(Tiểu luận) international economic relations the 1973 oil crisis and its effects on the international economy

MINISTRY OF FOREIGN AFFAIRS
DIPLOMATIC ACADEMY OF VIETNAM
FACULTY OF INTERNATIONAL ECONOMICS
======*****======

INTERNATIONAL ECONOMIC RELATIONS

THE 1973 OIL CRISIS AND ITS EFFECTS
ON THE INTERNATIONAL ECONOMY
Instructor : Ph.D Lâm Thanh Hà
Ms. Nguyễn Ngọc Hà
Class

: QHKTQT (2)

Group

: 11

Student

: Phạm Thùy Bạch Dương KDQT48C1 - 0036
Nguyễn Lê Minh Anh

KDQT48C1 - 0009

Lê Hương Ly

KDQT48C1 - 0064

Hoàng Bảo Lam

KDQT48C1 - 0051

Phạm Tùng Dương

KDQT48C1 - 0037

Hanoi, November 2022

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TABLE OF CONTENTS
LIST OF ACRONYMS ...................................................................................................... 3
A. INTRODUCTION ....................................................................................................... 4
B. CONTENTS ................................................................................................................. 5
CHAPTER 1: THEORETICAL BASIS ....................................................................... 5
1.1.

Definition of Oil Prices .................................................................................. 5

1.2.

Definition of Oil Crisis ................................................................................... 5

1.3. What is OPEC? .............................................................................................. 6
CHAPTER 2: ABOUT THE 1973 OIL CRISIS ........................................................... 7
2.1.

Background .................................................................................................... 7

CHAPTER 3: THE 1973 OIL CRISIS ECONOMY EFFECTS AND ITS
CONSEQUENCES ....................................................................................................... 10
3.1.

Energy Crisis: Effects on the globe in general ............................................ 10

3.1.1. Energy Crisis: Effects on the economy ..................................................... 10
3.1.1.1. The US.................................................................................................. 11
3.1.1.2. Jap an .................................................................................................... 11
3.1.2. Energy Crisis: Effects on the industry ....................................................... 13
3.1.2.1. West European ..................................................................................... 13
3.1.2.2. The US.................................................................................................. 13
3.1.2.3. Japan .................................................................................................... 14
3.2. Effects on human .......................................................................................... 14
3.2.1. Lost jobs ...................................................................................................... 14
3.2.2. Lower consumer confidence ...................................................................... 14
3.3. Energy Crisis: Lasting impact ..................................................................... 15
CHAPTER 4: DISCUSSIONS .................................................................................... 16
4.1.

Evaluation of the Oil Crisis ......................................................................... 16

4.2.

Practical research finding: Russia - Ukraine War ...................................... 16

C. CONCLUSION .......................................................................................................... 18
D. REFERENCES .......................................................................................................... 19
MEMBERS PERFORMANCE EVALUATION ........................................................... 22

2

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LIST OF ACRONYMS
No.

Acronym

Meaning

1.
2.

BPD
GDP

Barrels Per Day
Gross Domestic Product

3.
4.

OPEC
OAPEC

5.

US

Organization of Petroleum Exporting Countries
Organization of Arab Petroleum Exporting
Countries
United States

6.
7.

WCS
WTI

Western Canadian Select
West Texas Intermediate

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A. INTRODUCTION
Recently, the crisis between Russia and Ukraine caused the dramatic increase
of the oil price. Not only did the oil price climb unexpectedly, the world economy

