Essay on Opec Oil Embargo's Effects on the Macro Economy

2034 Words Mar 27th, 2013 9 Pages
Drew Haley


The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to unify the policies of oil exporting countries in the Middle East (About Us). During the 1973 Arab-Israeli War, the United States and Netherlands helped Israel in this war with supplies. This angered OPEC countries and acted as a catalyst for the 1973 oil embargo (Reid). Many countries in OPEC and most notably Saudi Arabia, wanted Israel to retreat from territories they gained during the war (Reid). The embargo that resulted caught many Western countries flat footed and sparked a global recession.

Economic Effects

In October of 1973, OPEC announced that it would increase the price of oil by 70% by cutting production by 25%
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The skyrocketed price of oil caused the price of everything else to increase as well. This had nothing to do with money supply. Inflation from this coupled with unemployment and a slow growth rate is what’s known as stagflation. This is generally not supposed to happen in Keynesian economics but the supply shock of oil.
At the same time that this cost push inflation was happening, the value of the US dollar was decreasing. Due to pressure from Americans, President Nixon took the dollar of the gold standard. This caused the dollar to devalue during the early 1970’s. This upset oil exporters because oil was bought and sold with dollars. Oil exporters were getting less for oil not because of a decrease in the price of oil but because of the decrease in value of the dollar.

Government Action

In order to combat this oil embargo, the United States implemented new policies to try and combat this. One of the most notable new policies was that for cars whose license plates ended in an odd number could only get gasoline on odd numbered days. Even numbered license plates could only get oil on even numbered days (Origins). There was also a set amount that a consumer could buy. This rationing policy created long lines at the pumps. My dad remembers waiting in lines that stretched for city blocks. Instead of letting the market determine the price, government decided how much consumers would buy. This type of action by the government leads to a black-market, which

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