“The meek shall inherit the earth…But not its mineral rights” Paul Getty
1973 saw the first and severest energy crisis brought about by OPEC countries who reduced oil production. The economic crisis that started in the US in late 1973 significantly surpassed the global economic crisis of 1957-1958 in terms of the number of affected countries, duration, severity and devastation and, in certain aspects, was similar to that of 1929-1933. Besides, over 10 million people were shifted to part-time or laid off by companies. Real income of population fell everywhere. However, the 1973 Oil Crisis boosted oil exports to the West from the Soviet Union and heralded the independence of the USSR and, later, Russia from the oil pipeline and oil dollars.
Confrontation, or Origins of the Energy Crisis
Developed countries’ dependence on oil imports from third world countries who owned 90% of proven oil reserves of the capitalist world was quickly growing after the Second World War. The liquid fuel turned into a major source of energy given the number of technological advantages it had over coal and the policies of the International Petroleum Cartel which used low oil prices to oust coal from the energy consumption balance and didn’t encourage its exploration in developed countries. A serious inconsistency between the balance of reserves and consumption of primary energy carriers in the world occurred in the 1950-60s. There was a spike in the imports of cheap energy resources, primarily oil, from developing nations, and production growth for own energy resources slowed down and, in a number of cases, stopped altogether.
Dominated by US oil monopolies, the International Petroleum Cartel remained prevalent in the world’s oil industry by early 1970s. The Cartel was responsible for about 50% of petroleum production of all capitalist countries in 1972; it controlled 85-90% oil exports from developing countries. The Cartel generated its huge profits from the difference between monopoly-driven low prices that oil was purchased at from developing exporter countries and relatively high petroleum product prices in importing countries.
Having opted for a path of independent development, oil-producing countries persistently strove to restrict the scale of foreign capital activities by increasing taxes for concession companies, purchasing an interest in their authorized capital, creating the public sector in oil industry, nationalizing foreign concessions. These nations set up the Organization of Petroleum Exporting Countries (OPEC) in 1960 to protect their national interests and pursue aligned policies. By early 1970s OPEC had grown into a force that could resist the Petroleum Cartel.Frankly speaking, the raw materials issue has always been an idée fixe, primarily from the point of view of controlling access to resources or distribution of profits. The energy crisis was triggered by the fourth Arab-Israeli war. Arabic countries’ Ministers of Petroleum came to a meeting in Kuwait on 13 October 1973. It was the seventh day of the war. Tanks were on fire and people were dying on Mount Sinai and the Golan Heights. The Ministers were faced with the issue of both supporting Arabic troops in the battlefield and using the ‘petroleum weapon’. Any doubts about how serious were Arabic countries’ intentions were dispelled after they resolved to cut petroleum production by 5 percent every month until Israeli troops were fully removed from the occupied territories. In practice, Saudi Arabia and Kuwait decreased petroleum production by 10+ percent right away.
One by one, on 20-22 October, Arabic countries announced suspended petroleum deliveries to the United States that supplied Israel with weapons, and later the Netherlands that took a pro-Israeli stance. Production of the liquid fuel contracted in the Arabic countries almost by a third. They introduced an embargo for deliveries of raw materials to refineries that usually exported petroleum products to the US or sold them to the American Navy. To avoid a row with Arabs, Western Europe practically stopped exports of petroleum products to the US, including those produced from other than Arabic raw materials.
There was a meeting of representatives of the Persian Gulf petroleum exporting countries, including Iran, held at the same time as the conference of Arabic countries in Kuwait. They agreed to raise the reference petroleum price by nearly 70 percent and doubled the new price in December. Petroleum prices went fro $3 to $12 a barrel within the next year. OPEC’s economic pressure resulted in a declaration by the countries of the common market in support of the Arabs’ position. Besides, almost all African nations broke off diplomatic ties with Israel. The ensuing political situation increased Israel’s dependence on the US and unveiled the true scale of developed nations’ dependence on petroleum prices.
