1973 Oil Crisis - Macroeconomic Effects

Macroeconomic Effects

The 1973 oil crisis was a major factor in Japan's economy shifting from oil-intensive industries, and resulted in huge Japanese investments in industries such as electronics. The Japanese auto makers also took advantage of this embargo. After they realized what fuel costs were in the United States, they started producing small, more fuel efficient models, which began selling as an alternative to "gas-guzzling" American vehicles of the time. This triggered a drop in American auto sales that lasted into the 1980s.

The Western nations' central banks decided to sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers, and the policy is now considered by some to have deepened and lengthened the adverse effects of the embargo. Recent research shows that that the modern economy, represented by the period after 1985, is very resilient to energy price increases compared with the earlier era.

Long-term effects of the embargo are still felt. Many in the public remain suspicious of oil companies, believing they profiteered, or even colluded with OPEC. In 1974 seven of the fifteen top Fortune 500 companies were oil companies.