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Forex

The first oil embargo that shook the world

The first oil embargo that shook the world

June 24, 2019, | SQUARED DIRECT – When the United States decided to abolish the gold standard in 1971, widely known as the Nixon Shock, foreign countries could no longer redeem their foreign exchange dollar reserves for gold. Nixon’s move had gold prices shooting up to really high levels, at $445 per ounce, but because it came abruptly with no contingency plans set before the change, the value of the dollar collapsed.

OPEC member countries were directly affected because all oil contracts were priced in dollars which meant that they were suddenly losing a lot of revenue. OPEC was seriously considering pricing oil in gold to be able to sustain oil revenue and even tried to do so but to no avail.

The 1973 Arab Oil Crisis

However, the tell-tale event that shook the world economy was the Yom Kippur war of 1973 between Egypt and Israel. On October 19 of that year, President Nixon requested $2.2bln as military aid for Israel from the US Congress. This had upset OPEC to the point where it stopped all its oil exports to the US and any other Israeli ally.

While a truce to the war was signed 6 days later, on the 25th of October, the oil embargo remained until March of 1974 and effectively ended in May 1974 when Israel withdrew from the Golan Heights. OPEC’s oil embargo made oil prices rise from $2.90 to $11.90 per barrel.

Result of the Oil Embargo

It is said that the 1973-1975 recession of the US economy was directly correlated to OPEC’s 1973 embargo. However, various policies like the Federal Reserve’s “stop-go” and wage-price controls had contributed to the recession. Unemployment was high because companies had to lay off a lot of employees and prices for consumers could not be lowered so demand could be boosted. The interest rate at the time was constantly see-sawing and businesses were unable to plan for the future causing inflation to skyrocket. American oil supply was low and was unable to keep up with the growing demand, so a petrol rations policy had to be put in place. 

Other countries that were reliant on Middle-Eastern oil were also negatively affected by the embargo. For example, the economy of the UK fell by 8.5% while inflation rose to 24% causing strikes and eventually a change of government. Japan was also hit hard because its economy was heavily reliant on oil imports. About 50% of all employees across Japan had to be laid off, inflation rose to 23% and the trade deficit was $6bln in 1974. The Japanese had to remodel their economy and industry to readapt to this change.

On the other side, countries that had an economy which did not rely on oil imports were not so seriously affected. China, another major oil producer in Asia greatly benefited from the oil embargo by exporting its oil to oil-starved Japan, the Philippines, and Thailand which provided great revenue that was used to restructure and modernize its economy.

The 1973 Arab Oil Crisis made the history books as an event that forced the globe to change the way it did business and severely affected the world’s strongest economies. Oil is probably the most.

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