Oil crisis

Historical background


In the beginning of the XX. century saccharides became more and more of import in the universe because they were pure, easy manageable, inexpensive, have immense energy capacity and were available in large sums all over the universe.

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Petroleum can be used as a beginning of energy every bit good as a natural stuff in the fabrication of plastics and fertilisers, and merely really few trade goods have become as critical as it, and crude oil has been the object of geopolitical confrontations as a trade good of strategic importance. At that period several geopolitical events were closely related to oil or had effects on oil monetary values and supply. The determination in 1912 by the British Admiralty to change over war vessels from coal to oil propulsion because of velocity and scope advantages was the first event that led to the geopolitical importance of oil. Great Britain nationalized the Anglo-Persian Oil Company and committed itself to the protection of this resource in Persia – since 1934 the state is called Iran – because the state had no oil resources at all.

In the get downing the United States of America did the 60 % of the entire development, but by 1990 the undeveloped states took over it ; the Near East gave 26 % , Russia 21 % and North America merely 17 % of the whole development. 80 % of the known and exploitable oil resources were found in 8 states in the universe: Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, Venezuela, Russia and Mexico.

The first oil crisis was merely a local crisis ; it had no important consequence on the universe market. It took topographic point in Iran, because Mohammad Mossadeq, the premier curate of Iran, nationalized the oil companies, so English professionals went place and the state went insolvents in 3 old ages.

Then began the Suez crisis in 1956 when Nasser nationalized the canal. In the 50es yearly 210-220 1000s of dozenss of lading went through the canal and the 2/3 of it was crude oil that had to be transported to Western Europe. But after the arab-israeli war blow-up, Nasser made the canal wholly unserviceable. As the canal had a great significance, it caused some outstanding jobs – probationary crude oil deficit evolved in Western Europe, so ingestion was decreased, higher revenue enhancements were levied on gasoline, and gasoline vouchers were introduced.

Simultaneously Syria closed the crude oil lines in the Persian countries and Saudi Arabia introduced embargo towards Great Britain and France.

By 1957 the crisis came to an terminal, 90 % of the crude oil export that was non transported was compensated, and at that clip crude oil use was non so of import ( 1956 merely about 20 % of Europe ‘s energy usage ) and there were no considerable alterations in the monetary values.

World War I demonstrated the increasing importance of the internal burning engine on modern military operations, such as planes, trucks and armored combat vehicles. In the 1920s motorisation – car – was going an of import manner of transit and these old ages were characterized by detonating civilian demand for oil. At the same clip a few cardinal corporations -that became the oil giants of today – started to command the industry rapidly. The oligopolistic commercial control on the monetary value and the production of oil was in 1928 by the Achnacarry Agreements foremost established between the greatest oil multinationals of the clip: the ‘Seven Sisters ‘ .

Seven Sisters of the crude oil industry

The term ‘Seven Sisters ‘ refers to seven immense oil companies that dominated – since Rockefeller ‘s first mammoth monopoly – the mid twentieth century oil production, refinement and distribution.

Five of them were American and the two other were British. The American companies included Exxon, Mobil, and Socal which subsequently became Chevron, Gulf and Texaco. The British companies were Royal Dutch Shell ( it was a joint venture with the Netherlands ) and British Petroleum ( BP ) , whose involvement in universe oil expanded with the find of oil Fieldss in Iraq and in Indonesia. Later through acquisitions and amalgamations the ‘Seven Sisters ‘ have become four tremendous oil companies ; ExxonMobil, Royal Dutch Shell, BP and Chevron-Texaco.

These corporations have invested a batch in extraction substructures, peculiarly in the Middle-East and Latin-America. They were efficaciously in control of the oil supply and demand of the universe with a set of schemes, such as repairing production, monetary values and quotas. However, in several developing states a nationalisation tendency started to emerge, easy taking to the future oil supply control and dazes. In 1938 Mexico smartly took control of its full oil industry by expropriations, sabotaging its handiness to foreign markets for a piece, but bring forthing understanding in a batch of developing states as a symbol against foreign development of national resources.

