BIG OIL

The Big Oil crisis began in the month of October in 1973, when the members of Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab members of OPEC plus Egypt and Syria) announced, that they would no longer ship petroleum to nations that had supported Israel in its conflict with Syria and Egypt especially with the ongoing Yom Kippur War. The members also happened to agree to use their leverage over the world price settings mechanism for the Big Oil in order to raise world oil prices. This was especially after the attempts at negotiation with the “Seven Sisters” earlier in the month happened to fail miserably. The dependence of the industrialized world on Big oil and the predominant role of OPEC as a global supplier, led to a dramatically inflation in prices targeting economies of certain countries, while at the same time suppressive of economic activity. This led to a rethink on part of the certain targeted countries which responded with a variety of mostly permanent initiatives to contain their further dependency. The Big Oil crisis which was in the making only happened to be fast tracked with the inevitable Arab-Israeli conflict. The Oil producers then happened to display their strength with respect to controlling the oil production and thus triggering a huge oil crisis in the west.

The decrease in the oil production led to the US to pull out of the Bretton woods pact which resulted in the depreciation of the value of the US dollar among many other currencies. The price for the Big Oil was priced in dollars which meant oil producers were receiving less then usual income for the same price. It also led the market to become extremely volatile whose trends continue even to this day. The volatility also represents the huge dependence of countries on the Big Oil especially with a new lower level of oil supply initiated by the producers. The embargo placed on the Big Oil by the oil producers on the West resulted in doubling of the real price for crude oil at refinery level causing massive shortages in the U.S.

This embargo on the Big Oil only caused to change the nature of policy in the western nations towards more exploration, energy conservation and aggressive monetary policy to fight inflation.

The effects of the embargo were almost immediate when OPEC forced the oil companies to increase payments drastically leading to the price of the Big Oil being quadrupled by 1974 to nearly US$12 per barrel. The traditional flow of capital reversed with the countries of the Middle East acquiring control of a vital commodity and the Big Oil exporting nations accumulating vast wealth as a result. Some of the income was offered as aid to other underdeveloped nations caught between higher prices of oil and lower prices for their own export commodities and raw materials amid shrinking Western demand for their goods. Much of the aid then was absorbed in massive arms purchases that exacerbated political tensions, particularly in the Middle East.