International economic relations the 1973 oil crisis and its effects on the international economy

MINISTRY OF FOREIGN AFFAIRS DIPLOMATIC ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL ECONOMICS ======*****====== INTERNATIONAL ECONOMIC RELATIONS THE 1973 OIL CRISIS AND ITS EFFECTS ON

MINISTRY OF FOREIGN AFFAIRS

DIPLOMATIC ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL ECONOMICS

======*****======

INTERNATIONAL ECONOMIC RELATIONS

THE 1973 OIL CRISIS AND ITS EFFECTS

ON THE INTERNATIONAL ECONOMY

Ms Nguyễn Ngọc Hà

Nguyễn Lê Minh Anh KDQT48C1 - 0009

Hoàng Bảo Lam KDQT48C1 - 0051Phạm Tùng Dương KDQT48C1 - 0037

Hanoi, November 2022

TABLE OF CONTENTS

LIST OF ACRONYMS 3

A INTRODUCTION 4

B CONTENTS 5

CHAPTER 1: THEORETICAL BASIS 5

1.1 Definition of Oil Prices 5

1.2 Definition of Oil Crisis 5

1.3 What is OPEC? 6

CHAPTER 2: ABOUT THE 1973 OIL CRISIS 7

2.1 Background 7

CHAPTER 3: THE 1973 OIL CRISIS ECONOMY EFFECTS AND ITS CONSEQUENCES 10

3.1 Energy Crisis: Effects on the globe in general 10

3.1.1 Energy Crisis: Effects on the economy 10

3.1.1.1 The US 11

3.1.1.2 Jap an 11

3.1.2 Energy Crisis: Effects on the industry 13

3.1.2.1 West European 13

3.1.2.2 The US 13

3.1.2.3 Japan 14

3.2 Effects on human 14

3.2.1 Lost jobs 14

3.2.2 Lower consumer confidence 14

3.3 Energy Crisis: Lasting impact 15

CHAPTER 4: DISCUSSIONS 16

4.1 Evaluation of the Oil Crisis 16

4.2 Practical research finding: Russia - Ukraine W ar 16

C CONCLUSION 18

D REFERENCES 19

MEMBERS PERFORMANCE EVALUATI ON 22

LIST OF ACRONYMS

2 GDP Gross Domestic Product

3 OPEC Organization of Petroleum Exporting Countries

4 OAPEC Organization of Arab Petroleum Exporting

Countries

6 WCS Western Canadian Select

7 WTI West Texas Intermediate

A INTRODUCTION

Recently, the crisis between Russia and Ukraine caused the dramatic increase

of the oil price Not only did the oil price climb unexpectedly, the world economy also changed Link it to 1973, there was an oil crisis happening in this year The multifaceted effects of sudden, unexpected, and significant increases in the price

of crude petroleum were at the root of the oil crises of the 1970s The crises had immediate and undeniable effects on the global economy in addition to having a significant impact on events in the Middle East and the oil business, where they both originated

The 1973 crisis in particular led to a rift between the United States and its transatlantic allies, Japan's first break with American foreign policy since the Second World War, and intense discussion about energy and broader foreign policy issues within the recently expanded European Economic Community For the ostensibly fortunate oil producers, it produced a dramatic increase in oil revenues twice in a single decade For oil consumers, whether industrialized nations or less-developed countries, it increased the cost of imports severalfold The countries that export oil exploited their new power in international politics

to push for a significant reworking of the historical connections between rich and developing countries, especially a New International Economic Order The global economic institutions struggled to absorb the influx of petrodollars into an unsteady global economy, and OPEC meetings, which had previously been mostly ignored by the international press, now dominated news coverage

It is necessary to briefly discuss the role played by petroleum and its derivatives

in the global economy in order to understand why, during a period of rising inflation and in a world economy dominated by the industrialized countries, an increase in the price of one commodity should have had such an impact For that reason, in this essay, our group will investigate ideas to make clear of the oil crisis in 1973 and its impacts on the world economy and from the data that we have gathered, we will give our opinions about this crisis

