The Role of the Federal Reserveįrom the vantage point of policymakers in the Federal Reserve, the 1973-74 oil crisis served to further complicate the macroeconomic environment, particularly in regard to inflation. This drastic change in the value of the dollar is an undeniably important factor in the oil price increases of the 1970s. Due to the ending of the Bretton Woods agreement, which had pegged gold to a price of $35, the price of gold rose to $455 an ounce by the end of the 1970s. OPEC nations resorted to pricing their oil in terms of gold and not the dollar (Hammes and Willis 2005). Since the price of oil was quoted in dollar terms, the falling value of the dollar effectively decreased the revenues that OPEC nations were seeing from their oil. The devaluation of the dollar that was experienced in the early 1970s was also a central factor in the price increases instituted by OAPEC. These market dynamics, matched with the effect of OPEC nations’ greater participation rights in the industry, allowed OPEC to wield a much larger influence over the price setting mechanism in the oil market since their formation in 1960 (Merrill 2007). Additionally, non-Organization of the Petroleum Exporting Countries (OPEC) oil sources were declining as a percentage of the world oil industry, and OPEC was therefore gaining a larger percentage of the world oil market. Thus, when OAPEC cut oil production, prices had to rise because the American oil industry could not respond by increasing supply. oil industry had a lack of excess production capacity, which meant it was difficult for the industry to bring more oil to market if needed (Alhajji 2005). In addition to these cost pressures, the U.S. In the middle of 1973, wholesale prices of industrial commodities were already rising at an annual rate of more than 10 per cent our industrial plant was operating at virtually full capacity and many major industrial materials were in extremely short supply” (Burns 1974). The higher oil prices, on the other hand, remained (Merrill 2007).Īs Arthur Burns, the chairman of the Federal Reserve at the time, explained in 1974, the “manipulation of oil prices and supplies by the oil-exporting countries came at a most inopportune time for the United States. In March 1974, amid disagreements within OAPEC on how long to continue the punishment, the embargo was officially lifted. These cuts nearly quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974. ![]() oil imports from participating OAPEC nations, and began a series of production cuts that altered the world price of oil. On October 19, 1973, immediately following President Nixon’s request for Congress to make available $2.2 billion in emergency aid to Israel for the conflict known as the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) instituted an oil embargo on the United States (Reich 1995).
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