also changed. Link it to 1973, there was an oil crisis happening in this year. The
multifaceted effects of sudden, unexpected, and significant increases in the price
of crude petroleum were at the root of the oil crises of the 1970s. The crises had
immediate and undeniable effects on the global economy in addition to having a
significant impact on events in the Middle East and the oil business, where they
both originated.
The 1973 crisis in particular led to a rift between the United States and its
transatlantic allies, Japan's first break with American foreign policy since the
Second World War, and intense discussion about energy and broader foreign
policy issues within the recently expanded European Economic Community. For
the ostensibly fortunate oil producers, it produced a dramatic increase in oil
revenues twice in a single decade. For oil consumers, whether industrialized
nations or less-developed countries, it increased the cost of imports severalfold.
The countries that export oil exploited their new power in international politics
to push for a significant reworking of the historical connections between rich and
developing countries, especially a New International Economic Order.
The global economic institutions struggled to absorb the influx of petrodollars
into an unsteady global economy, and OPEC meetings, which had previously
been mostly ignored by the international press, now dominated news coverage.
It is necessary to briefly discuss the role played by petroleum and its derivatives
in the global economy in order to understand why, during a period of rising
inflation and in a world economy dominated by the industrialized countries, an
increase in the price of one commodity should have had such an impact. For that
reason, in this essay, our group will investigate ideas to make clear of the oil
crisis in 1973 and its impacts on the world economy and from the data that we
have gathered, we will give our opinions about this crisis.

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B. CONTENTS
CHAPTER 1: THEORETICAL BASIS
1.1. Definition of Oil Prices
Oil prices are mostly known as the price of crude oil, from which petroleum
products such as gasoline are derived. There is not one price for crude oil but
many. World crude oil prices measure the spot price of various barrels of oil, the
most common markets are the three market traded benchmarks: WTI, Brent
Crude and the Dubai Crude. The reference basket price of the OPEC, the futures
price of the New York Mercantile Exchange and WCS are also sometimes quoted.
What drives the price of oil? Oil prices are influenced by a number of factors
beyond the traditional movements of supply, demand and political instability.
Firstly, current supply and future supply has to do with how much oil is
available. Supply has traditionally been determined by countries that are part of
OPEC. But now, the United States is contributing more to supply thanks to
booming production from American shale fields. So if major oil-producing
countries are pumping out a lot of petroleum, the supply will be high which leads
to the steadiness of the price of oil.
Secondly, the required amount of oil at a particular time determines demand.
Frequently, that demand is for things like transportation, heat, and energy. The
more economic growth a region experiences, the more demand there will be for
oil.
Lastly, since the major oil-producing nations control supply, tension with one
of them can have a significant negative impact. Therefore, if there’s war or
conflict in an oil-producing region, crude inventories may appear threatened,

which could ultimately affect the oil price.
1.2. Definition of Oil Crisis
An oil crisis can be best defined as a sharp increase in the oil price
supplemented by a sudden decrease in the oil supply. Oil is known as one of the
biggest drivers of energy especially in the advanced industrial economy, because
of that reason any form of oil crisis can lead up to severe economic and political
instability. Depending on the severity of the crisis, it can debilitate the global
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economy which causes a worldwide recession or a significant reduction in global
real GDP below projected rates by 2-3% percentage points.
1.3. What is OPEC?
The OPEC is a permanent, intergovernmental organization, created at the
Baghdad Conference on September 10 to September 14, 1960, by founding
members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Until now, 16
countries have joined OPEC totally.
According to the OPEC website, OPEC's objective is to coordinate and unify
petroleum policies among Member Countries, in order to secure fair and stable
prices for petroleum producers; an efficient, economic and regular supply of
petroleum to consuming nations; and a fair return on capital to those investing in
the industry. The organization is dedicated to figuring out how to make sure that
there are no significant changes in the price of oil on the global market. By doing
this, it is possible to protect member countries' interests while ensuring that they

continue to earn consistent revenue from the unbroken flow of crude oil to other
nations.

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CHAPTER 2: ABOUT THE 1973 OIL CRISIS
2.1.Background
2.1.1. The decline of American production
After World War 2, during the 1950s and 1960s, the US controlled 90% of all
oil exports from developing countries. The U S imported 350 million barrels a
year in the late 1950s, mainly from Venezuela and Canada. Due to shipping costs
and tariffs, they never buy much oil from the Middle East.