B CONTENTS CHAPTER 1: THEORETICAL BASIS

1.1 Definition Oil Prices of

Oil prices are mostly known as the price of crude oil, from which petroleum products such as gasoline are derived There is not one price for crude oil but many World crude oil prices measure the spot price of various barrels of oil, the most common markets are the three market traded benchmarks: WTI, Brent Crude and the Dubai Crude The reference basket price of the OPEC, the futures price of the New York Mercantile Exchange and WCS are also sometimes quoted What drives the price of oil? Oil prices are influenced by a number of factors beyond the traditional movements of supply, demand and political instability Firstly, current supply and future supply has to do with how much oil is available Supply has traditionally been determined by countries that are part of OPEC But now, the United States is contributing more to supply thanks to booming production from American shale fields So if major oil-producing countries are pumping out a lot of petroleum, the supply will be high which leads

to the steadiness of the price of oil

Secondly, the required amount of oil at a particular time determines demand Frequently, that demand is for things like transportation, heat, and energy The more economic growth a region experiences, the more demand there will be for oil

Lastly, since the major oil-producing nations control supply, tension with one

of them can have a significant negative impact Therefore, if there’s war or conflict in an oil-producing region, crude inventories may appear threatened, which could ultimately affect the oil price

1.2 Definition Oil Crisis of

An oil crisis can be best defined as a sharp increase in the oil price supplemented by a sudden decrease in the oil supply Oil is known as one of the biggest drivers of energy especially in the advanced industrial economy, because

of that reason any form of oil crisis can lead up to severe economic and political instability Depending on the severity of the crisis, it can debilitate the global

economy which causes a worldwide recession or a significant reduction in global real GDP below projected rates by 2-3% percentage points

1.3 What is OPEC?

The OPEC is a permanent, intergovernmental organization, created at the Baghdad Conference on September 10 to September 14, 1960, by founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela Until now, 16 countries have joined OPEC totally

According to the OPEC website, OPEC's objective is to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry The organization is dedicated to figuring out how to make sure that there are no significant changes in the price of oil on the global market By doing this, it is possible to protect member countries' interests while ensuring that they continue to earn consistent revenue from the unbroken flow of crude oil to other nations

CHAPTER 2 ABOUT THE 1973 OIL CRISIS : 2.1 Background

After World War 2, during the 1950s and 1960s, the US controlled 90% of all oil exports from developing countries The U imported 350 million barrels a S year in the late 1950s, mainly from Venezuela and Canada Due to shipping costs and tariffs, they never buy much oil from the Middle East

Figure: US Oil Production and Imports, 1920 - 2000

(Source: US Energy Information Administration)

By around 1969 to 1970, America's domestic oil production had peaked to 9.5 million BPD but still could not keep up with the growing demand from transportation Because of that, the US began to import more oil to serve people’s demand Between 1973 to 1979, US crude oil imports nearly doubled, reaching 6.6 million BPD; 83% of the oil supply came from the Middle East while its production had declined 16% to 8.1 million BPD of global output

There has been Arab-Israeli conflict in the Middle East since the State of Israel was recreated in 1948 The Suez Crisis, also known as the Second Arab-Israel War, was listed among many battles fought between Israel and Arab countries (1956) During the Six-Day War, which started in June 1967, Israel invaded the

Golan Heights from Syria, the Sinai Peninsula from Egypt which advanced all the way to the Suez Canal, forcing Egypt to close the canal for eight years, and East Jerusalem from Jordan

Figure: Israel territory before and after the Six Day War, 1967

(Source: BBC News)

Because of the desire to regain sovereignty, Egyptian president Anwar Sadat and Syria (supported by several Arab nations) launched an attack against Israel which came to be known as the Yom-Kippur War After some deliberation, the leaders of Egypt and Syria decided to launch the attack on Israel at 6 pm on October 6, 1973 At that time, Israel was unexpectedly attacked without warning Even so, everything remained under Israeli control, after a few days, Israeli military forces defeated the Syrian campaign in the southern Golan Heights About Egypt, the battle is more difficult for Israel, when facing the risk of losing, Israel has asked the US to be their ally because the US has a close relationship with the Soviet Union - the source of weapons for Egypt and Syria

Al-A $2.2 billion in military aid was immediately approved by the US afterward Israel adjusted its strategy at the time, holding back Egypt Surprisingly, at the

time, the US had rising oil consumption, declining oil output, and rising oil imports, primarily from OPEC nations

