Shocks Oil

Arab embargo

The Arab countries’ intention to impose the oil embargo in 1973 resulted in a major oil shock that affected oil prices across the world. The embargo was an attempt by the Arab oil-rich nations to protest against the United States policies on Israel military intervention in other Arab nations (Zivo & Andrews, 2002). The Arab oil producing and exporting countries made significant reductions in the oil production until their demands to evacuate the Israel forces from other Arab countries was satisfied. Thus, the embargo was used as a weapon to persuade the United States to accept the demand from the Arab countries creating artificial shortages of oil. However, in 1974, the Israel forces continued to occupy other Arab territories despite the embargo that was imposed. The current paper will examine the main effects of oil shocks on the global markets since the year 1973. The major aspects that will be considered in examining these effects include industrial growth, economic growth, and their influence on consumer markets. The paper will look into the demand factors that place the oil products as an essential commodity. Based on the demand factors of the oil products, the paper will analyze the likelihood of a similar embargo in current times. Thus, the analysis will examine the necessity of oil in the 21st century that has great influence on the occurrence of fresh shocks.

The 1973 oil shock affected the global markets in several ways. Firstly, the global oil prices increased by double digits. As a result of the continued shortage of oil production increased, the demand for oil exceeded the supply. The oil producers and sellers charged high oil prices in response to the demand. The increasing oil prices led to increased macroeconomic instability through increasing inflation rates. Generally, the Latin American countries were most affected by the oil crisis. The countries included Brazil, Argentina, and Mexico where the inflation rates averaged 100 percent (Blanchard & Gali, 2007). The major reason for this phenomenon was the lax fiscal and monetary policies adopted by these countries before the oil crisis. Also, the interests rates raised tremendously in several countries due to the steady increases in inflation rates. For example, the interest rates in Brazil increased to over 20 percent. Government interventions through monetary policies enacting restrictive money supply increased the levels of unemployment which affected the economic developments of the countries. As a result, many countries which were affected by the crisis experienced low investment rates and economic growth. Industrial productivity was affected by inadequate and high fuel prices.

The global oil crisis had a significant impact on the developing countries government budget deficit. The average deficit rates across the world increased from 2 percent in 1973 to about 6 percent by the end of the year 1982. The increasing government deficits had significant impacts on the economies of the least developed and middle-income nations. The debt repayments through the internal transfer of resources affected the development of these countries during the late 1980s and 1990’s. The developing nations continued to borrow heavily from the developed nations in an attempt to sustain their industrial productivity and oil demands. The pursuance of strict monetary policies to protect such economies from inflation resulted in a recession in most of the countries (Geller, Harrington, Rosenfeld, Tanishima, & Unander, 2006). Productivity declined and overall consumer prices escalated. According to the International Monetary Fund, the consumer product prices increased to over 5 percent during the period between 1971 and 1975. In 1982, the prices increased by 12 percent. Consequently, economic growth fell significantly in several countries. Another major impact of the oil shocks was the growth of debts in the Western Hemisphere countries. For example, the United States banks had more than 200 percent other capital granted to the least developed countries. A total of 100 percent of the lending went to the Latin American countries hit worst by the oil crisis. Increasing the debt crisis in the countries such as Brazil and Mexico had profound effects on their economic growth which persists even today.

Energy crisis

The oil shock was a major wake for the consumer markets to strengthen their monetary and fiscal policies in preparation for the crisis (Hughes, 1986). For example, a majority of the countries that were affected by the oil shocks were mostly the developing markets in Latin America and Africa. The differential oil effects on the developed and developing markets, thus, called for policy changes in response to crisis situations. For example, the Latin American countries had lax monetary policies that could not effectively respond to the effects of the oil shocks. In the wake of increasing oil prices and escalating inflation rates, the monetary officials had to respond to restore their economies to a steady growth state. Also, the effects of the 1973 oil crisis created awareness of the need to reform the energy policies. Energy prices decontrol was one of the structural adaptation mechanisms adopted by the developed countries to shield the effects of the oil crisis. Due to the scarcity and ineffectiveness of the energy policies adopted by such nations, they were worst hit by the oil shocks. The oil shock was an important wake for the consumer markets to seek alternative sources of energy. Before the crisis, many countries used oil as the main energy source; and such countries rarely sought other energy sources.

The effects of the shock made many countries such as the United States seek other alternative sources of energy such as solar. It also created awareness of the need to redefine foreign policies in a way that they do not interfere with the countries economic relations. As a result of the crisis, the United States had to adopt a more conservative approach towards Arab issues including the advancement of Israel to other Asian nations. The effect of the oil crisis was awake to major consumers of the oil products to exercise sound trade policies that protected the sovereignty of all states. The countries realized the need to exercise their trading agreements with due care while enhancing peaceful relations among the nations.

The results of the 1973 oil crisis created awareness of the major consumer markets to manage their energy consumption in various ways (Hamilton & Herrera, 2004). Firstly, the widespread insufficiencies of oil reserves made it necessary to conserve the energy products and enhance their optimal use. Secondly, the subsequent increases in the prices for the oil products made it mandatory for the major consumers to reduce their oil expenditures through efficient usage. Also, it created awareness of the need to reduce energy consumption adopting efficient manufacturing processes in the industries and adoption of modern technology that enhances efficient energy utilization.

