The 1973 Oil Crisis

There are many similarities between the early 1970s and our current political environment and not just with the US Presidents of then and now. During the early 1970s, the US walked away from several important agreements and cozied up with countries that caused further issues – one such issue was the 1973 Oil Crisis.

There were two main players in the crisis and many others who were affected. The US was one and the OAPEC was the other. OAPEC was the Organisation of Arab Petroleum Exporting Countries, made up of some of the Arab members of OPEC – the Organisation of Petroleum Exporting Countries – (being Kuwait, Libya and Saudi Arabia) plus Algeria and Egypt. Venezuela, Iran and Iraq were founding members of OPEC but not in OAPEC.

By the early 1970s, OPEC had formally expanded to include Algeria, Indonesia, Libya, Nigeria, Qatar and the United Arab Emirates with OAPEC working as a political organisation rather than an oil industry association. Incidentally, OPEC was formed in 1960 to fight the “Seven Sisters” – the top oil companies of which five were US based. The Governments of the oil producing countries wanted to take control of the minerals coming out of their lands.

Several issues conspired to bring on the oil crisis in 1973
Firstly, the US had started to see their domestic oil production move towards a decline. The technology we have today and the refining techniques were not available then. The Government started to get nervous as that meant that they would have to import more from OPEC sourced wells – and they were fighting against the US oil companies. Bearing in mind that the Vietnam War was still raging and the US needed oil.

In 1971, President Nixon pulled out of the Bretton Woods Agreement that tied the US Dollar to the price of gold. This meant the currency could float on an open exchange. However, many other countries then followed suit effectively killing off the agreement and because the Government economists thought that their currencies would be volatile, they increased their monetary reserves which in turn deflated the value of the US Dollar as well as other currencies! The price of oil was historically defined in US Dollars and this meant that the income from oil sales was reduced. OPEC then tied the oil price to the gold price to try and recover lost revenue.

The outcome of this was that the main stock markets crashed causing significant economic disruptions across the US and Europe. Britain was badly hurt and I remember the 3-day week as well as the military being used for ambulance services thanks to the unrest that also resulted from this event. In effect Nixon had damaged the western world by his actions!

The next issue that was a factor in the Oil Crisis was the Yom Kippur War that started in October 1973. Egypt and Syria attacked Israel which didn’t help economic matters. The US then sold weapons to Israel and the Soviet Union backed Egypt and Syria. OPEC was less than pleased that the US was helping Israel – Iran, one of the OPEC founders, was at that time a very big ally of the US however they had been feeling ripped off by the US over oil. They were selling crude oil to the refining companies cheaply and getting back expensive consumer fuels.

OPEC’s response to the US was to raise the price of a barrel of oil by 70%! OPEC then collectively agreed to start reducing production to force the price even higher – with less on the market, the highest bidder would get the liquid. To finish off the response, they created an embargo to limit the amount shipped to the US, the UK, Canada, Japan and the Netherlands – all high users of their product.

OPEC continued to trim production, forcing President Nixon to enact the Emergency Petroleum Allocation Act that put into place controls to manage pricing, production and the marketing of oil. For several months, oil production was cut and the embargo widened to other countries. During early 1974, OPEC stopped cutting production volumes, Israel agreed to return to its territories and then OPEC lifted the embargo. The global economic conditions started to improve by the end of the year.

For the car industry, the Oil Crisis was a disaster – people couldn’t get enough fuel to run their vehicles, the economy had collapsed so buyers were getting rarer and the workplace unrest that came out of it almost killed many manufacturing facilities, forcing various Governments to bail out or buy their car companies. All the while, the taxpayer was being asked for more duties on products. In Britain a Value-Added Tax was implemented that raised the price of many products by 10% with petrol having a 12.5% VAT added in 1974!

For the larger manufacturers, build quality fell off a cliff especially in Britain and Italy where strikes and union unrest caused massive problems – no one wants a mass produced car built in those countries from that period! For many smaller, niche manufacturers, they simply went to the wall and failed and for manufacturers who produced luxury cars with big V8s, it was a tough time. However, on the bright side, it forced manufacturers to look at the fuel economy figures for their vehicles and to increase them. New technologies came to market although many cars had their power outputs cut to achieve the initial aim.

There were many knock-on effects from the desire by President Nixon to walk away from the Bretton Woods Agreement and it caused widespread unrest politically as well as economically. The old saying that “you reap what you sew” is very apt. Unfortunately we are in a similar period of political uncertainty thanks to having a bull running through the china shop of the world’s economy and it’s unlikely that it will want to pay for any breakages.