OPEC AND THE OIL PRICE SHOCK, 1973 term paper

Prompted by Standard Oil of New Jersey’s decision to reduce oil prices, Abdullah Tariki, Saudi Arabia’s director of oil and mining affairs, and Juan Pablo Pérez Alfonzo, Venezuela’s minister of mines and hydrocarbons, met on 9 September 1960 to found the Organization of Petroleum Exporting Countries (OPEC). OPEC’s goal was to coordinate oil policies, levels of production, and market prices, thereby giving the oil exporting countries some leverage against companies such as Standard Oil. Eventually seventeen other oil-producing countries, including Iran, Iraq, and Kuwait, joined OPEC.

For its first decade OPEC exerted little influence. By 1963 both Tariki and Alfonzo had resigned and Ahmed Zaki Yamani, Saudi Arabia’s new oil minister, became OPEC’s chief spokesman. In 1967 when Israel attacked Egypt, Jordan, and Syria, OPEC’s oil embargo directed at the United States, Great Britain, and western Europe had little effect. This was not the case in October 1973, when Egypt attacked Israel. Now OPEC’s oil embargo, aimed at the industrialized world, accompanied by severe cuts in oil production and a series of price hikes, immediately affected world oil supply. Western Europe, Japan, and the United States all ran short of oil. In December 1973, OPEC raised the price of its oil from $5.12 to $11.65 a barrel and announced further cuts in production.

For the first time since World War II Americans waited in long lines at gas stations. The Nixon administration urged electrical generating stations to shift from oil to coal, and for the first time Americans spoke of an “energy crisis.” The economies of Europe and Japan began to slow down, and the threat of a worldwide recession affected world financial markets. Books such as E. F. Schumacher’s Small Is Beautiful (1973), a plea for a simpler life, became huge bestsellers. Slowly the effect of the oil shock and the power of OPEC began to diminish. Despite Yamani’s leadership OPEC members were unable to agree on common price and production levels.

In March 1975, King Faisal of Saudi Arabia was assassinated by one of his nephews. Later that year a band of terrorists shot their way into OPEC’s Vienna offices, kidnapped Yamani, and flew him to Algiers before releasing him. Fearful that the terrorists might have been sponsored by Arab governments who resented his role in OPEC, Yamani sought better relations with the United States and resisted moves within OPEC to raise oil prices. But by 1980 a barrel of OPEC oil cost $30.00, a price that most industrialized nations could still afford in large part because the price shocks of 1973 had underscored the need for energy conservation and the value of a comprehensive national energy policy. Suggestions for Term Papers
1. How did President Nixon and his administration deal with the oil price shock of 1973? How did American consumers react to this crisis?
2. Why would Schumacher’s Small Is Beautiful (see Suggested Sources) become such a popular book in the 1970s? Evaluate its arguments and provide reasons for your position.
3. During the 1970s and 1980s Ahmed Zaki Yamani, Saudi Arabia’s oil minister and OPEC’s spokesman, was regarded as one of the most powerful men in the world (see Suggested Sources). Investigate the sources of his power and decide whether he was as powerful as the press portrayed him as being.
4. Spurred by the prospect of diminished petroleum sources, some automobile companies have begun to manufacture cars powered by alternative fuels. How successful has this been? What is the present status of alternative fuels?
5. President Carter, as a result of the oil price shock, began to develop a national energy policy. What reasons did President Reagan give for not continuing the policy?
6. All industrial nations except for the United States have a comprehensive energy policy. Organize a debate on whether the United States should have a national energy policy or not.

Research Suggestions

In addition to the boldfaced items, look under the entries for “The Six-Day War, 1967” (#66), “Terrorism in the 1970s” (#78), “Chernobyl, 1986” (#86), and “The 1992 Earth Summit in Rio” (#94). Search under energy crisis and Desert Storm.

SUGGESTED SOURCES

Primary Sources

OPEC: Official Resolutions and Press Releases, 1960–1990. Vienna: Organization of Petroleum Exporting Countries, 1990. A good starting point for OPEC’s policies.

OPEC Series. Vienna: OPEC, 1989– . First published in 1989, this is an annual report of OPEC policy papers.
Secondary Sources

Amuzegar, Jahangir. Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls. London: I. B. Tauris, 1999. Highlights the unpredictable character of OPEC’s history.

Evans, John. OPEC: Its Member States and the World Energy Market.Detroit: Gale Research, 1986. Scholarly profiles of OPEC countries and their economic impact.

Feldman, David Lewis. The Energy Crisis: Unresolved Issues and Enduring Legacies. Baltimore: Johns Hopkins University Press, 1996. A useful examination of the effects of the energy crisis on America.

Fink, Gary M., and Hugh Davis Graham, eds. The Carter Presidency: Policy Choices in the Post-New Deal Era. Lawrence: University of Kansas Press, 1998. Thomas J. Sugrue’s essay is a helpful examination of the Carter energy policy.

Ghanem, Shukri Mohammed. OPEC: The Rise and Fall of an Exclusive Club. London: Routledge and Kegan Paul, 1986. A brief history of OPEC.

Karl, Terry Lynn. The Paradox of Plenty: Oil Booms and Petro-States. Berkeley: University of California Press, 1997. A good look at OPEC in the 1990s.

Robinson, Jeffrey. Yamani: The Inside Story. New York: Atlantic Monthly Press, 1989. A reliable biography of OPEC’s most authoritative leader.

Salman, Khalik. A Macroeconomics Model and Stabilisation Policies of the OPEC Countries: With Special Reference to the Iraqi Economy. Aldershot, England: Ashgate, 1999. An examination of OPEC’s economic policies in the 1990s.

Schumacher, Ernst Friedrich. Small Is Beautiful: Economics as If People Mattered. New York: Harper and Row, 1973. A powerful argument that consumption does not bring happiness.

Skeet, Ian. OPEC: Twenty-Five Years of Prices and Politics. Cambridge: Cambridge University Press, 1988. An accessible history of OPEC’s worldwide influence.

Terzian, Pierre. OPEC: The Inside Story. Translated by Michael Pallis. London: Zed, 1985. An explanation of how OPEC sets policy.

Tugwell, Franklin. The Energy Crisis and the American Political Economy: Politics and Markets in the Management of Natural Resources. Stanford: Stanford University Press, 1988. A comprehensive study of how the energy crisis has shaped American trade policy.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power.New York: Touchstone, 1993. Solid chapters on OPEC and an excellent bibliography.



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