Figure: US Oil Production and Imports, 1920 - 2000
(Source: US Energy Information Administration)
By around 1969 to 1970, America's domestic oil production had peaked to 9.5
million BPD but still could not keep up with the growing demand from
transportation. Because of that, the US began to import more oil to serve
people’s demand. Between 1973 to 1979, US crude oil imports nearly doubled,
reaching 6.6 million BPD; 83% of the oil supply came from the Middle East
while its production had declined 16% to 8.1 million BPD of global output.
2.1.2. The conflict between Arab – Israel
There has been Arab-Israeli conflict in the Middle East since the State of Israel

was recreated in 1948. The Suez Crisis, also known as the Second Arab-Israel
War, was listed among many battles fought between Israel and Arab countries
(1956). During the Six-Day War, which started in June 1967, Israel invaded the
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Golan Heights from Syria, the Sinai Peninsula from Egypt which advanced all
the way to the Suez Canal, forcing Egypt to close the canal for eight years, and
East Jerusalem from Jordan.

Figure: Israel territory before and after the Six Day War, 1967
(Source: BBC News)
Because of the desire to regain sovereignty, Egyptian president Anwar AlSadat and Syria (supported by several Arab nations) launched an attack against
Israel which came to be known as the Yom-Kippur War. After some deliberation,
the leaders of Egypt and Syria decided to launch the attack on Israel at 6 pm on
October 6, 1973. At that time, Israel was unexpectedly attacked without warning.
Even so, everything remained under Israeli control, after a few days, Israeli
military forces defeated the Syrian campaign in the southern Golan Heights.
About Egypt, the battle is more difficult for Israel, when facing the risk of
losing, Israel has asked the US to be their ally because the US has a close
relationship with the Soviet Union - the source of weapons for Egypt and Syria.
A $2.2 billion in military aid was immediately approved by the US afterward.
Israel adjusted its strategy at the time, holding back Egypt. Surprisingly, at the

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time, the US had rising oil consumption, declining oil output, and rising oil
imports, primarily from OPEC nations.
An oil embargo was announced during a conference in Egypt between
members of the OAPEC, led by Saudi Arabia. Targets of the embargo were
countries that had supported Israel during the Yom Kippur War. The oilproducing Arab nations viewed American political and economic support of
Israel during the Yom Kippur War as siding with their enemy, and they sought
to bring a harsh punishment. Along with the US, many other developed nations
were targeted as these countries were allies of the US, including Canada, Japan,
the Netherlands, and the United Kingdom. The embargo later expanded to
Portugal, Rhodesia, and South Africa as well.

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CHAPTER 3: THE 1973 OIL CRISIS ECONOMY

EFFECTS AND ITS CONSEQUENCES
3.1. Energy Crisis: Effects on the globe in general
The OPEC embargo demonstrated the new power of the cartels in the global
economy and took many Americans by surprise as another example of their
decline in the 1970s. Once the embargo took effect, the price of oil per barrel
first doubled, then quadrupled from $3 to $12 a barrel. When retail gasoline
prices climbed by as much as 40 percent in November 1973 alone, the impact
hit American consumers in their wallets. Fearing gasoline shortages, Americans
lined up at gas stations to fill up, and gas stations raised prices several times a
day. Fuel Line revealed the panic that occurred during the embargo as motorists
feared that if they didn't refuel today, prices could rise tomorrow.
Unsurprisingly, many gas stations were running low on fuel due to high demand,
and late fall saw widespread "Sorry, no gas today" signs.
Western European countries and Japan, key US allies, which source 45-50%
of their oil from OPEC, faced an even more difficult problem due to the
embargo. A global recession seemed to loom as the embargo coincided with the
devaluation of the dollar.The US allies in Europe and Japan had accelerated oil
stockpiles to provide short-term buffers, but high oil prices and the long-term
prospect of recession have created a split within the Atlantic Alliance. European
nations and Japan found themselves in the uncomfortable position of needing
US assistance to secure energy sources, even as they sought to distance
themselves from US Middle East policy. Faced with increasing reliance on oil
consumption and declining domestic reserves, the US is relying more than ever
on imported oil, amid difficult domestic economic conditions that help weaken
its international influence, so they had to negotiate the end of the embargo.
3.1.1. Energy Crisis: Effects on the economy
In terms of just economics, the embargo and its effects had significant macro
impacts. The macroeconomic situation was made more difficult by the 1973–
1974 oil crisis, particularly concerning inflation.