World War II. revealed to be a struggle that was strategically dominated by oil because the cardinal arms were air and armoured forces. In 1941 the United States decided to set up an oil trade stoppage on Japan, this was one event that triggered the war in the Pacific. The strategic aims of Japan were to procure the resources of Southeast Asia, chiefly the Indonesian oil Fieldss, and the state has planned fast operations in order to accomplish these aims. The same twelvemonth, Germany ‘s invasion of the Soviet Union had the securing of the oil Fieldss in the Caucasus part among its cardinal aims, but both Germany and Japan failed to set up a unafraid beginning of oil, in 1945 that contributed to their overthrow by strategically more nomadic allied forces. About 86 % of the universe ‘s oil supply was controlled by the allied states.

The increasing geopolitical importance of the Middle-East was underlined by the station World War II. epoch, as from that part the United States and Europe were importing turning measures of oil. In1948 in Saudi Arabia a new beginning of oil was discovered, called Ghawar Field, that accounted for the largest conventional oil field in the universe ; more oil militias were discovered in this part, so the supply was switching quickly. They were seeking many times to incorporate states like Iran, Iraq and Saudi Arabia in confederations with Western powers, but a series of geopolitical events, merely like the creative activity of the OPEC and Islamic patriotisms, would perplex entree to oil resources.


The western Seven Sisters wanted to accomplish a powerful economic control of oil production, so many bring forthing states – most of them were from the Middle-East – had a common end: to garner a bigger portion of the oil incomes by commanding supply.

In 1960 an organisation called ‘Organization of Petroleum Exporting Countries ‘ ( OPEC ) was founded at the Baghdad Conference. It contained five establishing members: Iraq, Iran, Kuwait, Saudi Arabia and Venezuela, but by the terminal of 1971, six other states had joined the group, they were the undermentioned states: Katar, Indonesia, Libya, United Arab Emirates, Algeria and Nigeria. They besides wanted to keep the oil monetary values. In 1968 the Arab states founded the Organization of Arab Petroleum Exporting Countries.

Throughout the station World War II period exporting states found increasing demand for their rough oil but there was a 40 % diminution in the buying power of a barrel of oil. The balance of power shifted in March 1971. And this month the Texas Railroad Commission set proration at 100 per centum for the first clip which meant that Texas manufacturers were no longer limited in the volume of oil that they could bring forth. It meant – more significantly – that the power to command rough oil monetary values shifted from the United States – Texas, Oklahoma and Louisiana – to the OPEC. There was no more trim capacity in the United States and as a effect no tool to set an upper bound on monetary values. A small over two old ages subsequently OPEC – through the unintended effect of war – achieved a glance of the extent of its power to influence monetary values.

The OPEC was unable to increase oil monetary values until the beginning of the seventiess. The major grounds were the importance of production in non-member states and there OPEC members had some troubles to hold on a common policy, since economic theory clearly underlines that trusts are bound to neglect at repairing monetary values. Consequently, developed states were confident: the monetary value of crude oil would stay comparatively stable. In the early 1970s it was predicted by the American Government that by 1980 oil monetary values might lift to about 5 dollars per barrel. So the crude oil monetary values were really low and the economic growing was strong but this state of affairs changed rapidly.

During the period of the Six Day War ( 1967 ) OAPEC members announced an trade stoppage towards states helping Israel ; Iraqi and Saudi oil lines became shut down. Then 900 dozenss less were exported each twenty-four hours and besides the Suez Canal was closed at that clip, so the development was raised in the United States, Venezuela, Iran and Indonesia.

In the terminal Iran and Saudi Arabia boycotted the trade stoppage and they could pull off to avoid a serious crisis. The lone also-rans of this event were those Arab states that were shuting down the export.

The trade stoppage

In the early 1970 ‘s under President Nixon ‘s order, the United States of America began transporting weaponries to Israel.

In 1993 the Yom Kippur War broke out between Israel and Egypt ( and several Arabian states ) . This war gave the OPEC extra grounds to step in: they imposed export quotas, reduced production by 25 % and nationalized production installations. The oil crisis started on October seventeenth 1973 and lasted until June 1974. Not long after the start of the War, when the Arab states decided to turn to the ‘oil arm ‘ once more ; the Organization of Arab Petroleum Exporting Countries announced the decrease of oil development by 5 % each month in those states back uping Israel in the struggle during the war. In their sentiment Israel could stand against the onslaught of the other two counties because the West gave them aid. They wanted to sabotage Israel ‘s support, chiefly the USA, so oil became a geopolitical arm.

The market became controlled by supply by oil manufacturers, doing the first oil daze.

