Description
oil crisis of 70s and its impact on the economic world.
OIL CRISIS OF THE 70?S
AGENDA
1.
2.
3. 4. 5. 6. 7. 8.
Introduction 1973 crisis: Arab Oil Embargo Economic Effects Impact on International Relations 1979 crisis Impact on India Impact on Automobile Industry Decline of OPEC
Founding of OPEC
•
•
•
•
•
OPEC- Organization of Petroleum Exporting Countries Created at the Baghdad Conference On Sep 14 1960 Five founding members - Iran, Iraq, Kuwait, Saudi Arabia and Venezuela Other members joined in later Organized to resist pressure to reduce prices by the „Seven Sisters?
Bretton Woods System
? ?
?
?
?
Established in July 1944 during world war II Dollar was pegged against gold($35 per ounce of Gold) Other countries currencies pegged against Dollar Establishment of International Monetary Fund(IMF) & International Bank of Reconstruction & development(IBRD) Countries to maintain exchange rates within +/1% of parity
End of Bretton Woods System
?
? ? ? ?
?
US pulled out of Bretton Woods System on 15 August 1971 Britain and other developed nations followed Resulted in depreciation of Dollar Oil was priced in terms of Dollars Oil producers received less real income for the same price Led to „Oil shock?- OPEC raised prices
Political Context: Yom Kippur War
?
?
? ? ?
Started on October 6 , 1973 Egypt and Syria launched a attack on Israeli occupied territories US provided arms & supplies to Israel Soviet Union to Arab Countries OPEC decided to increase prices
1973 crisis: Arab OIL Embargo
?
?
?
?
On October 16, 1973, OPEC announced a decision to raise the posted price of oil by 70% US president Richard Nixon?s decision to aid Israel triggered a collective response by Arab Countries Arab oil ministers agreed to cut production in increments of 5% until their political & economic objectives are met Curbed oil exports to US followed by western Europe and Japan
1973 crisis: Arab OIL Embargo
? ?
Embargo was not uniform across Europe Of the nine members of the European Economic Community (EEC):
? ? ?
Netherlands faced a complete embargo UK and France received uninterrupted supply Other six faced partial cut-backs
?
Embargo was withdrawn after some time after EEC issued a statement of not supporting Israel
OPEC revenue pattern
Immediate Economic Effects
?
Price of oil quadrupled to US $ 12 per barrel by 1974
?
Oil exporting countries accumulated vast wealth
The control of oil came to be known as „Oil weapon? US companies started searching for alternatives
?
?
Price Controls and Rationing
?
Government price controls further accelerated the crisis in case of US
? Limited
the price of „old oil?(that already discovered) ? Allowed newly discovered oil to be sold at higher prices ? Led to withdrawal of old oil from the market ? Creation of artificial scarcity
?
?
The rule intended to promote newer oil exploration wasn?t able to serve its purpose Scarcity dealt by Oil Rationing
Rationing- Different Approaches
?
?
In 1973, U.S. President appointed William E. Simon as the first Administrator of the Federal Energy Office, or the “Energy Czar” Simon allocated states the same amount of domestic oil for 1974 that each consumed in 1972
Worked well for states whose populations were not increasing ? States with increased population faced shortages ? American Automobile Association reported that in last week of Feb 1974, 20% of gasoline stations had no fuel
?
Rationing- Different Approaches
?
?
ODD-EVEN Rationing: Gasoline to be given on the basis of license plates Three color flag system:
? Green
flagUnrationed sale ? Yellow flag-restricted and rationed sale ? Red flag – no gasoline
Conservation and reduction in demand
?
Emergency Highway Energy Conservation Act- National maximum speed limit of 55 mph
?
Daylight Saving Time – calling for clocks to be advanced one hour
?
Automaker including the „Big Three? started developing more fuel efficient cars
Macroeconomic effects
?
?
?
? ?
Japan shifted from oil intensive industries to electronics Central Banks decided to cut interest rates to boost growth Inflation became a secondary concern Actually resulted in stagflation This policy blamed for deepening of the impact
Impact on International Relations
? ? ? ?
?
Western Europe and Japan shifted to pro Arab stance U.S remained a staunch supporter of Israel U.K distanced itself From the U.S Canada changed its stance on Middle East from neutral to pro Arab Non Aligned Block called for a new international Economic order
Soviet Reaction
?
?
?
?
?
Increase in price created opportunities for export of Soviet Oil Production from Siberia and Caspian Basin became cost effective Soviet Union increased oil production Relationship between the Union and middle east turned sour Suspicion increased after invasion of Afghanistan
1979 – Oil Crisis
?
?
? ?
?
?
Occurred due to the Iranian revolution Shah of Iran fled the country Ayotollah Khoemeini gained control Nation wide protests shattered the Iranian oil sector Saudi Arabia and other OPEC nations increased production to offset impact In 1980 Iranian oil production stopped completely after Iraqi invasion
Reason for the crisis
?