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Since then, economists have known that a central bank can control how much
supply shocks affect inflation, but there is a cost to doing so. Higher oil prices
tend to result in both slower growth and inflationary pressures because of the
impact they have on commodities. These forces often have an inverse
connection over the short term, which means that as one increases, the other
decreases, and vice versa.
The 1973 oil embargo was only one of many complex variables that caused
American officials to overestimate the country ’s potential and underestimate
their contribution to the widespread inflation that took place during the 1970s .
3.1.1.1. The US
According to reports, the price shock of 1973 caused the US economy to
contract by almost 2.5 percent, increased unemployment and inflation, and
plunged the country into a deep and protracted recession (1973 –1975).
After decades of plentiful supply and rising use, Americans faced price
increases and fuel shortages, which resulted in long queues at gas stations
around the nation. Local, state, and federal officials demanded energy-saving
measures, requesting that gas stations close on Sundays and that residents forgo
putting up holiday lights on their homes.”It continues to affect the standard of
living of the populations of oil importing countries, where economic growth is
still hampered by the fourfold increase in oil prices that followed the Arab Israeli conflict of 1973, and foreign policy, especially of the United States, is
heavily influenced by the fear that supplies will be withheld” said by Geoffrey

Kirk.
3.1.1.2. Japan
Japan faced two main challenges: the remarkable inflation and transition
from one model of high economic growth to another.

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Figure: Compared Economic Growth Japan, US, United Kingdom; 1970 -1975
(Source: Procedia Economics and Finance)
About the economic growth, in a comparison of the three nations, Japan, the
US and the United Kingdom, we can see that the Japanese economy was the
most affected, with a drop of nearly 10% to -1% in 1974, while the US had a
6% drop to -0.5% in 1974 and the United Kingdom had a decrease of 8.5% to.
-1.2%.

Figure: Compared Inflation Japan, US, United Kingdom; 1970-1975
(Source: Procedia Economics and Finance)
Comparing the evolution of inflation in the three nations studied in the eighth
figure, we can observe that Japan has seen the most overall growth in consumer
prices over 18%, from 5% to 23.20%, whereas the US increased by over 9%
and the UK by more than 7.5%. The sharp rise in consumer prices was caused
by several factors, including rising power costs. The majority of Japan ’s
electrical system was made up of thermal power plants that burned imported oil

during the period of low oil prices. Electricity costs rose dramatically as a result
of the resource ’s increasing cost, surpassing those in other industrialized
nations by a wide margin. As a result, Japan ’s competitiveness was severely
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harmed, particularly in some specific areas of aluminum electrolysis. The years
1973 and 1974 also saw limitations on the usage of electricity. As a result, new
branches were to replace those that had been abandoned.
Following these occurrences, the government ’s major concern shifted to
managing inflation. The major government goal for 1975 was for inflation to
fall below 10%. As seen in the preceding picture, inflation was efficiently
handled in the period following the oil shock, when it crossed the 23% level,
and was near the official target in 1975, achieving 11%. As a result, the
Japanese archipelago saw 12% deflation, the United Kingdom had nearly 2%
deflation, and the US consumer price index continued to rise. The Japanese
government’s attempts to reduce energy use and refocus the economy have paid
off, with the recession being less severe than in the other nations studied. It was
critical for the Japanese that the primary goal of halting inflation was met. For
a country as reliant on crude oil as Japan, such a spike in prices was
understandably reflected in its trade balance.
Internally, there were many factors, among which we list the following: the
capital-labor ratio was declining; the total working hours were about to decrease
due to declining employment and the expansion of free time. In addition, the

