22 December 1973: Opec more than doubles the price of oil
[That Jag in the picture has TWO fuel tanks; I can remember someone with one of these wincing as he filled it up - 6mpg or thereabouts. Way to go carbon footprint!]
Opec’s recent decision not cut production sent massive shock waves causing the price of oil to plummet, but on this day in 1973 Opec took, an arguably even more shocking decision.
Overnight, Opec more than doubled the price of oil from $5.12 a barrel to $11.65. The initial price was in fact a hike of its own a few months earlier on a price of $3. The price increase caused the legendary 1973 oil crisis, and was a major shock for the western world economy.
The reason behind the price hike was political. Israel had just won the Yom Kippur war against Egypt and Syria. The two Arab countries launched a surprise attack on Israel during the Jewish Yom Kippur festival. The aim was to reverse the losses of the Six Day War in 1967 and reassert Arab claims over the region.
However, the Opec move was not designed against Israel. It was meant to hurt the United States who had quickly and heavily supplied Israel with military equipment to fight the war, as well as providing political support.
Richard Nixon, the US President at the time, created a new short term Energy Office to deal with the crisis. It implemented price controls which forced ‘old oil’ to stay at a certain price, while newly discovered oil was allowed to be sold at market rates.
It was meant to reduce dependence on Arab oil by opening up new suppliers. However, the result was an artificial shortage in fuel because ‘old oil’ disappeared from the market. To tackle this, the government introduced a rationing programme and even reduced the speed limit to 55mph to cut consumption.
Eventually, the crisis ended through a negotiated settlement between Israel and the Arab countries. Israel came out on top overall but relinquished some of the new land it had taken during the war.
Interestingly, if the increased price of $11.65 in 1973 is adjusted for inflation to 2014 it comes to $63.88. In the last few months the price of crude oil has plummeted from $110 a barrel to around $60.
On a separate but related note, Fathom Consulting was on the radio this morning pointing out that the falling oil price is more likely due to falling demand rather than rising supply (though it is a mix, not either/or). The reasoning given is the slowing growth in China - they put the annual growth rate at 4%, not 7.4% - and [with all the other posts on China I have given you] you should by now see how all these elements are beginning to fit together. I hesitate to use the term "perfect storm" but a lot of people I know are increasing the cash element of their portfolios (insurance).
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