US OIL CRISIS – 1970s

1. Background. The 1970s oil crisis was a major event that took place in
the global oil industry and adversely affected the global economy, with long-lasting
effects that are still felt today. It was characterized
by a sharp increase in oil prices and a
disruption in oil supplies to many countries,
particularly the United States, Western Europe,
and Japan. The crisis began in 1973 when the
members of the Organization of Arab Petroleum
Exporting Countries (OAPEC) announced an oil embargo against countries that
supported Israel in the Yom Kippur War. This led to a sudden reduction in the supply
of oil to the international market, causing prices to skyrocket.
2. Issue/ Crisis. The crisis had a significant impact on the global economy,
as many countries were heavily dependent on oil imports. The United States, in
particular, was severely affected, as it relied heavily on foreign oil imports to fuel its
economy. The oil crisis was caused by several factors including: -
a. Political Instability in the Middle East.
b. Rising demand for oil.
c. Decrease in the value of the U.S. dollar.
d. Decision of OPEC to impose an oil embargo.
3. Response by US Govt. In response to the embargo, the U.S. government
imposed a price ceiling on domestic oil which was intended to protect consumers
from the impact of the crisis by limiting the price of oil that domestic producers
could charge. The effects were immediate and dire. The price of oil shot up to $11.65
per barrel, an increase of 387%.
4. Fallouts. However, the US Govt decision of price ceiling had unintended
consequences - Cobra Effect that made the crisis worse. Lines miles-long formed at
gas stations. The United States consumed one third of the world's oil, and its
citizens quickly discovered just how much of daily life depended on cheap oil.
Families living in far-flung suburbs depended on automobiles to get everywhere. Even
after the embargo ended in March 1974, prices for oil remained about 33% higher than
they had been before the crisis. Salient of the fallout are are as under: -
 a. Firstly, the price ceiling led to a decrease in the supply of domestic
oil. With the government limiting the price that oil producers could
charge, they found it challenging to make a profit. As a result, many
oil producers cut back on their production, leading to a shortage of
oil. The shortage of oil led to long lines at gas stations, rationing, and
higher prices for other goods and services that relied on oil for
transportation and production.
b. Secondly, the price ceiling created economic inefficiencies. Since the
government was controlling the price of oil, it became difficult for the
market to determine the true value of oil. This resulted in a decrease
in investment in new sources of domestic oil, as investors were
reluctant to invest in a market that had been artificially capped. The
price ceiling also created a black market for oil as some producers and
distributors found ways to sell their oil outside of the regulated market.
5. Crisis vis-à-vis Applicable Economics Laws. Let us explain the
economic laws that are relevant to the oil crisis of the 1970s and the price ceiling
imposed by the U.S. government.
a. One of the basic economic laws that is relevant to this situation is the
law of supply and demand. This law states that when the price of a
good or service increases, the quantity supplied will also increase, while
the quantity demanded will decrease. Conversely, when the price of a
good or service decreases, the quantity supplied will decrease, while the
quantity demanded will increase. This law is crucial in understanding
the impact of the price ceiling on the supply and demand of oil
during the oil crisis of the 1970s.
b. When the U.S. government imposed the price ceiling on domestic oil, it
limited the price that oil producers could charge for their products.
This caused a decrease in the supply of
domestic oil, as producers were unable
to make a profit at the artificially low
price. The decrease in supply is
represented on a graph by a leftward shift
in the supply curve, as shown in the figure.
 c. The leftward shift in the supply curve causes
the equilibrium price of oil to rise, as
shown in the figure. This increase in price
was felt by consumers, who had to pay
higher prices for gasoline, home heating oil,
and other products that relied on oil for
transportation and production.
d. The price ceiling also led to a decrease in investment in new sources of
domestic oil, as investors were reluctant to invest in a market that had
been artificially capped. This decrease in investment further leftward
shift in the supply curve.
e. The leftward shift in the supply curve leads
to an increase in the equilibrium price of oil,
as shown in the figure. This increase in
price made it even more challenging for
consumers to access affordable oil and led
to economic inefficiencies in the market.
f. Finally, the price ceiling created a black
market for oil, as some producers and distributors found ways to sell
their oil outside of the regulated market. This black-market shift in the
supply curve to the right.
g. The rightward shift in the supply curve leads to a decrease in the
equilibrium price of oil. This decrease in price made it easier for
consumers to access oil, but it also created economic inefficiencies in
the market.
6. Measures Taken to Avoid Crisis in Future
a. Strategic Petroleum Reserve: The US government established the
Strategic Petroleum Reserve (SPR) in 1975, which is a stockpile of
crude oil that can be used in case of a supply disruption. Currently, the
SPR holds around 600 million barrels of oil.
b. Energy Policy and Conservation Act: The US government passed
the Energy Policy and Conservation Act (EPCA) in 1975 aimed to
reduce the country's dependence on foreign oil by promoting
energy conservation and increasing domestic energy production.
 c. Fuel economy standards: The US government implemented fuel
economy standards for cars and trucks, which required automakers to
produce more fuel-efficient vehicles. This reduced the country's demand
for oil.
d. Diplomatic efforts: The US government engaged in diplomatic
efforts to improve relationships with oil-producing countries and
reduce tensions that could lead to another oil crisis.
7. Conclusion. The crisis ended in 1974 when the oil embargo was lifted, but oil
prices continued to remain high, and the supply of oil remained unstable. Another oil
shock occurred in 1979 when the Iranian Revolution led to a further reduction in oil
supplies and a second round of price increases. In conclusion, while the oil price
ceiling by US Govt was intended to protect consumers from the impact of the oil crisis,
it ultimately worsened the situation; Cobra Effect. The decrease in the supply of
oil, the economic inefficiencies, and the creation of a black market for oil all
made the crisis more severe. The economic laws and graphs that are relevant to the
oil crisis of the 1970s and the price ceiling imposed by the U.S. government illustrate
the impact of government intervention in the market.
8. The oil crisis of the 1970s remains a significant event in the history of the global
economy and serves as a reminder of the importance of careful economic policy-
making. Moreover, it highlighted the vulnerability of many countries to disruptions
in the oil market. The crisis also led to increased efforts to reduce oil dependence
and to develop alternative sources of energy, such as renewable energy and
nuclear power.