Free «The Two Oil Shocks» Essay Paper

Introduction

The two oil shocks of the 1970s, namely the 1973 and the 1979-1980, had a tremendous impact on international relations on the regional and global level. This phenomenon is special in the sense that it included a multitude of aspects: there was an economic side, a political side, a social, an environmental and a military side to the problem. Also, the crises revealed the urgent problems that Western society faced and outlined the major challenges that humanity has faced at the turn of the century. In addition to all of this, we can state that these crises continue to influence world economy and geopolitics even today.

Definition of the oil crisis

First of all, we need to clarify the very definition of the notion “oil crisis” and realize the mechanism of its effect on the world. According to Cleveland and Morris (2009), “for economic purposes, an oil crisis is defined as an increase in oil prices large enough to cause a worldwide recession or a significant reduction in global real gross domestic product below projected rates by two or three percentage points” (p.359). In fact, the events of 1973 and 1979 both count as fully-fledged oil crises by this definition, because the 1973 crisis caused “a decline in GDP of 4,7% in the US, 2,5% in Europe and 7% in Japan whilst the 1979 crisis caused the world GDP to fall by 3%”.

 

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The causes of the first oil shock

The first power crisis began in autumn 1973, after that as OPEC (Organization of Petroleum Exporting Countries) reduced the amount of oil production approximately by 5 % quite consciously, in order to influence world prices for their benefit.  On the 16^th of October, 1973, the oil prices rose by 70 % from three dollars for a barrel to five. During the next year oil prices increased to twelve dollars for a barrel. This event is known in history as “oil embargo”, because the decline in amounts of oil production was carried out for political reasons and was an instrument of pressure that the OPEC states employed against Western countries. The OPEC states-members were dissatisfied that the West supported Israel in the War of the Judgment Day (also known as the Yom Kippur war). While the crushing economic effect of these events is obvious, it is important to understand the global geopolitical trends it caused and the new tendencies that appeared in international relations of that time.

The international consequences of the 1973 oil shock

The network of allies that Nixon’s administration and his predecessors struggled to establish began to fall apart as European partners of the USA and also Japan made attempts to distance themselves from American Middle East policy (Yergin, 1973). The US was evidently more dependent on the oil supply, and thus entered the negotiations on lifting the embargo from the weaker position. OPEC, in its turn, put the solution of this issue into direct dependence on the matters in the Middle East. The OPEC states-members published a list of “unfriendly countries” which included the USA, the Netherlands, Western European states, Japan and a number of other countries. The Arabic states required from “hostile countries” to change their policy regarding the events in the Middle East, or at least to speak words of political support for “the cause of the Arabic people”. This was the first case of usage of «oil weapon» with political purpose. Aiming to avoid the risk of introduction an embargo on the import of oil from the Arabic countries, France, German Federal Republic, and Japan, almost at once spoke out in support of the decisions of the UN on the Middle East conflict and declared their support of just fight of the Arabic people for territories taken by Israel in 1967. It did not mean that the American allies unreservedly had turned to the side of the Arabic states. But it meant expression of political support and indirect conviction of Israel. The “oil weapon” appeared effective.

The OPEC members gained more influence on the international arena: the Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela (Organization of the Petroleum Exporting Countries).

The problem was that the territory of Sinai and the Golan Heights still belonged to Israel, according to the results of the previous part of the conflict, the Six-Day war. The 1973 phase of the conflict, not having brought victory to Arab states, spurred their response on the energy field. As sources of the US Department of State claimed, “To address these developments the United States announced Project Independence to promote domestic energy independence. It also engaged in intensive diplomatic efforts among its allies, promoting a consumers' union that would provide strategic depth and a consumers' cartel to control oil pricing. Both of these efforts were only partially successful” (OPEC Oil Embargo, 1973-1974).

The events of 1973 as a reason for international security system transformation

The first “oil shock” has provoked a gradual decline and removal of the old model of industrial production, which provided prosperity for the western world in the first post-war decades. Running into the threat of instability of supplies of oil, the West was forced to implement large structural reforms of economy, and increase investment in the development of avant-garde technologies able to cut energy consumption and limit growth of dependence on the import of oil. Reform of the world economy carried out by the concerted efforts of leading countries actually became the determining task of international politics of the second half of 1970s. At the same time, oil crisis of 1973 caused an increase of oil export westward from Soviet Union and put a beginning to dependence of the USSR, and then of Russia on the “oil pipe” and the so-called petrol dollars (Roberts, 2005). Thus, the “oil shock” destroyed the old and irrelevant system of resource-consuming production.  The increase of seriousness of economic difficulties in the middle of 1970s stimulated more balanced and strong coordination between the leading countries. International community began to search for new approaches in power safety not only in terms of national or regional, but also of the global system. Forming of power safety system of the industrial world began.