transfer of labor from less productive to more productive sectors had to come
to an end. Finally, several environmental investments that had been ignored
until that point were about to be made.
3.1.2. Energy Crisis: Effects on the industry
3.1.2.1. West European
West European automobile customers turned away from larger, less economical
vehicles as a result of the oil crisis. The growth in popularity of small hatchbacks
was the most prominent outcome of this change. Before the oil crisis, the only
significant compact hatchbacks produced in Western Europe were the Peugeot 104,
Renault 5, and Fiat 127.
3.1.2.2. The US
They mark the beginning of an effort to test renewable energy sources.
Americans develop alternative energy sources, such as nuclear power and
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renewable energy sources like solar or wind power, to lessen their reliance on
fossil fuels. To create alternatives to oil in the refinement of gasoline, the federal
government eventually began to finance the development of ethanol from corn as
well. Car manufacturers started creating smaller, more fuel-efficient vehicles.
(When oil prices declined, though, American buyers reverted to fuel-guzzling
trucks and sport utility vehicles).The energy crisis not only significantly impacted
consumer lives but also dealt a severe blow to the American automobile industry,
which had for decades produced bigger and bigger cars and was now being

outpaced by Japanese producers of smaller, more fuel-efficient models.
3.1.2.3. Japan
In terms of the effects of the first oil shock on Japan, the country ’s growing
reliance prompted it to do extensive research into preserving raw
materials,energy, and substituting such products. A new industry emerged, with
the Japanese focused on integrated circuits, computer machines, industrial
robots, electronic materials.
3.2. Effects on human
3.2.1. Lost jobs
Companies had to maintain high pay due to wage-price limits. Thus they had
to lay off employees to save expenses. To increase demand, they were unable
to decrease prices. When people lost their jobs, it dropped.
Unfortunately, the Fed changed interest rates so often that firms were unable
to make future plans. Therefore, companies maintained high pricing, which
made inflation worse. Besides, they were also afraid to hire new workers,
worsening the recession. The lesson through history of US recessions that Fed
officials have learned was they had to manage businesses ’ expectations of
inflation. Since that time, Fed representatives have consistently acted in the
same way. More importantly, they provide enough advance notice of their
plans.
3.2.2. Lower consumer confidence
By driving up oil costs, the oil embargo made inflation worse and the US
economy was particularly vulnerable at the time. Oil production in the country
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was at maximum capacity. Additionally, the percentage of non-OPEC oil
production compared to global output has decreased. Lower demand and lack
of confidence of consumers resulted from people having less money to spend
on other products and services due to higher petrol costs. Therefore, people
were compelled to alter their routines, giving the impression that there was a
crisis that the administration strove in vain to overcome. For example, drivers
were forced to wait in long lines and they had to get up before dawn and wait
until sunset.
3.3. Energy Crisis: Lasting impact
Although the oil embargo was lifted in March 1974, the prices of oil were
still high. Besides, the consequences of the energy crisis lingered throughout
the decade.

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CHAPTER 4: DISCUSSIONS
4.1. Evaluation of the Oil Crisis
In fact, oil plays a crucial role in the global economy. Besides, it is also
known as the black gold of the world economy.
The 1973 oil crisis is considered the most unforgettable of the 1970s.
Specially, Japan was the most affected country and those who have experienced

