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The Great Inflation — 1971 to 1982 · 5 of 11

Energy Policy After 1973

Explain what the oil-importing countries built after the 1973 embargo to cope with the next cut in supply and to use less oil, and what of it is still there.

Before you start

What you'll be able to answer

  1. What did the oil-importing countries build to cope with the next cut in supply?
  2. How did governments try to use less oil after the shock?
  3. Is that machinery still there, and has it been used?

Where this sits

The Great Inflation — 1971 to 1982 · this module is lit

  1. 15 Aug 1971The United States stops turning dollars into gold, freezes wages and prices, and puts a tax on imports
  2. Dec 1971–Mar 1973New fixed rates are agreed in December 1971, with the dollar devalued against gold; they break down, and by March 1973 the main currencies float
  3. 1972Food and commodity prices start to climb, while consumer prices across the rich world are already rising
  4. Oct 1973Arab oil producers embargo shipments to the United States and the Netherlands
  5. 1974Imported crude costs US refiners far more than in 1973; in America inflation and unemployment rise together
  6. Jan 1976At a meeting in Jamaica, IMF members agree that each country may choose its exchange-rate arrangement; gold is to lose its official price
  7. 1979Iran's revolution cuts its oil production, and the oil price rises a second time
  8. Oct 1979The Federal Reserve raises its discount rate, and most of the other countries the series follows raise an official rate within two months
  9. 1982Bank lending to developing countries halves, and a debt crisis begins
  10. 1983Inflation is below its peak in all eleven countries the series follows

A year after the embargo, oil importers agreed to stand together

In November 1974, a year after the embargo began, a group of oil-importing countries set up the International Energy Agency, and the United States signed its founding agreement. The members promised to hold stocks of oil, to have plans ready to cut their use of oil in an emergency, and to share oil if supplies were cut again. The question was how much oil each would keep in store.

Predict first

Members agreed to hold oil equal to a number of days of their net imports. How much do you think they had to hold by 1980?

Members of the new agency had to hold oil in reserve

Each member had to hold oil equal to 60 days of its net imports, meaning its oil imports minus its oil exports, at first, and 90 days by 1980. If supplies are cut, a country can draw on its store while the gap lasts. And a country with oil in store is harder to pressure with an embargo. The Organisation for Economic Co-operation and Development (OECD), a body of rich industrial countries, had already advised its European members to hold stocks from 1962, and to hold more from 1971. From 1974 holding stocks was a duty of membership of the new agency.