Wotan: I think you are just confused it was an embargo in 1973... Not an OPEC price hike.
I think you are confused - as well as most americans. October 1973 - March 1974 Oil Embargo linked to Arab-Israeli war was a short-term political event that as any military energency was supposed to be handled from the national oil reserves. Guess what? It was handled:
"crude oil supplies in the US grew tightest in February 1974 and even then were only 5.1 percent lower then the daily average for the first three-quarters of the preceding year. What is more, the Netherlands, singled out by the Arabs, experienced less of a shortfall than France and Britain, the countries that led western Europe's pro-Arab political initiative." - not much of an effect from embargo, is it?
Lets' take a look at the misleading (by omission) website from which Mickey1992 got his chart:
The new official price was agreed among OPEC member countries: $11.65. As Figure 1, which displays historical oil prices from 1920-present, shows the jump in prices was unprecedented. Oil prices jump from about $3.00 a barrel before the war to $11.65. The embargo, which did not end until the Syrian-Israeli disengagement was secured, drove the world economy into deep recession.
See how neatly the embargo and "unprecedented jump in prices" are bundled together? Could that "jump" have happened without embargo? After all, if it couldn't, why did not world oil prices jump right back? After all, the OPEC was not even half of the market and did not even cut the production that much, the world economy was in deep recession - meaning decreased demand for oil. Why didn't westen countries' oil producers sold oil cheaper and more of it? Couldn't they have used the money? What, they were greedy? Still, with price controls domestic oil was selling in US at times 70% cheaper than imported oil - actually lowering incentive to produce and explore. How about oil explorers? They are not the same as producers. Why did not they
Now look at this data and chart:
The Bretton Woods Accord of 1944 converted the world gold standard to a dollar standard and provided that the United States would maintain the dollar value of gold at $35 per ounce. Currencies were fixed to dollar and dollar was fixed to gold - so currency rates were anchored to gold which prevented monetary inflation and allowed countries to hold reserves in dollars and US treasuries rather then gold.
Misguided by some economists and scared by mild U.S. recession of 69-70 and monetary crisis caused by adjustment form 1934 dollar devaluation and made worse by bad policies, Nixon tried to use inflation as a tool to ensure employment and boost GNP. The plan was conceived in 1971 to devalue the dollar and free it from gold - which predicted that besides other great things the price of gold would plummet to $7 an ounce!
In 1971 Nixon did devalue the dollar - thus hitting other countries, like Germany with significat loss for trusting US and holding it's bonds - but not french who did not trust US bonds and avoided holding any.
Anyway, in early 1973, a permanent floating of the dollar was announced. As the de facto price of gold had floated up to $140 from the official $40 the oil-producing countries immediately set to work to quadruple the oil price in dollar terms. See - no embargo, no war yet!
The arabs and other people do not use dollars as currency - each country has it's own money. They only used dollars because those pieces of paper entitled them to some value like certain amount of gold that could be exchanged for stuff or their own currency or held as reserve. Once the dollar became nothing more than worthless paper with no relation to gold or anything, holding it as reserve became irrational. They just adjusted dollar prices of oil they sold to receive about the same amount of gold for it! There was no raise in prices to them - they still sold it for the same amount of gold or dinars rupees or whatever. Of course the dollar was now four times cheaper - heading to 20 times cheaper at ~$800/ounce - but was that their fault?
The economists of course blamed the Arabs for "oil price raise"! The Arabs were demonized for this despicable behavior - not wanting to receive for their oil money worth four times less and not guaranteed to hold even that value! "Bad arabs caused inflation!".
Mikey, care to compare your chart of what oil cost in dollars to this chart showing what dollar was worth in gold? What, there was another embargo in 1980? Price of oil increased 10-fold? But dollar dropped over 20-fold compared to gold. Wasn't that natural for oil price as expressed in dollars to increase as much?
Obviously the rate of inflation in US - the raise in price of products like hot dogs and diapers - did not nearly match the raise in price of gold. Unfortunately arabs were not interested selling us oild for hot dogs and diapers - they needed currency - not arbitrary sum of worthless and "floating" paper money of highly-infaltionary and mismanaged country but the equivalent value of convertible stuff - like gold.
So from the world perspective - no price raise. Just americans playing funny games and making their currency worthless. From american perspective and poor dupes who fixed their money to dollar - huge increase in price.
miko