the oil crisis in the Middle East will never forget the long lines of people in
front of gas stations due to the severe supply shortage and the high price of
oil. Moreover, it is also associated with economic recession and seriously
affects the global financial situation.
The embargo rocked the oil industry and reduced supply. The embargoed
countries were able to convince oil corporations to sell them oil from alternative
sources. However, the widespread uncertainty brought on by the return of the
regular supply led to a dramatic increase in prices.
Some people think that 1973 was pivotal. It was a “turning moment in history
for the layperson as well as for the oil man, for neither will enjoy the same
energy lifestyle again,” the Oil and Gas Journal said on December 31, 1973.
Others countered that the 1973 “oil crisis” was a brief stoppage in supply.
Despite the shock brought on by this interruption and any ad hoc regulations or
other government responses to the immediate crisis, in their opinion,
individuals would continue to consume energy in much the same manner as
before.
4.2. Practical research finding: Russia - Ukraine War
When the Russia-Ukraine war broke out, along with increased sanctions from
the US and its Western allies, it disrupted the supplies of oil and gas to Europe.
As a result, it pushed the price of oil up and made the crisis spiral out of control
very quickly.
After lots of weeks discussing and conversing, the European Union leaders
finally decided that they would stop importing two-thirds of their oil from
Russia. This would put pressure on Russia to put an end to the war with Ukraine.
Moreover, a ban on transporting oil orders when by sea is also given to Russia.
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However, experts claimed that Russia had foreseen this, so they have cut oil
and gas prices by 40% to find new customers. Nowadays, India, China, and
many other countries continue to buy oil and gas from Russia. Therefore, the
European Union oil and gas embargo against Russia will probably "go
nowhere"!
Russian crude oil is currently a hot commodity. However, since the military
campaign against Ukraine, most buyers have stayed away for fear of damaging
their reputation or violating US sanctions and Europe.
The Russia – Ukraine War led to a significant increase in the world oil price
by nearly 10 USD/barrel, which is now close to nearly 120 USD/barrel in just
a few days. While world supply has grown marginally, the exclusion of Russia,
one of the world's largest oil and gas exporters, from the global energy market
has sent oil prices soaring.
Finally, the most severe consequence is that global consumers have been
traumatized due to the global energy shock. Sudden shocks to commodity
markets, such as the 1973 oil embargo or the current situation in Ukraine, have
prompted a reassessment of supply security as well as the beginnings of longterm shifts in demand. However, once political threats fade, supply traditionally
returns to the most efficient trade routes and supply sources. While acute shocks
on a global scale might spark long-term changes in consumer behavior, those
habits can become stagnant over extended periods of inexpensive energy. The
Russia-Ukraine crisis looks to be hastening Europe's shift away from fossil
fuels, and the rest of the world is watching.

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C. CONCLUSION
The exaggerated extent of these consequences, rather than their limited
influence, should be stressed in many cases, even if they turned out to be less
lasting or far-reaching than those initially thought. This argument has been made
on several occasions in this essay. It's possible that the findings were not enough
from what was anticipated at the time but we can strictly state that the fundamental
legacy of the oil crises for the Third World is a debt rather than a New International
Economic Order. Instead of ushering in a new era of wealth and growth for the top
oil exporters, rising oil income instead brought about political unrest and, in some
cases, economic troubles. In the Middle East, focus has turned from Israel's
security to the future of the Palestinians, but there is still no answer that may bring
the two sides together. However, each of these actual results is very important in
and of itself. Their total influence is significant, especially when combined with
the economic developments frequently linked with 1973. Although it is possible
to spot symptoms of change well before that year, 1973 has come to be used as a
point of reference for a shift that, for many, only became obvious in that year. It
marks the transition from the postwar era of economic expansion, higher living
standards (at least for those in the industrialized West), and a stable economic
system to one of repeated recessions, accelerating globalization, and the
detrimental effects of unemployment and inflation. The prospect of decolonization
has been replaced in the developing countries by escalating debt problems and
growing poverty. Historian Eric Hobsbawm once said that: ‘The history of the
twenty years after 1973 is that of a world which has lost its bearings and slid into
instability and crisis. The year 1973 was a potent symbol of change, both in

perception and reality, and the oil crisis adequately justifies inclusion in our series
on historical turning moments. It is irrelevant if there will ever be another oil crisis
with comparable effects.

18

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