?
?
?
?
?
Saudi Arabia announces drastic cut in first quarter oil production Strike by workers at Iran?s nationalized oil refineries Production reduced from 6 million barrels to 1.5 million barrels Saudi Arabia announces intention to increase sale through direct selling Jimmy Carter announces cessation of oil imports from Iran Iran cancels contract with all US companies
Effect on US
?
?
? ? ? ?
Phased deregulation of oil prices Caused domestic oil production to increase Oil imports fell sharply Many states implemented odd-even rationing Coupons were issued but never used Built solar panels on the roof of White House
Effect on Economic Theory
?
?
?
? ? ? ? ?
Inflation in the advanced economies Containment of inflation became top priority Inflation considered a purely monetary phenomenon Moves to avoid creation of excess demand Move towards balanced budget or surplus Fully autonomous role to central banks Addition of inflationary goal Away from Keynesian economics
Stagflation and Keynesian Theory
?
Keynesian Theory ignored the theory of stagflation
?
Stagflation is a supply side phenomenon As Keynesian Economics assumes aggregate supply to be straight line in the long run
?
?
So could not explain stagflation
Philips Curve and stagflation
?
? ? ? ?
Relationship between unemployment and inflation explained by Philips curve Firms hire more when prices rise But in stagflation that is not the case The Philips curve itself shifts upwards Firms do not hire in anticipation of inflation
Impact on India
? ? ? ? ?
Import bill soared Foreign Exchange costs of oil soared Greater focus on exploration Foreign Exchange allocation for ONGC Bilateral agreement with oil producing countries
?
Nationalization of oil companies in India
Contd…
?
Oil majors found unprofitable assets in India not worth retaining
?
Coped up due to rise in exports
Did not have to look for external borrowings
?
Impact on car market
? ? ? ? ? ?
Moved away from large, less economical cars Popularity of medium sized hatchbacks Demand for large cars in the US reduced Demand for small cars was more than supply Import from Japan and Europe Big three also introduced fuel efficient cars
Decline of OPEC
?
?
?
? ? ?
Shift to other sources of Energy Shift of Production pattern Emergence of Russia and other major producers Divisions among member nations Dominant influence of commodity traders Power lies in the hands of Commodities Futures Trading Comission
Crude Production Pattern
THANK YOU
doc_325549601.pptx
oil crisis of 70s and its impact on the economic world.
OIL CRISIS OF THE 70?S
AGENDA
1.
2.
3. 4. 5. 6. 7. 8.
Introduction 1973 crisis: Arab Oil Embargo Economic Effects Impact on International Relations 1979 crisis Impact on India Impact on Automobile Industry Decline of OPEC
Founding of OPEC
•
•
•
•
•
OPEC- Organization of Petroleum Exporting Countries Created at the Baghdad Conference On Sep 14 1960 Five founding members - Iran, Iraq, Kuwait, Saudi Arabia and Venezuela Other members joined in later Organized to resist pressure to reduce prices by the „Seven Sisters?
Bretton Woods System
? ?
?
?
?
Established in July 1944 during world war II Dollar was pegged against gold($35 per ounce of Gold) Other countries currencies pegged against Dollar Establishment of International Monetary Fund(IMF) & International Bank of Reconstruction & development(IBRD) Countries to maintain exchange rates within +/1% of parity
End of Bretton Woods System
?
? ? ? ?
?
US pulled out of Bretton Woods System on 15 August 1971 Britain and other developed nations followed Resulted in depreciation of Dollar Oil was priced in terms of Dollars Oil producers received less real income for the same price Led to „Oil shock?- OPEC raised prices
Political Context: Yom Kippur War
?
?
? ? ?
Started on October 6 , 1973 Egypt and Syria launched a attack on Israeli occupied territories US provided arms & supplies to Israel Soviet Union to Arab Countries OPEC decided to increase prices
1973 crisis: Arab OIL Embargo
?
?
?
?
On October 16, 1973, OPEC announced a decision to raise the posted price of oil by 70% US president Richard Nixon?s decision to aid Israel triggered a collective response by Arab Countries Arab oil ministers agreed to cut production in increments of 5% until their political & economic objectives are met Curbed oil exports to US followed by western Europe and Japan
1973 crisis: Arab OIL Embargo
? ?
Embargo was not uniform across Europe Of the nine members of the European Economic Community (EEC):
? ? ?
Netherlands faced a complete embargo UK and France received uninterrupted supply Other six faced partial cut-backs
?
Embargo was withdrawn after some time after EEC issued a statement of not supporting Israel
OPEC revenue pattern
Immediate Economic Effects
?
Price of oil quadrupled to US $ 12 per barrel by 1974
?
