The Current Oil Crisis And How It Is Affecting The Economy

The Current Oil Crisis And How It Is Affecting The Economy Report on the Current Oil Crisis, How it is Affecting the Economy, and Some Possible Outcomes November 14, 2000 With the current spike in oil prices, many American consumers have asked, “what is going on?” In order to fully understand the current situation and how it is affecting the economy one must look at a variety of factors including: the history of oil crisis in the United States, causes of the current situation, and possible outcomes for the future. It is only after meticulous research in these topics that one is prepared to answer the question, “what is the best possible solution to the oil crisis?” Although many critics have not yet labeled the current oil situation a “crisis,” there is sufficient evidence that it is becoming more severe and is beginning to reflect oil crisis of the past. The current crude oil price spike began early in 1999 due to a variety of factors. Struggle in the Middle East along with minimal policy changes from the Organization of Petroleum Exporting Countries and the U.S. Government has kept prices high to this very day.

The History of Oil Crisis Within the United States Before looking at the current oil situation, it is important to understand the times of oil crisis in our country’s past. Through the years between 1970 and 2000, the price of oil has risen and fallen in often-drastic amounts. It is these price fluxuations in crude oil that has caused fuel prices to vary and the economy of the United States to be volatile. Throughout the past twenty years there have been several drastic changes in oil prices. These dramatic shifts are helpful to look at because of their impact upon the economy and the oil industry.

During this time period there are three major shifts in oil price that can be linked to specific events in world history (Miller, 1998). First, the Arab oil embargo of 1973 caused a widespread oil crisis and brought crude oil from three dollars a barrel to a staggering twelve dollars a barrel. Second, the 1979 Iranian revolution caused another crisis that brought crude oil prices to an all time high of thirty-six dollars per barrel. Finally, the third major shift occurred in 1991 due to the Persian Gulf War (Miller, 1998). ? Source: The Energy Information Administration (Hakes, 1998).

Oil crisis of 1973 The first large price shift in oil prices came in 1973. The oil crisis of 1973 began in the Mediterranean because of a war. The Yom Kippur War was a result of an attack on Israel by Syria and Egypt an October 5, 1973. Throughout history, the United States has always shown support for Israel and its campaigns. This situation was no different.

The United States and many countries in the western world showed strong support for Israel (Williams, 1999). As a result of this support, Arab exporting nations imposed an embargo on the nations supporting Israel (Williams, 1999). Because these nations had the power of a monopoly in the oil industry, they tried to use the embargo as a blackmail technique. The Arab nations began the embargo by curtailing oil production by five million barrels per day. In turn, the United States increased production in other countries by about one million barrels per day. The remaining net loss of four million barrels per day extended through March of 1974 and represented seven percent of the free-world production (Williams, 1999).

The oil embargo was imposed by Arab oil producers through the then-powerful cartel, the Organization of Petroleum Exporting Countries (OPEC)(Miller, 1998). OPEC was founded in 1960 with five members: Iraq, Kuwait, Saudi Arabia, and Venezuela. Six other nations had joined OPEC by the end of 1971. These included Qatar, Indonesia, United Arab Emirates, Algeria, and Nigeria. This cartel had experienced a decline in the real value of their product since the foundation of the Organization of Petroleum Exporting Countries (Williams, 1999). But in March of 1971, the power to control crude oil prices shifted from Texas and the United States to OPEC because of a change in governmental regulations. If there was any doubt that the ability to control crude oil prices had passed from the United States to OPEC, it was removed during the Arab Oil Embargo.

During the oil embargo, OPEC boosted prices from $2.90 per barrel before the embargo to $11.65 by Christmas. Prices in other markets were even worse; some Iranian oil went for $17 per barrel (Sheets, 1998). The extreme sensitivity of prices to supply shortages became all too apparent. Prices increased four hundred percent in six short months (Williams, 1999). Even though the OPEC induced embargo lasted only six months; it triggered worldwide energy shortages that lasted eight years, a global recession, and permanent changes in the oil market and U.S.

economy. In 1973, the President of the United States, Richard Nixon, tried to bring peace between the Arab states and Israel. His attention could have been more helpful if it was not overshadowed by the scandals of Watergate. The nation at this time was dependant upon foreign oil to keep its transportation systems and factories working (Sheets, 1998). In 1977 – four years after the embargo – President Jimmy Carter appeared on national television and declared “the moral equivalent of war” on the nation’s dependency on imported oil (Miller, 1998).