Realities of the Energy Crisis
The world, nevertheless, had to face the cold reality of the situation with a lack of warmth-producing raw materials. Cold homes, paralysis of part of industry and transport, growing prices, introduction of petroleum product cards – all these were manifestations of the energy thirst in winter 1973-74. At the heat of the crisis western presidents, prime-ministers and ministers of economy dedicated their lengthy statements and interviews to energy issues. Crisis combating headquarters were set up, expert meetings were convened at the national and international levels. ‘Somber Prospects’, ‘We’re In for an Age of Darkness’, ‘Energy War’ – West European and Japanese papers printed features with such headlines to report on new fuel saving measures almost every day.Development limits were now defined by lack rather than surplus of resources. Dreams of the past failed under cruel collision with real political and economic problems that left no single country of the world unaffected. Everything changed after the 1973 energy crisis. Even though negative consequences of structural upheavals weren’t quite fully perceived even common people had to feel the arrival of a new epoch in 1973.
The US restricted supply of liquid fuel to institutions, homes and schools, announced plans to ration petroleum products and increase taxes on them. Rigid fuel oil rations were introduced for the first time after the Second World War. US Congress gave the President extraordinary powers in response to the energy crisis. All industries were not allowed to shift from coal to petroleum, airline companies cut flights, open hours of schools, institutions and stores were limited. People were called upon to reduce indoor temperatures to save energy. Americans increased petroleum production from the continental shelf. The US spoke of the petroleum challenge comparing it to the most serious problems ever faced by the country.
US industry always used to squander energy which was too cheap to worry about. Given cheapness of petroleum, the cost of energy purchased by the US processing industry grew only by 5 percent in current prices from 1958 to 1970. In the meantime, all other spending was growing fast. As a result, industrialists got a powerful incentive everywhere to replace expensive labor with cheap energy. Energy-intensive industries ended up in the gravest position. They had to be the first to raise prices of their products. More expensive energy first hit when real wages of workers started falling.
Suspended petroleum deliveries forced the Netherlands to ban all private car trips on Sundays. West German and Dutch highways looked on Sundays as if after the atomic war. The Prime-Minister of one European nation rode a bicycle to make a point. Demand for bicycles in Italy brought about the shadow market of this vehicle almost forgotten in Europe. Owners of expensive hotels in Paris announced with a sense of humor: ‘Clients that arrive on horseback can have oats and hay for free’. French car producers were forced to suspend production for a few days. The government had to reduce flights, cut show time, limit speed on roads.
British miners announced that they weren’t going to work overtime without relevant remuneration. The Railway Workers’ Trade Union started a strike demanding higher wages almost at the same time. Steel-smelting and chemical industries cut production. The Cabinet of Conservatives took an unprecedented step by introducing a three-day workweek only to wave aside miners’ demands for overtime payment. English airlines cut trans-Atlantic flights. Many ad lights died out in London. The Government ordered to cut supply of gas and other fuel to consumers. ‘The Japanese miracle was left behind’ – bitterly stated a concerned president of one of Japan’s most influential companies.
During the crisis, industrial production in the US lost 13%, Japan - 20%, FRG - 22%, Great Britain - 10%, France - 13%, Italy - 14%. From December 1973 to December 1974 stock prices fell 33% in the US, 17% in Japan, 10% in FRG, 56% in Great Britain, 33% in France, 28% in Italy. Bankruptcies grew in 1974, as compared to 1973, in the US by 6%, Japan - 42%, FRG - 40%, Great Britain - 47%, France - 27%.
The feeling of impending doom was exaggerated. But the energy crisis surely broke out before it was expected. According to expert forecasts, it had to commence a decade later. ‘No other event after the Second World War led to such wide-ranging consequences of international scale’ – reported The Times, - ‘The sudden lack of fuel drove governments to an understanding that the era of abundant cheap energy is over’.
Oil Weapon, Embargo, Showed its Might in Full
Oil weapon played a major role politically and was even more significant economically. Politically, all countries dependant on OPEC petroleum exports were interested in staying on good terms with the Arabic world. These included such countries as Japan, the Federal Republic of Germany, Italy, Great Britain, France – in a word, all developed countries other than nations that had their own resources. The idea of a joint response to OPEC failed, and each country tried to find a solution and ensure petroleum supplies through bilateral agreements. Petroleum consumers shared Israel’s interests in the political field but were increasingly less efficient in supporting them. Palestinians’ motifs met increasing understanding even when reflected in terror acts. The Palestine Liberation Organization and its leader, Abu Ammar, more known as Yasser Arafat, were becoming more influential and gradually PLO grew into almost public authority.‘If you are hostile to us, you won’t get any petroleum. If you’re neutral, you’ll get it, though less than before. If you’re friendly to us, you’ll be getting as much as you used to’ – that’s how Minister of Petroleum of Saudi Arabia, Yamani, summarized the embargo policy.
