1973 Oil Crisis - Arab Oil Embargo

Arab Oil Embargo

On October 16, 1973, OPEC announced a decision to raise the posted price of oil by 70%, to $5.11 a barrel. The following day, oil ministers agreed to the embargo, a cut in production by five percent from September's output, and to continue to cut production over time in five percent increments until their economic and political objectives were met. October 19, U.S. President Richard Nixon requested Congress to appropriate $2.2 billion in emergency aid to Israel, including $1.5 billion in outright grants. George Lenczowski notes, "Military supplies did not exhaust Nixon's eagerness to prevent Israel's collapse...This decision triggered a collective OPEC response". Libya immediately announced it would embargo all oil shipments to the United States. Saudi Arabia and the other Arab oil-producing states quickly followed suit, joining the embargo on October 20, 1973. At their meeting in Kuwait the OPEC oil-producing countries, proclaimed the oil boycott that provided for curbs on their oil exports to various consumer countries and a total embargo on oil deliveries to the United States as a "principal hostile country". The embargo was thus variously extended to Western Europe and Japan.

Price increases were also imposed. Since short term oil demand is inelastic, demand falls little when the price is raised. Thus, oil prices had to be raised dramatically to reduce demand to the new, lower level of supply. Anticipating this, the market price for oil immediately rose substantially, from $3 per barrel to $12 per barrel. The world financial system, which was already under pressure from the breakdown of the Bretton Woods agreement, was set on a path of recessions and high inflation that persisted until the early 1980s, with oil prices continuing to rise until 1986.

Over the long term, the oil embargo changed the nature of policy in the West towards increased exploration, energy conservation, and more restrictive monetary policy to better fight inflation.