Historical &
Geographical Location: USA,


Chronicle of the event: In 1973 oil crisis, there was a negative supply shock of
oil with the inflationary demand for oil in the USA. A supply shock is
basically an event that triggered a sudden increase or decrease of supply of a
particular product. A positive supply shock causes increase in the supply of
particular product and negative supply shock causes decrease in the supply of a
particular product.  On October 16th 1973,
the members of the Organization of Arab Petroleum Exporting Countries (OAPEC,
consisting of the Arab members of OPEC plus Egypt and Syria) proclaimed an official
ban on oil against Canada, Japan, the Netherlands, the United Kingdom and the
United States. The embargo was a response to American involvement in the 1973
Yom Kippur War. Six days after Egypt and Syria launched a surprise military
campaign against Israel, the US supplied Israel with arms.



Breakdown of the
event: As seen from figure 6, the demand for oil by U.S. was on an
increasing spree towards 1974 while supply of oil to U.S. indicates a downwards
trend. In terms of market equilibrium prices, the increase in demand caused the
demand curve to shift to the right while the declining supply led the supply
curve to shift leftwards, thereby creating new market equilibrium with an
inflated price of oil. Thus at the end of the embargo in March 1974, the price
of oil had risen from U.S. $3 per barrel to nearly $12 globally; US prices were
significantly higher. To add – during this time, the world produced over 2.5
billion new motor vehicles, half of which were in the United States.
Transportation accounted for almost 70% of all US oil consumption, of which 2/3
is motor gasoline. With 6 percent of the world’s population then, the U.S. was
consuming 33 percent of the world’s energy. Also referring to data in table 2,
there has been a 50 percent rise in the consumption of oil by U.S. from 1965 to
1974, confirming that demand for oil in U.S. was increasing and is supported by
data from Energy information administration. America’s 35% oil consumption was
provided by OPEC at the time.



Consequences of the
event: The embargo both banned
petroleum exports to the targeted nations and introduced cuts in oil production
thus forcing oil companies to increase payments drastically. Thus U.S. imports
of oil reduced from 1.2 million barrels per day to 19000 barrels per day. Also,
U.S. oil production started to decline, exacerbating the embargo’s impact as
seen from table 1.

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