Oil Crisis and How It Is Affecting the Economy Essays

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Oil crisis and how it is affecting the economy

With the current spike in oil prices, many American consumers have asked, “What is going on?” In order to fully understand the current situation and how it is affecting the economy one must look at a variety of factors including: the history of oil crisis in the United States causes of the current situation, and possible outcomes for the future. It is only after meticulous research in these topics that one is prepared to answer the question, “what is the best possible solution to the oil crisis?”

Although many critics have not yet labeled the current oil situation a “crisis,” there is sufficient evidence that it is becoming more severe and is beginning to reflect oil crisis of the past. The current crude oil price spike began early in 1999 due to a variety of factors. Struggle in the Middle East along with minimal policy changes from the Organization of Petroleum Exporting Countries and the U.S. Government has kept prices high to this very day.

The History of Oil Crisis within the United States

Before looking at the current oil situation, it is important to understand the times of oil crisis in our country’s past. Through the years between 1970 and 2000, the price of oil has risen and fallen in often-drastic amounts. It is these price fluxuations in crude oil that has caused fuel prices to vary and the economy of the United States to be volatile.

Throughout the past twenty years there have been several drastic changes in oil prices. These dramatic shifts are helpful to look at because of their impact upon the economy and the oil industry. During this time period there are three major shifts in oil price that can be linked to specific events in world history (Miller, 1998). First, the Arab oil embargo of 1973 caused a widespread oil crisis and brought crude oil from three dollars a barrel to a staggering twelve dollars a barrel. Second, the 1979 Iranian revolution caused another crisis that brought crude oil prices to an all time high of thirty-six dollars per barrel. Finally, the third major shift occurred in 1991 due to the Persian Gulf War (Miller, 1998).

Source: The Energy Information Administration (Hakes, 1998).

The first large price shift in oil prices came in 1973. The oil crisis of 1973 began in the Mediterranean because of a war. The Yom Kippur War was a result of an attack on Israel by Syria and Egypt an October 5, 1973. Throughout history, the United States has always shown support for Israel and its campaigns. This situation was no different. The United States and many countries in the western world showed strong support for Israel (Williams, 1999). As a result of this support, Arab exporting nations imposed an embargo on the nations supporting Israel (Williams, 1999). Because these nations had the power of a monopoly in the oil industry, they tried to use the embargo as a blackmail technique. The Arab nations began the embargo by curtailing oil production by five million barrels per day. In turn, the United States increased production in other countries by about one million barrels per day. The remaining net loss of four million barrels per day extended through March of 1974 and represented seven percent of the free-world production (Williams, 1999).

The oil embargo was imposed by Arab oil producers through the then-powerful cartel, the Organization of Petroleum Exporting Countries (OPEC)(Miller, 1998). OPEC was founded in 1960 with five members: Iraq, Kuwait, Saudi Arabia, and Venezuela. Six other nations had joined OPEC by the end of 1971. These included Qatar, Indonesia, United Arab Emirates, Algeria, and Nigeria. This cartel had experienced a decline in the real value of their product since the foundation of the Organization of Petroleum Exporting Countries (Williams, 1999). But in March of 1971, the power to control crude oil prices shifted from Texas and the United States to OPEC because of a