Oil exporting countries accumulated vast wealth
The control of oil came to be known as „Oil weapon? US companies started searching for alternatives
?
?
Price Controls and Rationing
?
Government price controls further accelerated the crisis in case of US
? Limited
the price of „old oil?(that already discovered) ? Allowed newly discovered oil to be sold at higher prices ? Led to withdrawal of old oil from the market ? Creation of artificial scarcity
?
?
The rule intended to promote newer oil exploration wasn?t able to serve its purpose Scarcity dealt by Oil Rationing
Rationing- Different Approaches
?
?
In 1973, U.S. President appointed William E. Simon as the first Administrator of the Federal Energy Office, or the “Energy Czar” Simon allocated states the same amount of domestic oil for 1974 that each consumed in 1972
Worked well for states whose populations were not increasing ? States with increased population faced shortages ? American Automobile Association reported that in last week of Feb 1974, 20% of gasoline stations had no fuel
?
Rationing- Different Approaches
?
?
ODD-EVEN Rationing: Gasoline to be given on the basis of license plates Three color flag system:
? Green
flagUnrationed sale ? Yellow flag-restricted and rationed sale ? Red flag – no gasoline
Conservation and reduction in demand
?
Emergency Highway Energy Conservation Act- National maximum speed limit of 55 mph
?
Daylight Saving Time – calling for clocks to be advanced one hour
?
Automaker including the „Big Three? started developing more fuel efficient cars
Macroeconomic effects
?
?
?
? ?
Japan shifted from oil intensive industries to electronics Central Banks decided to cut interest rates to boost growth Inflation became a secondary concern Actually resulted in stagflation This policy blamed for deepening of the impact
Impact on International Relations
? ? ? ?
?
Western Europe and Japan shifted to pro Arab stance U.S remained a staunch supporter of Israel U.K distanced itself From the U.S Canada changed its stance on Middle East from neutral to pro Arab Non Aligned Block called for a new international Economic order
Soviet Reaction
?
?
?
?
?
Increase in price created opportunities for export of Soviet Oil Production from Siberia and Caspian Basin became cost effective Soviet Union increased oil production Relationship between the Union and middle east turned sour Suspicion increased after invasion of Afghanistan
1979 – Oil Crisis
?
?
? ?
?
?
Occurred due to the Iranian revolution Shah of Iran fled the country Ayotollah Khoemeini gained control Nation wide protests shattered the Iranian oil sector Saudi Arabia and other OPEC nations increased production to offset impact In 1980 Iranian oil production stopped completely after Iraqi invasion
Reason for the crisis
?
?
?
?
?
?
Saudi Arabia announces drastic cut in first quarter oil production Strike by workers at Iran?s nationalized oil refineries Production reduced from 6 million barrels to 1.5 million barrels Saudi Arabia announces intention to increase sale through direct selling Jimmy Carter announces cessation of oil imports from Iran Iran cancels contract with all US companies
Effect on US
?
?
? ? ? ?
Phased deregulation of oil prices Caused domestic oil production to increase Oil imports fell sharply Many states implemented odd-even rationing Coupons were issued but never used Built solar panels on the roof of White House
Effect on Economic Theory
?
?
?
? ? ? ? ?
Inflation in the advanced economies Containment of inflation became top priority Inflation considered a purely monetary phenomenon Moves to avoid creation of excess demand Move towards balanced budget or surplus Fully autonomous role to central banks Addition of inflationary goal Away from Keynesian economics
Stagflation and Keynesian Theory
?
Keynesian Theory ignored the theory of stagflation
?
Stagflation is a supply side phenomenon As Keynesian Economics assumes aggregate supply to be straight line in the long run
?
?
So could not explain stagflation
Philips Curve and stagflation
?
? ? ? ?
Relationship between unemployment and inflation explained by Philips curve Firms hire more when prices rise But in stagflation that is not the case The Philips curve itself shifts upwards Firms do not hire in anticipation of inflation
Impact on India
? ? ? ? ?
Import bill soared Foreign Exchange costs of oil soared Greater focus on exploration Foreign Exchange allocation for ONGC Bilateral agreement with oil producing countries
?
Nationalization of oil companies in India
Contd…
?
Oil majors found unprofitable assets in India not worth retaining
?
Coped up due to rise in exports
Did not have to look for external borrowings
?
Impact on car market
? ? ? ? ? ?
Moved away from large, less economical cars Popularity of medium sized hatchbacks Demand for large cars in the US reduced Demand for small cars was more than supply Import from Japan and Europe Big three also introduced fuel efficient cars
Decline of OPEC
?
?
?
? ? ?
Shift to other sources of Energy Shift of Production pattern Emergence of Russia and other major producers Divisions among member nations Dominant influence of commodity traders Power lies in the hands of Commodities Futures Trading Comission
Crude Production Pattern
THANK YOU
doc_325549601.pptx