When the Arabic countries decided to use petroleum in pursuit of their goals they were accused of ‘politicizing’ a commercial product by the west. Such statements drew nothing but a smile. Petroleum had always been politicized. Hardly had anybody forgotten the way imperialist states sent their squadrons to protect their interests, landed troops, organized coups and ‘bent down’ nations that tried to take control over their own riches. The circle of history came round. One French magazine was properly wrote: ‘Middle East countries are free to use their resource in the best way in their own interests: they are entitled to increase petroleum prices in response to demand, preserve their oil fields, use their natural capital in their own interests rather than ours. Being indignant about them keeping us ‘in their control’ means forgetting how Europeans and Americans treated the rest of the world for centuries and still treat whenever they can'.
Western strategy used to be based on a premise to the effect that ‘The Arabs can’t drink oil’. This meant they couldn’t live without selling their raw materials. Indeed, Arabic nations weren’t able to use the bulk of liquid fuel they produced. Arabian oil countries with small populations, however, and Libya had accumulated large gold and foreign currency reserves by that time and could last for a long time without exporting oil at all.
But the situation had another aspect, too. The national currencies of petroleum producing countries were not circulated in the international market. Suspended convertibility of the dollar drove gold out of circulation at a time when the mechanism of special drawing rights didn’t operate yet. Consequently, it was the dollar alone that could serve as the safe haven currency for huge surpluses and the payment currency for huge deficits of the balance of payments of countries involved. As a result, the dollar turned from the surplus currency into a safe haven. What this created in practice was kind of a vicious circle when the balance of payment deficit was to a great degree financed by relocation of surplus dollars to the Middle East and loans offered by OPEC nations to developed countries directly or through such international organizations as the International Monetary Fund. In this way most oil dollars returned to the west as OPEC nations’ deposits in European markets. Many governments borrowed huge amounts from European banks to cover their deficits: London market prospered as never before.
This is why it became obvious soon that instead of large independence of Arabic countries, growing prices only strengthened the interdependence between most important of them and the west, especially with the US. Needs and spending related to petroleum wealth of the Arabic world offered some governments an opportunity to pursue a policy of sustainable economic growth though such development was linked to operation of the petroleum market to an increasingly higher degree, i.e. to availability of buyers.
Energy Crisis Determined Further Development of Global Economy
These couple of years became kind of ‘Axis Age’, or a period that determined future development of global economy to a large extent. Indeed, it was in 1971-74 that the expansion of the European Community coincided with a recession of most developed western economies, especially the US. This period of time gave impetus to commercial development of gigantic oil and gas fields in soviet Siberia. That’s why the ‘energy crisis’ was exceptionally, centrally positioned. Virtually unflinching for decades, stability of the petroleum market was perceptibly shaken as early as in February 1971 when Persian Gulf states managed to get a significant, 20% rise in crude oil reference prices for the first time under the OPEC’s agreement with petroleum-producing companies. However, the genuine explosion of the market occurred in mid October 1973.Last stages of destruction of the gold standard coincided with initial stages of development of the global energy crisis with fascinating calendar precision. 1971: the first serious spike of petroleum prices and a ban on the dollar-to-gold exchange for US residents, 1973: the Federal Reserve System (Fed) ultimately outlaws such exchange, and the petroleum market virtually explodes. Such coincidences support the truth that oil is black gold to a certain degree. It appears that the seemingly impulsive decision to raise export prices was based on objective economic grounds, especially given that gold and oil prices had remained equally stable over the previous four decades.
A spike in oil prices immediately triggered a global economic crisis and stagflation afflicting many countries and not described by classical Keynesianism when reduction in production and growing unemployment rates were accompanied by high inflation. The second impulse of the oil crisis caused a new wave of the total economic decline.
