barrels per day in 1973. Until 1973, an abundance of oil supply had kept the market price of oil lower than the posted price.
President Nixon's Cost of Living Council imposes a two-tier price ceiling on crude petroleum sales: production of "old" oil (that produced at or below 1972 levels from existing wells) to be sold at March 1973 prices plus 35 cents; production of "new" oil (that produced above 1972 levels from existing wells and oil produced from new wells) to be sold at uncontrolled prices.
The Gulf Six (Iran, Iraq, Abu Dhabi, Kuwait, Saudi Arabia, and Qatar) unilaterally raise the posted price of Saudi Light marker crude 17 percent from $3.12 to $3.65 per barrel and announce production cuts.
On October 12, 1973, US president Richard Nixon authorized Operation Nickel Grass, a strategic airlift to deliver weapons and supplies to Israel in order to replace its materiel losses, after the Soviet Union began sending arms to Syria and Egypt.
On October 17, Arab oil producers cut production by 5% and instituted an oil embargo against Israel's allies: the United States, the Netherlands, Rhodesia, South Africa, and Portugal.
Saudi Arabia only consented to the embargo after Nixon's promise of $2.2 billion in military aid to Israel. The embargo was accompanied by gradual monthly production cuts—by December, production had been cut to 25% of September levels.
In 1973, Nixon named William E. Simon as the first Administrator of the Federal Energy Office, a short-term organization created to coordinate the response to the embargo. Simon allocated states the same amount of domestic oil for 1974 that each had consumed in 1972, which worked for states whose populations were not increasing.
Japan was hard hit since it imported 90 percent of its oil from the Middle East. It had a stockpile good for 55 days, and another 20-day supply was en route. Facing its most serious crisis since 1945 the government ordered a 10% cut in the consumption of industrial oil and electricity. In December it ordered an immediate 20% cut in oil use and electric power to Japan's major industries and cutbacks in leisure automobile usage.
Despite being little affected by the embargo, the UK nonetheless faced an energy crisis of its own—a series of strikes by coal miners and railroad workers over the winter of 1973–74 became a major factor in the defeat of the Labour government. The new Conservative government told the British to heat only one room in their houses over the winter.
Japanese automakers also benefited from the crisis. The jump in gasoline prices helped their small, fuel-efficient models to gain market share from the "gas-guzzling" Detroit competition. This triggered a drop in American sales of American brands that lasted into the 1980s.
Year-round daylight saving time was implemented from January 6, 1974, to October 27, 1975, with a break between October 27, 1974, and February 23, 1975, when the country observed standard time. Parents complained loudly that it forced many children to travel to school before sunrise. The prior rules were restored in 1976.
Washington Energy Conference opens. Attended by 13 industrial and oil-producing nations. Called by the U.S. to resolve the international energy problems through economic cooperation among nations. Henry Kissinger unveils Nixon Administration's seven-point "Project Independence" plan to make the U.S. energy independent. Libya nationalizes three U.S. oil companies that had not agreed to 51 percent nationalization in September.
To help reduce consumption, in 1974 a national maximum speed limit of 55 mph (89 km/h) was imposed through the Emergency Highway Energy Conservation Act. Development of the Strategic Petroleum Reserve began in 1975, and in 1977 the cabinet-level Department of Energy was created, followed by the National Energy Act of 1978.
The crisis eased when the embargo was lifted in March 1974 after negotiations at the Washington Oil Summit, but the effects lingered throughout the 1970s. The dollar price of energy increased again the following year, amid the weakening competitive position of the dollar in world markets.
The average US retail price of a gallon of regular gasoline rose 43% from 38.5¢ in May 1973 to 55.1¢ in June 1974. State governments asked citizens not to put up Christmas lights. Oregon banned Christmas and commercial lighting altogether. Politicians called for a national gasoline rationing program.
World Bank establishes its "Third Window," a fund to make loans to countries too rich to qualify for "soft" no-interest loans, but too distressed to afford loans at the prevailing normal lending rates. The action represents significant cooperation between oil-exporting and industrial nations.
President Ford signs the Energy Policy and Conservation Act (EPCA) effective February 1976. Authorizes the establishment of the Strategic Petroleum Reserve (SPR), participation in the International Energy Program, and oil price regulation.
Student protests against the government of Reza Pahlavi, Shah of Iran, begin, touching off a wave of political unrest and violent clashes between police and demonstrators. Throughout the year increasing anti-Shah activities are led by Muslim fundamentalists seeking to establish a Muslim state.
Iran and Saudi Arabia block efforts of OPEC price hawks to fix the price of OPEC oil in a currency more stable than the U.S. dollar. Say the world economy cannot support associated price increases. Are accused by hawks of being U.S. agents.