Development of the Petroleum Industry
During the period of the Six Day War (1967) OAPEC members announced an embargo towards countries aiding Israel; Iraqi and Saudi oil lines became shut down. Then 900 tons less were exported each day and also the Suez Canal was closed at that time, so the exploitation was raised in the United States, Venezuela, Iran and Indonesia.
In the end Iran and Saudi Arabia boycotted the embargo and they could manage to avoid a serious crisis. The only losers of this event were those Arab countries that were closing down the export.
In the early 1970’s under President Nixon’s order, the United States of America began shipping arms to Israel.
In 1993 the Yom Kippur War broke out between Israel and Egypt (and several Arabian countries). This war gave the OPEC additional reasons to intervene: they imposed export quotas, reduced production by 25% and nationalized production facilities. The oil crisis started on October 17th 1973 and lasted until June 1974. Not long after the start of the War, when the Arab countries decided to turn to the ‘oil weapon’ again; the Organization of Arab Petroleum Exporting Countries announced the reduction of oil exploitation by 5% each month in those countries supporting Israel in the conflict during the war. In their opinion Israel could stand against the attack of the other two counties because the West gave them help. They wanted to undermine Israel’s support, mainly the USA, so oil became a geopolitical weapon.
The market became controlled by supply by oil producers, causing the first oil shock.
The oil embargo affected the United States of America, its western European federates and also Japan. During this half year period the western world was facing with the strategic significance of oil and its shortage for the first time. For example in the States at the top of the crisis on even days only cars ending with even registration number and on odd days cars ending with odd number were allowed for a while to be refueled. This embargo damaged the U.S. economy so greatly that many were unsure if the country would escape such devastation.
Among the few countries that were affected, the United States suffered greatly, because after they gave aid to Israel the whole oil export ended toward them.
The ability to control crude oil prices was passed from the United States to OPEC, and it was removed during the Arab Oil Embargo. Prices increased 400% in 6 months, and the extreme sensitivity of prices to supply shortages became all too apparent at that time.
The world crude oil price was relatively flat from 1974 to 1978, ranging from 12.21 dollars per barrel to 13.55 per barrel, but when adjusted for inflation world oil prices were in a period of moderate decline.
The crisis in 1973 had a huge effect on the world market, because this year the oil export from the Near East amounted 1 billion tons, and 40% of the petroleum of the bourgeois world originates from this region – England 73%, France 83%, Italy 85% …
As a result of the shortage of oil petrol and gas oil prices increased, so the forestalling of fuel started. This resulted in bigger shortage and prices became higher and higher. In America the rise of prices almost caused a shock just like the world war.
Prices started to fall at the New York Stock Exchange, restrictions were introduced for car usage, and people were encouraged to use less energy.
With the start of the embargo, U.S. imports of oil from the Arab countries decreased from 1.2 million barrels a day to a mere 19,000 barrels. Daily consumption dropped by 6.1% from September to February, and by the summer of 1974, by 7 percent as the United States of America suffered its first fuel shortage since World War II.
The impact of the embargo was drastic and it had an immediate effect on the whole economy. In the United States of America the retail price of a gallon of gasoline rose from a national average of 38.5 cents in May of 1973 to 55.1 cents in June of 1974. Meanwhile, The New York Stock Exchange shares lost $ 97 billion dollars in value in 6 weeks.
Prices were rising since 1971 and by 1973 the price of petroleum reached the 11,68 USD/ton, this means that the prices became 10 times higher than they were originally. It could occur because of the disharmony of the consumer countries and so they could not make movements together against the embargo (for example anti-Americanism in France).
In times of shortage or oversupply crude oil prices behave much as any other commodity with wide price deflections. The crude oil price cycle may circulate over many years responding to changes in demand as well as OPEC and non-OPEC supply.
From 1974 to 1978 under the control of the OPEC, the price of oil still remained high but stable: around $12 per barrel. Many developed countries started to worry about the unreliable supply sources and the exhaustion of oil reserves, but they did not do much one on this regard. The Iranian revolution in 1979 and the ensuing Iran-Iraq War lasting from 1980 to 1988 caused the second oil shock where the price of oil surged over $35 per barrel, this imposed several drastic – but somewhat temporary – measures to lower oil consumption. This resulted in a relocation of energy-consuming industries, in strategies for consuming less energy, such as energy efficient cars and appliances, in relying more on national energy sources like petroleum, coal, natural gas, hydroelectricity, nuclear energy, in building strategic reserves, and in substituting petroleum for other energy sources when it is possible. About 2 billion barrels are estimated to be held in strategic reserves all around the world, the bulk of it in the United States, Germany and Japan. In 1980 the Carter Doctrine, which states that the United States would intervene militarily if its oil supply was compromised, is also the outcome of the uncertainties derived from the first and second oil shocks. The military presence of the United States in the Middle-East was extended, as the oil of the Persian Gulf was clearly perceived as of foremost significance to the national security.