The 1973 crisis shocked almost all economies, developed and developing alike.However, consequences turned out to be very different. Clearly, leading countries recovered from the painful hit before others. There is a more important thing: primarily in the mature economy of such countries, the oil crisis gave rise to formation and development of new macroeconomic tendencies that resulted in major progressive structural changes in the entire global economy.
The explosive expansion of information technologies and industries would have been impossible without strategic relocation of global investment resources to least energy-intensive fields and investments. In other words, modern economy is to a large degree the product of the 1970s energy crisis that hit mainly traditional energy-intensive sectors of industry and made investment in development of new less costly industries more effective. As concerns ‘old’ industries the crisis encouraged development and, later, implementation of energy saving technologies on a scale not seen before. Energy saving devices and technologies, in turn, promoted successful solution of environmental problems of economic development that became increasingly more balanced.
Another consequence of the 1970s oil crisis was gradual withdrawal of some developed countries from strategic imports of liquid fuel and development of their own petroleum production. Hydrocarbon resources of the North Sea shelf were largely explored before the crisis but their commercial development became practical only in the new economic context. Oilmen of Great Britain and Norway hasted to take advantage of this and ensured their countries were independent in terms of energy. The fuel crisis drove other developed countries of Europe to restructure their energy balances. For example, Denmark and the Netherlands were preemptively increasing consumption of natural gas extracted in the coastal shelf and the share of wind was growing in power generation. France was stepping up effort to further develop nuclear energy by increasing its share in the country’s energy balance to almost 80% and practically gave up using fuel oil for power generation.
Consequences of the crisis were much graver for less developed countries that didn’t have their own petroleum. Growing deficits of their balance of payments caused by the need to buy fuel at new prices forced them to take out external funding. Starting in mid 1970s, loans of transnational banks (TNB) become most available. It suffices to say that TNBs’ actual interest rate was negative which naturally stimulated demand for them from developing nations.
Such favorable conditions for borrowers primarily originate from a surplus of credit resources in the international loanable funds market. The matter is that new dozens of billions of oil dollars could be neither invested in the poor economy of major fuel exporters nor deposited in local credit institutions as the Arabs simply had none: the Koran didn’t allow the faithful to set up banks. Financial flows gushed to TNB, principally US-based, because they had nowhere else to go. These flows appeared quite sizeable: Saudi Arabia and Kuwait alone with their small populations received about forty billion dollars of additional revenues a year after 1973.
Foreign debt of developing fuel importing countries was growing at similar rates. It exceeded half a trillion dollars by 1979 almost quadrupling since 1973. In early 1980s the debt grew by another one and a half times and continued growing in the years after, but the nature of growth changed: the main reason for a growing debt in the 1970s was the need to pay an increasing price for fuel imports, while in a later period new borrowings were taken to a large degree for repayment of old debt. Fed’s credit policies were significantly revised after Ronald Reagan’s Republican Administration came to power in the US. As a result, loan capital headed for the US from all over the world, supply of credit resources in the international market perceptibly contracted and the cost of old debt maintenance multiplied. Dozens of developing nations appeared unable to make timely payment of interest and were forced to borrow more foreign money. Their total debt was growing like an avalanche, and the international debt crisis has become an important feature of global economy of recent decades. This phenomenon is rooted largely in the mid 1970s energy crisis.
Consequences of the energy crisis appeared extremely serious for the Soviet Union and not only for the soviet economy, but also for the fate of the USSR constituents. This country played no significant role in late 1960s in the global market of liquid fuel: it was only СМЕА countries that practically imported soviet petroleum and there were no market conditions for trade. A decade later the USSR starts large-scale development of newly discovered major oil fields in West Siberia, its export capacity significantly increases, new pipelines are laid to Europe. As a result, oil turns into the major item of soviet exports and becomes a crucial source of foreign currency revenues.
