Wall Street History

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Wall Street History

04/12/2002

Oil and the 70s, Part II

While the topic is still fresh, I thought I’d follow-up last week’s
column with some more material I first wrote back in October
1999 in this space concerning the oil price shocks of the 1970s. I
added a few new statistics from the era.

In March 1974 the Arab oil embargo was lifted, but the event had
left its mark. American prosperity had depended in large part on
what the Shah of Iran described as “the mystical power of the oil
companies,” or, the arrogance with which the industrial world, in
the role of colonial power, claimed dominion over the planet’s
natural resources.

The price of oil continued to rise throughout the 70s, from $2 a
barrel in 1970 to a peak of $40 by 1980. Oil wasn’t the only
commodity to witness huge price increases, either, as tin, silver
and gold rose to all-time levels, while rubber, cotton and grain hit
new highs, too.

In 1974, the consumer price index in the U.S. rose at an 11%
clip, the highest peacetime price-surge in American history. A
year later, President Gerald Ford unveiled his “Whip Inflation
Now” program, with its humiliating WIN buttons.

Meanwhile, worldwide, between 1973 and 1981, inflation in all
of the developed nations was 9.7%, with GDP growth of just
2.4% on an annualized basis. [In the U.S., inflation was below
8% for this same period, with annual GDP growth of 2.3%.]

Of course the situation was far rosier for the Arab oil nations.
From 1973 through 1978, annual revenues from crude in the
producing countries grew enormously. For example:

Saudi Arabia’s rose from $4.35 billion to $36 billion, Kuwait’s
from $1.7 billion to $9.2 billion, and Iraq’s increased from $1.8
billion to $23.6 billion.

But this huge swing in wealth led to a corresponding dependence
on the very industrialized nations the Arab countries had sought
to teach a lesson. The producers had to sell their oil, and the
industrial countries were their main consumers. So, with the
meager growth in the developed economies, along with a wicked
recession, the laws of supply and demand caught up with the
sheiks. Energy conservation programs and increased oil
production by nations not affiliated with OPEC eventually led to
a glut.

The bargaining position of OPEC grew weaker and its goal of a
high, uniform price level was difficult to maintain. Also, the
huge surpluses that the cartel generated had to be invested
somewhere, and, for the most part, they went into the
industrialized bloc. The oil states also had to look to these same
countries for the technical expertise necessary to develop their
own economies and, further, they sought help in modernizing
their armed forces.

[The issue is similar to today. The large investors of the Middle
East have been plowing their money into the West over the past
ten years, so Saudi Arabia et al need to be careful not to “break”
the world economy, or their own investments will plummet along
with the rest. Of course, many of their equity holdings have
already tumbled significantly in the last two years.]

For its part, by the late 1970s the U.S. was prepared to threaten
force if its oil supplies were interrupted again. We were not just
worried about revolutions in the producing countries, but also the
extension of Soviet influence in the region, i.e., the 1979
invasion of Afghanistan.

After the 1973 oil embargo, Nixon and Kissinger had looked on
Iran as an important regional ally. Unlike King Faisal in Saudi
Arabia, the Shah of Iran did not use his oil to place political
pressure on the U.S., although he had no problem hiking the
price. Iran allowed the U.S. to refuel ships at its ports, while the
war of words between America and the Soviet Union heated up.

Nevertheless, a second oil crisis in the 1970s accelerated by ’79
as a result of the Iranian revolution, as well as the reaction in the
bulk of the Arab world to the Camp David Accords between
Egypt and Israel. Oil was soon at $40 a barrel.

But, again, the forces of supply and demand took over, and the
industrialized nations began to develop energy conservation
programs, while OPEC failed to maintain a united front on prices
and production levels. The 1980s would then see crude tumble.

Sources:

“The Great Wave” David Hackett Fischer
“A History of the Arab Peoples” Albert Hourani
“A Reassessment of U.S. Strategic Interests in the Post-Gulf War
Middle East” W. Judd Peak
“One World Divisible” David Reynolds

Brian Trumbore

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