The oil trade stoppage affected the United States of America, its western European federates and besides Japan. During this half twelvemonth period the western universe was confronting with the strategic significance of oil and its deficit for the first clip. For illustration in the States at the top of the crisis on even yearss merely autos stoping with even enrollment figure and on uneven yearss autos stoping with uneven figure were allowed for a piece to be refueled. This trade stoppage damaged the U.S. economic system so greatly that many were diffident if the state would get away such desolation.

Among the few states that were affected, the United States suffered greatly, because after they gave assistance to Israel the whole oil export ended toward them.

The ability to command rough oil monetary values was passed from the United States to OPEC, and it was removed during the Arab Oil Embargo. Monetary values increased 400 % in 6 months, and the utmost sensitiveness of monetary values to provide deficits became all excessively evident at that clip.

The universe petroleum oil monetary value was comparatively level from 1974 to 1978, runing from 12.21 dollars per barrel to 13.55 per barrel, but when adjusted for rising prices universe oil monetary values were in a period of moderate diminution.

The crisis in 1973 had a immense consequence on the universe market, because this twelvemonth the oil export from the Near East amounted 1 billion dozenss, and 40 % of the crude oil of the businessperson universe originates from this part – England 73 % , France 83 % , Italy 85 % …

As a consequence of the deficit of oil gasoline and gas oil monetary values increased, so the obviation of fuel started. This resulted in bigger deficit and monetary values became higher and higher. In America the rise of monetary values about caused a daze merely like the universe war.

Monetary values started to fall at the New York Stock Exchange, limitations were introduced for auto use, and people were encouraged to utilize less energy.

With the start of the trade stoppage, U.S. imports of oil from the Arab states decreased from 1.2 million barrels a twenty-four hours to a mere 19,000 barrels. Daily ingestion dropped by 6.1 % from September to February, and by the summer of 1974, by 7 per centum as the United States of America suffered its first fuel deficit since World War II.

The impact of the trade stoppage was drastic and it had an immediate consequence on the whole economic system. In the United States of America the retail monetary value of a gallon of gasolene rose from a national norm of 38.5 cents in May of 1973 to 55.1 cents in June of 1974. Meanwhile, The New York Stock Exchange portions lost $ 97 billion dollars in value in 6 hebdomads.

Monetary values were lifting since 1971 and by 1973 the monetary value of crude oil reached the 11,68 USD/ton, this means that the monetary values became 10 times higher than they were originally. It could happen because of the inharmoniousness of the consumer states and so they could non do motions together against the trade stoppage ( for illustration anti-Americanism in France ) .


In times of deficit or oversupply rough oil monetary values behave much as any other trade good with broad monetary value warps. The rough oil monetary value rhythm may go around over many old ages reacting to alterations in demand every bit good as OPEC and non-OPEC supply.

From 1974 to 1978 under the control of the OPEC, the monetary value of oil still remained high but stable: around $ 12 per barrel. Many developed states started to worry about the undependable supply beginnings and the exhaustion of oil militias, but they did non make much one on this respect. The Persian revolution in 1979 and the resulting Iran-Iraq War enduring from 1980 to 1988 caused the 2nd oil daze where the monetary value of oil surged over $ 35 per barrel, this imposed several drastic – but slightly impermanent – steps to take down oil ingestion. This resulted in a resettlement of energy-consuming industries, in schemes for devouring less energy, such as energy efficient autos and contraptions, in trusting more on national energy beginnings like crude oil, coal, natural gas, hydroelectricity, atomic energy, in constructing strategic militias, and in replacing crude oil for other energy beginnings when it is possible. About 2 billion barrels are estimated to be held in strategic militias all around the universe, the majority of it in the United States, Germany and Japan. In 1980 the Carter Doctrine, which states that the United States would step in militarily if its oil supply was compromised, is besides the result of the uncertainnesss derived from the first and 2nd oil dazes. The military presence of the United States in the Middle-East was extended, as the oil of the Persian Gulf was clearly perceived as of foremost significance to the national security.


  • hypertext transfer protocol: //www.people.hofstra.edu/geotrans/eng/ch5en/appl5en/ch5a1en.html
  • hypertext transfer protocol: //www.wtrg.com/prices.htm
  • Anthony Sampson. The Seven Sisters: The Great Oil Companies and the World They Shaped. New York: Viking Press, 1975

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