An oil embargo was announced during a conference in Egypt between members of the OAPEC, led by Saudi Arabia Targets of the embargo were countries that had supported Israel during the Yom Kippur War The oil-producing Arab nations viewed American political and economic support of Israel during the Yom Kippur War as siding with their enemy, and they sought

to bring a harsh punishment Along with the US, many other developed nations were targeted as these countries were allies of the US, including Canada, Japan, the Netherlands, and the United Kingdom The embargo later expanded to Portugal, Rhodesia, and South Africa as well

CHAPTER 3: THE 1973 OIL CRISIS ECONOMY EFFECTS AND ITS CONSEQUENCES

The OPEC embargo demonstrated the new power of the cartels in the global economy and took many Americans by surprise as another example of their decline in the 1970s Once the embargo took effect, the price of oil per barrel first doubled, then quadrupled from $3 to $12 a barrel When retail gasoline prices climbed by as much as 40 percent in November 1973 alone, the impact hit American consumers in their wallets Fearing gasoline shortages, Americans lined up at gas stations to fill up, and gas stations raised prices several times a day Fuel Line revealed the panic that occurred during the embargo as motorists feared that if they didn't refuel today, prices could rise tomorrow Unsurprisingly, many gas stations were running low on fuel due to high demand, and late fall saw widespread "Sorry, no gas today" signs

Western European countries and Japan, key US allies, which source 45-50%

of their oil from OPEC, faced an even more difficult problem due to the embargo A global recession seemed to loom as the embargo coincided with the devaluation of the dollar.The US allies in Europe and Japan had accelerated oil stockpiles to provide short-term buffers, but high oil prices and the long-term prospect of recession have created a split within the Atlantic Alliance European nations and Japan found themselves in the uncomfortable position of needing

US assistance to secure energy sources, even as they sought to distance themselves from US Middle East policy Faced with increasing reliance on oil consumption and declining domestic reserves, the US is relying more than ever

on imported oil, amid difficult domestic economic conditions that help weaken its international influence, so they had to negotiate the end of the embargo

In terms of just economics, the embargo and its effects had significant macro impacts The macroeconomic situation was made more difficult by the 1973–

1974 oil crisis, particularly concerning inflation

Since then, economists have known that a central bank can control how much supply shocks affect inflation, but there is a cost to doing so Higher oil prices tend to result in both slower growth and inflationary pressures because of the impact they have on commodities These forces often have an inverse connection over the short term, which means that as one increases, the other decreases, and vice versa.

The 1973 oil embargo was only one of many complex variables that caused American officials to overestimate the country s potential and underestimate ’their contribution to the widespread inflation that took place during the 1970s

3.1.1.1 The US

According to reports, the price shock of 1973 caused the US economy to contract by almost 2.5 percent, increased unemployment and inflation, and plunged the country into a deep and protracted recession (1973 1975) – After decades of plentiful supply and rising use, Americans faced price increases and fuel shortages, which resulted in long queues at gas stations around the nation Local, state, and federal officials demanded energy-saving measures, requesting that gas stations close on Sundays and that residents forgo putting up holiday lights on their homes.”It continues to affect the standard of living of the populations of oil importing countries, where economic growth is still hampered by the fourfold increase in oil prices that followed the Arab -Israeli conflict of 1973, and foreign policy, especially of the United States, is heavily influenced by the fear that supplies will be withheld” said by Geoffrey Kirk

3.1.1.2 Japan

Japan faced two main challenges: the remarkable inflation and transition from one model of high economic growth to another

Figure: Compared Economic Growth Japan, US, United Kingdom; 1970 1975

-(Source: Procedia Economics and Finance)

About the economic growth, in a comparison of the three nations, Japan, the

US and the United Kingdom, we can see that the Japanese economy was the most affected, with a drop of nearly 10% to -1% in 1974, while the US had a 6% drop to -0.5% in 1974 and the United Kingdom had a decrease of 8.5% to -1.2%

Figure: Compared Inflation Japan, US, United Kingdom; 1970 1975

-(Source: Procedia Economics and Finance)

Comparing the evolution of inflation in the three nations studied in the eighth figure, we can observe that Japan has seen the most overall growth in consumer prices over 18%, from 5% to 23.20%, whereas the US increased by over 9% and the UK by more than 7.5% The sharp rise in consumer prices was caused

by several factors, including rising power costs The majority of Japan ’s electrical system was made up of thermal power plants that burned imported oil during the period of low oil prices Electricity costs rose dramatically as a result

of the resource s increasing cost, surpassing those in other industrialized ’