Oil Crisis Impact On The United States, Essay Example

Prior to the 1950’s the United States was able to supply the countries demand for oil independently. As the 1950’s progressed there was increased demand, which the United States was no longer able to meet. As the years progressed and the domestic demand continued to increase, oil imports from other countries began. By the 1970’s more than a third of oil used was imported from other areas of the world. This opened up potential problems for the United States because it created a dependence on foreign governments and the many relationships that are involved. The potential for difficulty and problems was now eminent because of the dependence on other countries for supplemental oil supply. The relationship between the United States and foreign markets was at risk at any rate; however the interaction between the Middle East and other areas now would pose potential problems. In fact, the Yom Kippur War that broke out in October of 1973 caused issues for oil imports, thereby affecting the economy. The war began when Egypt and Syria waged attack on Israel. The United States became involved when they sent emergency aid to Israel. OPEC became involved and imposed an oil embargo against Israel allies, which led to oil shortages in the United States. According to Morris, “1970’s disasters had at least three primary roots – the loss of business vision, demographic shifts, and gross economic mismanagement”. ¹ This suggests that the waste of natural resources prior to the oil crisis opened the door to foreign imports, which ultimately created a dependence on other markets for stability and the country’s economic welfare.

Notably a decrease in supply causes an increase in pricing, which created difficulty for individuals in the ability to afford energy costs. As the price for energy increased other pricing also increased because the higher rate of travel, therefore leading to an increased rate of inflation.

This chain of events caused a need for increased energy conservation and ultimately deindustrialization. The slowing of manufacturing led to decreased productivity in many areas, but especially in the automobile and steel industries. As the United States slowed in manufacturing it allowed other areas of market such as Europe and Latin America to become more competitive, this increased the financial difficulty for the U.S. and led to loss of jobs.

Economic Impact Of 1970’s Oil Crisis

While the oil crisis of the 1970’s had a negative effect on the United States economy it did not lead to devastating financial effects. While prices rose and there was a shortage of oil supply, it was a relatively short span of time until the problem was rectified. In order to address the shortage, Americans were urged to save energy and other changes such as speed limit changes were enacted. Oil prices were drastically increased and it made Americans more aware of the preciousness of the commodity, which ultimately led to the understanding of conservation. As Krugman, Dominquez and Rogoff, note that inflation will surface and present itself, meaning that at some point in the relationship of oil imports, higher pricing would have become a reality.² Inflation was high for that year; however it created awareness of the political and economic situation whereas oil was used as a war weapon in times of conflict. The economy had been weakened by the Vietnam War, but prior to that it was a growing market. While the oil crisis was a definite detriment it was more of an isolated event that did not tax the positive economy of the country to the point of crisis. The industrial period and growth are likely to credit for allowing the economy to survive the first oil crisis.

Most all industries suffered after the oil crisis of the 1970’s. Unemployment grew to as much as 20% as industries sat idle. ²  The booming automobile industry came to a halt as the price of gasoline was expensive and thereby drove up pricing of the manufacturing process. Shortages of energy caused families to ration their energy usage and therefore gave them a reason to save rather than engage in generous usage as they had been for years. The agricultural field was also hindered during this time as the ability to grow crops, fertilize and use their farm equipment. As the price of growing food increased, again other prices soared, leading to high inflation, shorter demand and decreased beliefs of prosperity.

The oil crisis of 2000 was a multifaceted situation that had developed over the past several decades. In the 1970’s there was an alliance between the United States and foreign markets, however the complexity of overall world market had grown enormously. In 2000, China and Japan were a large part of the equation and the demand/supply ratio of oil.⁴

The population of the world, along with the federal deficit had led to the dependency on oil & other commodity trade and the mere stability of the economy. Other foreign areas are placing a high demand for oil; an example would be the mass building and manufacturing present in China. The deficit that is carried by the United States is also a leading factor that led to a damaged economical state. The dependence on Chinese and Japanese imports allows those foreign markets additional resources and placed the United States at an even higher disadvantage. With an increased demand for oil by the U.S., there is also the risk of increased inflation, which hinders the economy as a whole. ² As pricing adjusted to the demand-supply issues that took place in 2000, citizens found a rising cost to heat their homes and travel. Gasoline was adjusted for the rising price per barrel of oil and caused additional struggles. Other factors such as the overextended housing market were also to blame for the detriment of economic crisis. Individual families and their budgets were already stretched thin and with rising inflation, it only worsened the problem.

Prior to the 1970’s economic theory believed that there was in inverse relationship between inflation and unemployment. If inflation grows and prices increase, the unemployment will decrease because the increase in demand will encourage companies to increase production. ² On the other hand, if prices began to fall, unemployment would increase and the overall inflation rate would fall. In order to regulate the economy, all the Federal Reserve had to do was regulate the money supply. An increase in the supply of money would increase employment and promote economic growth; this was Keynesian economic theory. ³ Keynesian theory simply put is an economic theory that advocates active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.

At the close of the Vietnam War, the economy was experiencing a period of slow economic growth, high inflation rates, and high unemployment. This is in direct contrast to the prevailing economic theory. The reasoning was blamed on the world’s new found concern with energy crisis, a worldwide oil shortage. Countries were conserving oil reserves for their own future use, causing demand to increase for the abundant reserves in the Middle East. The ongoing strife between Israeli states and the Arab Nations caused what became known as the Arab oil embargo. The embargo drove oil and gas prices to unheard of highs. In America, the demand for gas stayed relatively constant which allowed stagnation to prevail. Even as the oil embargo ended, the price of fuel continued to remain high.

Some blame the continuance of high inflation on the fact that no one wanted to take responsibility for the federal money supply and the nation’s inflation problems. ² Experts blame the 1970’s inflation three things. First, the lack of an influential policy maker in the Federal Reserve who was willing or able to place high priorities on stopping inflation. Second, there was a trend to “blame the 60’s” for the policies that left in place to deal with inflation and unemployment. And third, remnants of the great depression believed that business cycles were a fluctuation around rather than a shortfall below outputs and employment.

In conclusion, understanding the influence of the oil crisis in both the 70’s and again in 2000, one must understand the entire demand. While the United States is dependent on foreign oil sources, so are other countries, which create a precarious situation. Not only is there concern for the relationship between the United States and Middle East countries, there is also some concern for the relationship between other countries as well. As the United States deficits grow and the demands for oil increase, it only increases the amount of demand and vulnerability that is present.

Notes

Charles R. Morris. The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (New York: Public Affairs, [March] 2008).

Krugman, Paul. It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap. Massachusetts institute of Technology, 2008.

“Petroleum”. The World Book Encyclopedia Vol. 15. Chicago: World Book, Inc., 1997.

Blanchard, Olivier (2009). Macroeconomics (Instructor’s Review Copy) (5th ed.). Prentice Hall. pp. 152, 583.