In view of the analysis above, it is evident that oil is demanded in all consumer markets including its major producer, Arab countries. After the oil crisis, all consumer nations were affected more than the producing countries. However, it can be said that the Arab countries were also affected by the shock since their revenues were greatly affected. The global reliance on the oil-producing countries in Asia impacted the industrial production and growth. For example, it is estimated that during the period of the oil shocks, the global production fell by at least 20 percent (Hamilton & Herrera, 2004). The shocks had greater impacts on countries that had weak monetary and fiscal institutions as well as limited sources of energy. It can thus be argued that the consumer markets need more oil than the oil-producing countries. Since most of the Arab oil-producing countries depend on oil as the main export product, their payment balances were affected. During the crisis, the revenues of the oil producing countries fell drastically and this led to reduced economic growth rates.

In my own view, the oil-producing countries in the Arab world can afford another embargo similar to the one lifted in 1973. However, the embargo would result in more devastating effects on the producing countries than on the consuming markets. Energy demands in the 21st century have reached alarming rates due to the increasing industrial growth demands. As a result of the increasing demands, countries will continue to rely on the oil-producing countries in the Arab world. Despite the efforts made by individual countries to explore their own oil reserves, little progress has been made and the dependence of oil from the Arabian nations remains a reality (Rose, 2004). In other instances, discoveries of oil in some countries have been impeded by civil strife and political interferences. For example, discoveries of oil deposits in some countries of Africa such as Sudan have invited serious confrontations between the local populations over its exploitation. In other countries such as Nigeria, Civil strife has compounded the exploitation while in others, the total supplies are inadequate to meet the demand. Thus, a likelihood of new oil-rich reserve nations remains relatively low while the reliance of oil from the Arabia countries is still high.

In addition, the recent developments in the discoveries of alternative energy sources have been relatively low and oil remains the most widely used energy source. Oil is demanded in the industrial sector, the motor sector as well as home appliances. The dependence of oil as the major source of energy has been facilitated by its diverse usages in almost all sectors. The alternative energy sources such as solar energy have limited applications and thus it’s rarely used. Also, such energy sources have rarely been exploited especially in the developing nations that experience the lack of technology to exploit such energy potentials. As a result, many countries across the world rely on oil as their major energy source which implies that the likelihood of another embargo is far from being remote. However, the extent to which the Arab nations can impose a new embargo will be constrained by existing international trade agreements and rules. The likely implications of another embargo include trade sanctions which will result in delayed economic growth. Also, the dependence of oil as the major export for such countries is likely to affect the economic states of the oil-producing Arab countries greatly.

The 1973 embargo was the main reason for the victory of the Arabs after the oil shock. The embargo had far-reaching consequences for the United States and other oil consumers across the world which necessitated the need to seek ways to end the crisis (Mann, 2013). These include the cooperation between the Eastern and the Western nations to solve energy crisis issues. The conservative foreign policies of the United States in response to the oil crisis proved the success of the embargo influencing the United States to accept the demands of the Arabs. The United States had to re-consider their ambitions concerning Israel advancement in other Arab countries prior to the crisis of 1973. The embargo was particularly necessary to the Arab countries to enhance their influence across the world and respect for their sovereignty. As a result of the impacts felt by other powerful countries such as the United States, the embargo was suitable for enhancing cooperation in solving energy problems and crisis.

The oil embargo taught important lessons concerning the oil reliance of the Arab countries. If the oil shock had not occurred, countries such as the United States would still continue to rely on the Arab oil-producing countries for its reserves. The absence of other nations with vast oil deposits across the globe would influence the United States to import its oil from the Arab countries due to the relatively high importation costs of other countries’ oil (Graf, 2012). During the crisis, several countries had to import oils from other nations at relatively high costs. For example, Great Britain had to import oil from Venezuela at $3.80 per barrel to prevent the energy shocks. The reliance on oil from the Arab countries shows the extent to which countries such as the United States could not separate from the oil importation from the Arab nations. Also, the embargo had significant effects on the Japanese industrial production. The energy crisis led to the reduction in Japanese industrial production and growth in the manufacturing sector. Also, the oil producing countries would be more confident about their reserves if they had retained the monopolies enjoyed prior to the 1973 oil shocks.

Conclusion

To conclude, the paper has examined the major impacts of the 1973 oil shocks on the global economies. The major impacts that have been identified include rising oil prices which increased inflation and interest rates across the world. As a result, the economic growth and development of many countries were affected and their gross domestic product reduced by great margins. Other effects included the development of a debt crisis in the developing countries as they financed their budget deficits in an acquisition of oil. The 1973 oil shocks raised awareness of the need to strengthen the monetary and fiscal policies to respond to a crisis. During the oil shock period, such countries as Brazil and Mexico which had weak monetary and fiscal policies were largely affected. Also, it created a need for energy sources conservation in the consumer markets as well as the usage of alternative energy sources. These include use of technologies that ensured efficient utilization of energy. In view of high demand for the oil products and their diverse applications, the likelihood of a new oil embargo is high. However, the application of economic sanctions is likely to reduce the chances of a new oil embargo in the 21st century.

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