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The founding of such an organization as OPEC in September, 1960 became a key moment in the history of development of energy bipolarity of the world, the more obvious division into the energy consumers and the energy suppliers. After the power crisis OPEC countries became important players in the international arena. They finally had a possibility to influence the political and economic world processes. The 1973 oil shock was the momentum force for the radical transformation in the structure of international security and the world economy (Rustow, 1982).

The reasons for 1979 oil crisis

In 1979, Ayatolla Khomeini became the new head of the Iranian state as a result of a coup that removed Shah Mohammad Reza Pehlevi from the position of the leader (Bill, 1998). This had an immediate impact on the oil sector of Iran: soon the production was largely shortened and the export amounts were reduced. The results of these happenings are known in the developed countries as the “oil panic”, which provoked countless conflicts at the petrol stations and airports – any place where oil was in question. The next year, when Iran-Iraq war started, matters became even worse as Iran almost completely withdrew from the oil market for some time (Lieber, 1976).

Regarding the 1979 oil crisis, it was directly connected to the Iranian revolution of the same year. According to Cooper (2002), who majors in the US diplomacy during the oil shocks, described the situation as follows: “The Great Gas Panic of 1979 holds a unique place in the social and political annals of the late 20th century. It confirmed that the first oil shock of 1973-1974 had not been an anomaly. It reminded Americans - if they needed to be reminded - of their dependence on Middle East oil. And it ended an era in American politics. The gas lines marked the beginning of the end of the Presidency of Jimmy Carter”. Surely perturbations like this drastically influence the domestic policy of the biggest consumers of oil, but the reasons and the most noticeable influence is made in the area of international relations.

With the first “oil shock”, the deepest world cutback of economic activity of the second half of XX century was begun. It even surpasses the Great Depression of 1929-1933. However, in the world there was a serious worsening of the economic state of affairs, downstream in some and sharp deceleration of rates of growth (sometimes to a zero mark) in other front-rank countries. A global slump proceeded in 1974 and 1975, and then repeated itself on the lower scales in 1980-1982 in connection with the second “oil shock”. Depression of 1970s appeared on the background of the so-called power crisis. It displayed itself not so much in the physical shortage of oil, but in its sharp rise in prices, which made power-hungry productions unprofitable. Developing such industry in the states not possessing energy products supplies became unprofitable.

The influence of 1979 oil shock on international relations

The main distinguishing feature of this crisis was the feeling of power that the  Arab mechanism of combating the difficulties that oil crises brought. The decrease in Iranian oil production immediately received feedback and reaction in the form of the increase of Saudi and USSR oil industry production. Consequently, the position of those countries in the international arena became stronger, and their influence was enhanced. In case with the USSR, this, along with other factors, became the reason for the Soviet intervention to Afghanistan and the subsequent deterioration of relationships with USA (Rustow, 1982). The 1979 oil shock partly provoked the more aggressive Soviet Middle East policy: the intervention of the USSR troops to Afghanistan was destined to last for almost 10 years and destabilized the situation in the region quite seriously. The struggle for power and supplies led to regional conflicts like this and also the Iran-Iraq war, and to the worsening of relationships between Iraq and Saudi Arabia, the two countries that had enough potential to undertake the role of a regional leader.

The 1979 crisis also led to certain alterations in the power balance hierarchy among the Asian states: specifically, Japan and South Korea that could boast a steady tempo of economic development before the crisis, but the situation changed immediately afterwards. Even though the USA granted help, “the sharp decrease in the GDP growth rate in South Korea reflected the high percentage of exported products that relied on energy-intensive industries, such as iron, steel and petrochemicals. South Korea’s economy took several years to recover from the shock of the second oil crisis” (Hyun, 2007).