Because the nation was heavily dependent on outside sources for oil, the impact of shortages and higher prices rippled through the economy and left motorists in a predicament. According to Daniel Yergin in his book The Prize, “motorists waited in line an hour or two, with their engines running and their temperature rising, sometimes seeming to burn more gas than they were able to purchase.” When the crunch hit, motorists felt security in having a full tank and went to the pumps whenever the needle dipped below completely full. True, some stations had no gasoline and others rationed out what they had. But the main reason for the long lines was related to the increased trips of Americans to the gas pump (Popular Mechanics, 1996). Although the oil crisis of 1973 affected motorists, it also created havoc in other areas of transportation and the economy.

The airline industry was forced to cancel flights and raise the price of tickets. The United States government imposed a blanket fifty-five mile per hour speed limit so that fuel efficiency could be optimized. An all year daylight savings time was instigated as an energy-saving measure. During the holiday season many neighborhoods banned Christmas light displays and the population had to live with turning down their thermostats. Office building lights were extinguished and big-city skylines faded into the night (Sheets, 1998). The economy was also affected during this time.

As the oil crisis hit the country head on in 1973, the economy was slowed dramatically. The stock market became volatile and the American people were thrown into a time of uncertainty. One lasting effect on America that came out of this time of crisis was switch to smaller, more economical cars. For many years the general public had driven large cars made by Lincoln, Buick, and Cadillac. With the rise in fuel prices, Americans began to buy smaller imported cars. This shift of the market helped the Japanese who had been bringing in nothing but small cars for a decade.

But as always there are two sides to an issue. The American car manufacturers were hurt by the shift of the market. This decline in the U.S. auto industry further helped to push the economy into a slump (Popular Mechanics, 1996). Oil crisis of 1979 The oil embargo ended in the spring of 1974. But a second oil shock jolted the industrial world in the winter of 1978-1979, when crude oil shipments from Iran were halted by a revolution and the overthrow of the Shah (Sheets, 1998). Problems in the Middle East only escalated over the next few years as Iran and Iraq became involved in war.

The Iranian revolution resulted in the loss of two to two and a half million barrels per day between November of 1978 and June of 1979. In 1980, Iraq’s crude oil production fell by 2.7 million and Iran’s fell by six hundred thousand barrels of oil per day. The combination of these two events resulted in crude oil prices more than doubling from $14 in 1978 to $36 per barrel in 1981 (Williams, 1999). Once again this oil crisis sent the economy into disarray. Motorists had to line up outside of gas stations as they watched the prices go higher and higher. The same governmental controls were still in effect from the oil crisis of 1973 and energy saving methods were once again reinstated. The one thing that did change through the oil crisis of 1979 was the government’s attitude.

They began to realize that if nothing were done soon, the U.S. dependency upon foreign oil and the vicious cycle of oil problems would continue. Therefore, at this time the United States government launched programs to develop electric vehicle, gasohol blends, and expand oil exploration (Popular Mechanics, 1996). During the mid 1980’s, an oil glut developed as a result of a global recession and strict conservation measures (Sheets, 1998). The methods of conservation in the United States and other countries around the globe were finally making a difference. The price of oil plunged from $32 a barrel in 1985 to $10 a few weeks later. Some Persian Gulf cargoes sold for about $6 a barrel. The stranglehold that the Organization of Petroleum Exporting Countries had on the rest of the world was finally broken.

Although this price drop was good for American consumers, it did little to help the struggling U.S. oil industry. The recession in the petroleum industry caused companies to restructure, downsize, and adapt (Sheets, 1998). By the late 1980’s a newly refocused industry had emerged. It was this new industry that helped America find new sources of oil production and solidify that there would never again be another oil crisis to the extent of the ones in the past. Oil crisis of 1991 The third and final major oil crisis in U.S.

history began in 1991 as a result of the Persian Gulf War. This war originated in the Middle East when Iraq invaded Kuwait on August 2, 1990. After Iraq finished the invasion it proceeded to annex Kuwait, which it had long claimed (, 2000). Iraqi president Saddam Hussein declared that the invasion was a response to overproduction of oil in Kuwait, which had cost Iraq over fourteen million when oil prices fell. Saddam Hussein and the Iraqis also accused Kuwait of illegally pumping oil from Iraq’s Rumaila oil field (, 2000).

