Effects of the Oil Crises on the Global Economy
Oil plays an important role in the global economy. It is a valuable commodity that ‘fuels’ trade and movement in the economy because all nations rely on oil as their main source of energy. As a result, the supply and demand for oil worldwide as well as the fluctuation of oil prices significantly affect economic growth. Various events influence the production and price of oil, which then affect the economy. In the succeeding discussion, some of these events will be discussed in relation to the ‘Oil Shock of 1973’ and the ‘1979 Energy Crisis’. In the discussion, the effects of both crises on global economies, particularly inflation, will be discussed. The Oil Shock of 1973The oil shock of 1973 was a result of the oil embargo implemented by the Organization of Arab Petroleum Exporting Countries (OAPEC) in October 1973.
The embargo was the Arab nations’ response to the United States’ involvement in the Yom Kippur War. In an attempt to recover some of Egypt and Syria’s territories, both nations attacked Israel in 1967. US helped Israel by arming them with weapons to fight against Egypt and Syria’s forces (Stein, 2002). As a result, the OAPEC sanctioned an oil embargo affecting export of oil to US and its allies including the Canada, Japan, and the Netherlands among others. The Nixon administration sought to remedy the situation by negotiating with Israel to withdraw their troops from various territories including the Golan Heights. The US and Israel agreed on negotiations with Syria, which convinced OAPEC nations to lift the embargo in March 1974 (Spiegel, 2014).From 1973 to 1974, major stock markets around the world were beginning to suffer due to the market crash caused by the Bretton Woods system.
Through the system, nations in various regions including Canada, Japan, and the US agreed to a unified monetary policy. The oil shock of 1973 exacerbated the impact of the market crash (Odekon, 2015). Oil price increased and Arab nations cut down their production of oil particularly for non-ally nations in the West, while other nations were totally cut off from oil exports. With limited supply of oil in the market, oil exporting countries were able to increase the cost of oil (Spiegel, 2014). While OAPEC nations benefited from the increased cost of oil, the oil shock only exacerbated the declining economy in the US. Even before the oil shock, the US economy was on the decline following the devaluation of the dollar, the continued drainage of funds due to the Vietnam War, and reduced productivity. All of these were signs of US’ declining economy, only exacerbated by OAPEC’s control of oil prices.
In Europe, the embargo only affected countries allied with the US. After the embargo was implemented, European nations sought to disassociate themselves from US. Some European countries were not affected by the embargo as they received continuous supply of oil from oil-producing countries. Hence, the impact of the embargo in Europe was minimal. The United …