Conflict in the Middle East: OPEC's 1970s Oil Embargo & Its Impact

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  • 0:05 Struggling '70s
  • 1:09 1973 Oil Embargo
  • 3:20 Effects on the Home Front
  • 4:53 Rise and Fall of Oil
  • 6:39 Lesson Summary
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Lesson Transcript
Instructor: Adam Richards

Adam has a master's degree in history.

The 1970s represented a period of economic distress in the United States. Learn about one of the major factors, the 1973 oil embargo by OPEC, and its devastating impact on the American economy in this video lesson.

Struggling '70s

For Americans, the 1970s represented a decade of economic stagnation, unusually high unemployment and constant financial concern. Presidents Nixon, Ford and Carter all attempted to remedy the daunting economic conditions of the decade, but they were all largely unsuccessful. One of the main culprits responsible for the inert American economy was oil production in the Middle East.

The United States had reached its peak of domestic oil production around 1970. The decade that followed witnessed a dramatic decrease in domestic oil production, yet oil consumption continued to rise. The United States was able to offset its own limited production by importing oil from the Middle East due to an agreement with the Organization of Petroleum Exporting Countries, or OPEC, which was an organization consisting of several Middle Eastern nations to control oil prices. Unfortunately, this meant that OPEC controlled the fate of the United States' energy consumption and, essentially, a part of the American economy. As you will see, in 1973, OPEC, for a number of reasons, drastically raised the price of oil which placed a heavy strain on the American economy.

1973 Oil Embargo

As mentioned above, 1970 represented the peak of oil production in the United States. Simultaneously, President Nixon decided it was in the nation's best interest to remove the United States from the international gold standard, which eliminated the requirement that the dollar had to be backed by gold. Now, why is this important? Simply put, the American dollar was the most powerful currency in the world; it was the basis for all international pricing and transactions.

For example, a barrel of oil produced by OPEC was based off the value of the American dollar. With the dollar no longer required to be backed by gold, its value was fluid. Angry over the decision to remove the dollar from the gold standard and its loss of net profits, OPEC decided to change the value of a barrel of oil from the American dollar to gold. This led to a significant increase in the cost of a barrel of oil for the United States.

The largest economic setback for the United States came in 1973. October 6 marked the beginning of the Yom Kippur War in the Middle East, which witnessed Syria and Egypt attack Israel. Nixon refused to allow the nation to collapse under the pressure of Syria and Egypt. He therefore authorized Operation Nickel Grass to deliver economic and military aid to Israel. Incensed by Nixon's decision to support Israel, OPEC authorized an oil embargo that had devastating effects on the United States economy.

On October 16, the oil embargo went into effect. The price of a barrel of oil rose by nearly 70% to roughly $5 a barrel. This may seem rather low considering in our time we have seen oil well over $100 a barrel, but you must consider the period where wages and earnings were relatively low. Eventually, OPEC nations agreed to a reduction in oil production in correspondence with the embargo. The price for oil eventually reached $12 a barrel in 1974.

The limited production of oil, coupled with the rising price of a barrel, resulted in an international recession. The effects of the recession were felt on the American home front as both inflation and unemployment skyrocketed. Many historians agree that the period of economic instability from 1970 to 1973 represented the worst financial distress the United States had seen since the Great Depression.

Effects on the Home Front

Rising inflation and unemployment were two large aspects of the OPEC oil embargo, but Americans faced additional struggles throughout 1973 and 1974 due to the incident. Gas rationing was the most prolific side effect. Congress decided to ration the amount of gasoline Americans could purchase in order to conserve oil and limit the amount of oil being imported from the Middle East.

As a result, Americans were limited to acquiring gasoline via the following system: if an individual had an even number as the last digit of his or her license plate, then that person was allowed to obtain gasoline on even-numbered days in the calendar year and vice-versa for odd-numbered plates. It was a noble attempt at conserving gasoline, however many gas stations had a limited amount of product to sell. This caused long lines at the pumps with no guarantee that the consumer would have the ability to acquire gasoline.

Concurrently, the cost of consumer products steadily rose. Remember, many of the products which you and I use are derived from oil. Rubbers, plastics, chemicals, papers and waxes all come from the manipulation of oil. Consumers in the 1970s felt the influx in price on all of these products without a corresponding rise in income.

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