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The Great Inflation — 1971 to 1982 · 4 of 11

The 1973 Oil Embargo

Explain what the 1973 oil embargo did to the price of oil and to supply, and how importing countries handled the shortage.

Before you start

What you'll be able to answer

  1. What happened to the price of oil in 1973 and 1974?
  2. What did the embargo do to supply, and how did governments handle the shortfall?
  3. What did the oil shock do inside the importing countries?

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

War in October 1973 brought an oil embargo

On 6 October 1973 war broke out between Israel and its Arab neighbours. Within weeks Arab oil producers cut their output and stopped shipping oil to the United States, which was resupplying Israel's army, and to the Netherlands. The price of crude jumped that month, and again in late December. For the United States, which bought a growing share of its oil abroad, the question was what that oil would now cost, and whether it would arrive at all.

Predict first

In 1973 imported crude cost US refiners about $4 a barrel on average. What do you think it cost them on average in 1974?

Imported crude cost US refiners more than three times as much

The average cost of imported crude to US refiners was $4.08 a barrel in 1973 and $12.52 in 1974, more than three times as much. Imported oil was free of US price controls, so refiners paid the new price in full, while the rest of US crude stayed at controlled prices.

It was not only the United States that paid more. Saudi Arabian Light, a Gulf crude whose price the previous module followed to 1972, cost $2.81 a barrel in 1973 and $10.97 in 1974. Importing countries everywhere faced the rise at the same time.

Arab producers cut output and embargoed some buyers

The embargo had two parts. Most Arab oil producers cut their production and exports. And they banned shipments altogether to the United States, the Netherlands and several other countries, including Portugal and South Africa. The aim, according to Nixon's Council of Economic Advisers, was to pressure other countries to support the Arab side.

The producers linked the end of the embargo to peace talks after the war. The prospect of a negotiated end to the fighting between Israel and Syria persuaded them to lift it in March 1974.