Before collapse of the USSR their total amount is estimated at 200 bn dollars or more. This wealth didn’t become a blessing for the country and it people. In developed capitalist nations where the oil crisis encouraged energy saving, successful solution of environmental problems and transition to qualitative economic growth, increased export revenues facilitated an unprecedented growth of population’s wellbeing in many oil-producing countries. In the USSR, however, the inflow of oil dollars only drowned scandalous evidence of the impending social and economic disaster. It put off its arrival for some time depriving the country of a chance to avoid revolutionary upheavals and opt for drastic, but manageable and conscious systemic transformations. At the heat of ‘stagnation’ it was billions of oil dollars that actually reinforced unreasonable kolkhoz order by becoming a resource for financing annual procurement of dozens of millions of tons of foreign grain. The unviable and costly economic system and the soviet state in general could hardly exist during the past 10-15 years by endlessly accumulating military potential and maintaining a prolonged and expensive war in Afghanistan but for favorable conditions in the global oil market resulting after 1973.
If the modern man were returned to the age of classic Rome, the muscle power of 80 people would have to be used to meet his usual energy needs. Wood was the main source of energy in early 19th century. Coal nursed humanity in the second half of the 19th and the first third of the 20th century later replaced by liquid and gaseous fuel. The share of coal in the global energy balance contracted from 80% to 35% between 1929 and 1970, while the weight of oil and gas grew from 19% to 63%. In early 1970s in Europe oil covered about 60 percent of energy needs, natural gas - 9, in the US – 44 and 33, respectively, while in Japan oil was responsible for 85 percent of consumed energy.
Effectiveness of Arabic countries’ effort on the oil front was determined by another fact that we have already touched upon: the US, the world’s main consumer of liquid fuel, became its major importer. Pumps at American oil wells, except in Alaska, started working full capacity for the first time but, nevertheless, were unable to meet the country’s need for liquid fuel. It imported about 300 million tons of petroleum a year in 1972. Scientists were involved in projects of taming in the energy of nuclear reactors, sun, wind, natural ‘furnaces’ in depths of the planet and sea tides. Some of these plans were soon to give real fruit. Be as it might, oil and gas will obviously remain major energy carries in the global economy for a long time.
1973 Energy Crisis in the Light of New Investment Theory by Masterforex-V
Any crisis or depression is followed by a rise - it’s the most important and interesting period of time in terms of investing in real economy. It’s vital to pinpoint its exact timing. Increased incomes of the population liven up retail and demand for a variety of services which, in turn, serve as a driving force for wholesale trade and, as a result, production. At this stage almost all kinds of goods and services become more expensive, their sales grow. It’s crucial here to determine the stage of the cycle for a certain type of goods or services and relevant market conditions and see the potential for investment.
An energy crisis occurs whenever demand for energy carriers substantially exceeds their supply. It can be rooted in logistics, policies or physical deficit caused by dire shortage of primary sources of energy. An energy crisis reflects disproportions between a growth in consumption of energy raw materials and their production. Indeed, have a look at latent reasons for the 1973 energy crisis.
TV and radio took pains to convince average people that the Arabic countries were to blame. Their actions are nothing else but blackmail. However, when energy problems appeared in the spotlight, it suddenly covered operations of the ‘Seven Sisters’, too. Clearly, Arabic countries and Iran were raising oil prices based primarily on their own interests. But it turned out that the Seven Sisters took advantage of the panic brought about both by themselves and Arabic countries and inflated prices to generate super-profits. The west was suffocating from oil thirst with oil reservoirs full and refineries loaded. The story of all possible shortages was blown out. Petroleum product prices spiked along with monopolies’ profits.
Even Americans who are used to many things started thinking after they found out that in 1973, in the heat of the oil crisis, profits of the petroleum industry rose almost by 60% a year. The Seven Sisters used to generate the bulk of their profits from producing and selling crude oil, i.e. using OPEC members. But the situation got reversed, and exporting countries (OPEC) started getting almost all revenues from sales of crude oil. And in this context, profits grew by 60%. Isn’t that a paradox? No. The Seven Sisters’ positions in the international arena were relatively weakened in general, but got strengthened both relatively and absolutely in developed countries. The thing is that reservoirs indeed were full during the crisis, and monopolies’ operations cleverly redistributed and diversified.
Then, what stops different investors from generating profits during crises, finding right solutions and significantly reducing the risk of investment loss? A professional and competent investor simply must do this (and many other things) – according to experts of the Investments Faculty within the Masterforex-V Academy.
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