When the United Nations became involved, it called for Iraq to withdraw it’s troops and issued an embargo on trade with Iraq as well. Subsequently this embargo also applied to the vast amounts of oil that America depended on from Iraq and Kuwait. On August 7, United States troops moved into Saudi Arabia to protect Saudi oil reserves from their neighbors in the east (, 2000). When Iraq failed to meet the deadline for peaceful withdrawal set up by the United Nations, Operation Desert Storm was launched. This attack by the U.S.

and its allies began on January 18, 1991 and came to a close by the twenty-eighth of the following month. This war in the Persian Gulf had a great affect upon the U.S. economy. The shortages sustained during the conflict were comparable to those during the oil crisis of 1973 and 1979. Once again American consumers were forced to pay outrageous gas prices and deal with shortages at the gas pump. Also, the New York Stock Exchange was deeply impacted by the oil crisis that ensued due to the Persian Gulf War.

Stock prices plummeted and the American public went into a slight panic. The Current Oil Crisis Recently, oil prices have been rising at an unprecedented rate. Crude oil has been flirting with twenty to twenty-five dollars per barrel, levels almost reminiscent of the shocks of the seventies (Jaffe, 2000). These dramatic price increases have both impacted the U.S. and world economies.

Causes of the Current Oil Crisis Although there are many issues involved in oil’s recent price fluxuation, the causes can be narrowed down into three main factors: the influence of the Organization of Petroleum Exporting Countries (OPEC), the dependency of the U.S. upon foreign oil, and the recent conflicts in the Middle East. A near tripling in price of crude oil from March 1999 to the first months of 2000, coupled with developments, initially brought about sharp increases in the price of heating oil and gasoline. The influence of OPEC The first factor that is to be considered in determining the causes of the current oil crisis is the influence of OPEC. During this period of soaring oil price, concerns were raise that a commitment from OPEC producers to boost production by roughly two million barrels per day would be needed to replenish worldwide crude inventories and forestall the potential for price volitity and spot shortages of gasoline in late spring and summer of 2000 (Bamberger, 2000).

These petroleum-exporting countries held the power to continue the oil crisis by further cutting back on production and raise the crude price even higher. When OPEC adjusted the production quotas of member nations in March 1999, crude oil supply was reduced by approximately two million barrels per day from previous production levels. In its estimate of global demand for the remainder of 1999, OPEC seriously underestimated the demand for oil. By early 2000, the resulting supply balance from the production cuts was a contributing factor to a raise in crude prices to thirty-two dollars per barrel, significantly higher than the level targeted in the March 1999 meeting (Bamberger, 2000). In the United States, concerns about reliability of supply and the high price of oil fuels escalated all winter. By late winter, inventories were so low that gasoline supply and avoiding further price increases for the rest of 2000 appeared in jeopardy (Bamberger, 2000).

In the weeks prior to the Organization of Petroleum Exporting Countries’ meeting scheduled for March 27, 2000, the United States Administration vigorously pursued a diplomatic course to persuade the OPEC nations that the sharp run up in prices in prices and volatility in world markets threatened the generally upbeat international economic climate (Bamberger, 2000). Due to these diplomatic efforts, most of the OPEC producers agreed that a boost in production was warranted. On March 28, 2000, OPEC and other producers agreed to raise production (Bamberger, 2000). This increase in production followed up on anticipation of price drops and caused crude oil prices to decline to roughly twenty-five dollars per barrel by the end of the first week of April. Still, this price of crude oil was significantly higher than in the past few years and brought consumers to question the stability of the oil market. The dependency of the United States upon foreign oil In its annual report, the Department of Energy forecasted that the United States dependence on imported oil will grow to sixty-six percent by 2020, far higher than the record set in 1998 of fifty percent (Miller, 1998).

To illustrate how much this percent has changed over the past twenty years, at the time of the 1973 oil embargo the nation was importing a mere thirty-three percent of its oil. This increase in oil imports is largely due to a reduction in oil production within the United States and an increase in U.S. demand for petroleum products (Miller, 1998). There are a variety of factors that are involved in the decision to import. The truth from an economic perspective is that it is cheaper to import oil rather than to try to develop it domestically. It is also true that any reasonable level of dependen …