From TheBestLinks.com
Before there was an OPEC (the Organization of Petroleum Exporting Countries), the great oil companies of the West ruled the roost. Oil is the lifeblood of the industrialized nations. Planes, cars, tanks, skyscrapers, fertilizer, drugs and synthetics all use it. Yet back before the days of OPEC, the great oil companies often retained 65% or more of the revenue from a product that was produced on someone else's property. Then in 1960, many of the oil producing nations, from both the Middle East and elsewhere, formed a cartel to protect their interests.
[To date, OPEC is comprised of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Large non-OPEC producers such as Mexico, Norway and Russia sometimes go along with the cartel position of the day.]
The goal of OPEC was to present a common front in negotiations with the giant oil companies, which themselves worked closely together. OPEC set the stage for a new process in which the producer nations would eventually take over the functions of the companies, at least in production, and retain much more of the revenues. But OPEC really had little impact from its founding in 1960 until 1973.
In 1973, the U.S. and the Western world were in the midst of an inflationary spiral. The world had become highly vulnerable to commodity cartels, as twenty years of prosperity and accelerating population growth had created heavy demand for raw materials. In the U.S., consumer prices were rising at an 8.5% clip, while inflation rates in other nations were often much higher. The demand for Middle Eastern oil had been increasing throughout the industrialized world and the needs of these countries grew far faster than production. OPEC was growing stronger and it was determined to increase its share of the profits.
United States President Richard Nixon, as part of his ill-fated price control program, had slapped controls on oil in March 1973. The United States, which had been self-sufficient in energy as recently as 1950, was now importing some 35% of its energy needs. U.S. petroleum reserves were nearly gone. Governments, corporations and individuals were entirely unprepared for what would happen next.
On October 6, 1973, the Jewish holy day of Yom Kippur, Egyptian forces launched a surprise attack across the Suez Canal, while at the same time Syrian troops were flooding the Golan Heights in a surprise offensive, starting the Yom Kippur War. After early losses, Israeli counterattacks quickly pushed into Syrian territory in the north, as troops outflanked the Egyptian army in the south. Israel, with help from the U.S., succeeded in reversing the Arab gains and a cease-fire was concluded in November. But on October 17, OPEC struck back against the West by imposing an oil embargo on the U.S., while increasing prices by 70% to the United States's Western European allies. Overnight, the price of a barrel of oil to these nations rose from $3 U.S. to $5.11. (In January 1974, they raised it further to $11.65.) The U.S. and the Netherlands, in particular, were singled out for their support of Israel in the war.
When OPEC announced the sharp price rise, the shock waves were immediate. Industrial democracies, accustomed to uninterrupted sources of cheap, imported oil, were suddenly at the mercy of a modern Arab nationalism, standing up to American oil companies that had once held their countries in a vise grip. Many of these "new" Arabs were Harvard educated and familiar with the ways of the West, and to many Americans it was impossible to understand how their standard of living was now being held hostage to obscure border clashes in strange parts of the world.
The embargo in the U.S. came at a time when 85% of American workers drove to their places of employment each day. Suddenly, President Nixon had to set the nation on a course of voluntary rationing. He called upon homeowners to turn down their thermostats and for companies to trim work hours. Gas stations were asked to hold their sales to a max of ten gallons per customer.
In the month of November 1973, Nixon proposed an extension of Daylight Savings Time and a total ban on the sale of gasoline on Sundays. (Both were later approved by the United States Congress.) But the biggest legislative initiative was the approval by Congress on November 13 of a Trans-Alaskan oil pipeline, designed to supply 2,000,000 barrels (318,000 m³) of oil a day. [This was completed in 1977.]
A severe recession hit much of the Western world, including the U.S., and as gasoline lines snaked their way around city blocks and tempers flared (the price at the pump had risen from 30 cents a gallon to about $1.20 at the height of the crisis), conspiracy theories abounded. The rumor with the widest circulation had the whole crisis as being contrived by the major oil importers who were supposedly secretly raking in the profits. New York Harbor was really full of tankers loaded with oil, in no hurry to dock, according to the Oliver Stone types.
On Wall Street, shares in oil stocks performed well as profits soared, but the rest of the market swooned 15% between 10/17/73 and the end of November. [The Dow Jones fell from 962 to 822.] This ended up being the middle of the great bear market that would see the Dow go from its November 1, 1973 high of 1051 to 577 by June 12, 1974, a whopping 45% decline over nearly two years.
As for the embargo, the Arabs lifted it against the U.S. on March 18, 1974. The Dow then stood at 874.
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