The solution of the global crisis spurred by the oil shock of 1979 was the introduction of the so-called Reaganomics, the economic course of Reagan’s administration. The growing need of developing countries for credits created the basis for the ambitious plans of economic development, which depended on a cash inflow in addition to the domestic savings. It coincided with the acceleration of international operations of private banks and resulted in granting large loans to the developing countries, which helped them to get along with the consequences of oil crises of 1973 and 1979 years. Less developed countries answered to the first oil crisis by continuation of the economy growing and covered growing charges on oil with loans. During oil shock of 1979 their reaction was similar, although it implied some transformation relating to the slump. Nevertheless, both oil shocks resulted in a higher level of debt of developing countries and to the increase of scales of crediting private banks.

Also, the 1979 crisis strengthened the positions of countries like Norway and United Kingdom, which started research and development of oil production in the Northern sea. In such a way, the situation on the world petroleum market changed drastically, ending the period of Arab countries monopoly (Roberts, 2005).

The consequences of the decade of energy problems

There was a necessity not only for the structural reform of economies of the developed countries but also in the new orientation of world production as the whole in the direction of transferring of energy- and resource-demanding industries to the developing world. The last got a chance to carry out industrialization due to the help of the developed countries, interested in the «up cast» of resource- and power-consuming productions in the less developed states. Reform of the world economy, carried out by the concerted efforts of leading countries, actually became the determining task of international policy of the second half of 1970s and, to a lesser degree, beginning of 1980s. The political rapprochement still proceeded, but the minds of politicians were no more occupied by the economy. The process of such transformation took about seven or eight years and was completed by the moment of dismissal of the West from a cyclic slump of 1980-1982.

On 13^th of February, 1974 the conference of basic oil consuming countries opened in Washington with participation of the USA, Japan, Canada, Norway and nine countries of European community. Its tasks were the determination and concordance of urgent measures for decreasing the dependence on Arabic oil supply by means of accumulation of fuel supply, adjusting of reciprocal deliveries of power sources, joint development of alternative energy and energy-saving technologies.

Also, “the Carter administration issued the "Carter Doctrine," which unraveled some of the price controls put in place by the Nixon administration during the 1973 crisis, as well as stating that America would assume that any country that caused trouble with oil-rich nations in the Persian Gulf was hostile to American interests” (Bill, 1998).            

One of the characteristics of the 1973 and 1979 crises was its illustrative effect on the relationships between the two world superpowers. After all, the antagonism of the Cold War was well underway by that time, and it is natural that the two governments took respective sides: the USSR supported the Arab states, and the USA granted help to Israel.

The influence of the oil crisis spread on all industries of the economy, cementing its dependence on the basic power source. The crisis provoked the change in conception of oil production in the whole world. The northern states of Europe began to develop technologies of shelf oil production. The USA in reply to the association of the Arabic oil ministers created the “big seven”, initially planned as an international instrument of solution of power problems, came to more exact policy on the Middle East, and re-oriented the system of oil import towards the countries of the Western hemisphere. Due to sharp growth of export of oil to Western Europe, Soviet Union was able to support at required level of unprofitable military industry and to continue the production of weapon and development of the new kinds.

Also, as OPEC’s official sources claim, the organization reached the peak of its power and influence within the period of 1970s, partly because its States Members took firm control over domestic oil production and began to control the global price setting on the world petroleum markets. The oil shocks of 1973 and 1979 demonstrated quite clearly the opportunities and the potential of petroleum exporters combined. In Algeria in 1975, the first general summit of the heads of member states was organized, and this was a milestone event that pointed at the start of admittance of poorer and less influential nations into world politics if they had the natural resources. Immediately after the Summit, OPEC established a Fund for International Development, which officially started its operation in 1976.

According to Salameh (2002), today’s world continues to suffer from the consequences of the oil shocks. The author sees the Iranian revolution, the Iran’s nuclear program, and the 21^st century’s first oil war (by that he means the US invasion of Iraq) as interdependent links of one chain. He claims that “with the peaking of global conventional oil production, geopolitics and market economics will result in even more significant price increases and security risks. Future oil wars are certainly not out of the question” (p.76).

Conclusion

The oil crises of 1979 were the test paper for international relations of the decade and of the following years. Those were the milestone events that defined the character of the problems that awaited the international political and economic system for the next years. We can still trace the influence of those happenings in our current international and economic situation. The crises were the result of a rapprochement between the Arab states, which made their cooperation within OPEC more efficient and gave them means of controlling or at least influencing the policy of Western countries. Also, the crises added one more actor of opposition between the two super-states that continued to antagonize on the regional level of Middle East. The Soviet Union profited economically from exporting its oil to Western Europe and thus made it possible to stay afloat for at least another decade.