Finance

Israeli War, instituted an oil embargo against the united States and Holland. The Arab oil embargo came at a time of declining domestic crude oil production, rising demand, and Increasing Imports. The embargo was accompanied by decreased OPEC production. And with minimal global excess production capacity available outside OPEC, created short-term shortages and price increases. (7) When Arab production was restored and the embargo lifted six months later, world crude oil prices had tripled from the 1973 average to about $12 per barrel, and OPEC was firmly in control of the world oil market.

Industry Action/Reaction: U. S. Refiners made short-term changes In oil purchasing and began Importing crude OLL from any available source. About 30 percent less of the more costly crude 011 was Imported during the embargo. Iran at the time appeared to be a stable, long- term source. Iran moved to expand sales to the united States, and these imports served to offset losses from Kuwait and Libya until Libyan crude oil imports resumed ;n early 1975. ; Imports from other Arab OPEC countries resumed shortly after the embargo ended in March 1974, and continued to climb through 1977.

Despite reduction buildups from the North Sea and Alaska, Arab Pope’s share of U. S. Crude OLL Imports Increased from nearly 26 percent In 1973 to 36 percent In 1977, when imports were than at historic high levels which were not again reached until 1994. ; The refining industry moved to develop technology and processing methods to reduce fuel consumption and to increase operating efficiency. Results: The embargo caused sudden price hikes and short-term shortages of refined products after decades of ample supplies and growing consumption. Tight supplies caused lines to form at gasoline stations.

All petroleum products were much more consumers were paying approximately 57 percent more for leaded regular gasoline and 91 percent more for home heating oil. (8) These increases reflect the increase in world oil prices over the period. The large Jump in energy prices is widely considered to be a cause of the economic recession that occurred in 1974 and 1975, though some later economic studies indicate that other factors may have contributed. (9) ; Various efforts were undertaken to conserve energy and to switch from petroleum to less expensive alternative fuels.

Petroleum consumption declined both in 1974 and 975 as a result of conservation efforts. (10) Alternative fuels in some industrial and electric utility facilities replaced large volumes fatalities fuel oil and residual fuel oil. ; To plan for future supply disruptions and to establish secure stable supplies, the United States Joined with 20 other nations in 1974 to form the International Energy Agency (EIA). Member nations, including the United States, developed plans to establish strategic reserves for use in any future supply disruptions. Legislation was put in place over the next several years that had a significant impact on all aspects of the petroleum industry. Iranian Revolution of 1978-1979 Description: The Iranian Revolution, which began in late 1978, resulted in a drop of 3. 9 million barrels per day of crude oil production from Iran from 1978 to 1981. World supplies appeared to be tight, although much of this lost production was offset initially by increases in output from other OPEC members, particularly from Iran’s Persian Gulf neighbors. (21) In 1980, the Iran-Iraq War began, and many Persian Gulf countries reduced output as well.

OPEC crude oil prices increased to unprecedented levels between 1979 and 1981. By 1981, OPEC production declined to 22. 8 million barrels per day, 7. 0 million barrels per day below its level for 1978. Industry Action/Reaction: At the same time OPEC was trimming output, companies and governments began to stockpile oil and build reserve supplies. Those actions, combined with the cuts in production, put upward pressure on oil prices. The world price of crude oil (22) jumped from around $14 per barrel at the beginning of 1979 to more than $35 per barrel in January 1981 before stabilizing.

Prices did not drop appreciably until 1983, when the world price stabilized between $28 and $29 per barrel. The high cost of crude oil stimulated exploration and production operations in non-OPEC countries, prolonged the productive life of marginal wells, and made secondary and tertiary production techniques profitable. In addition to these trends, development projects in the North Sea, Mexico, and the North Slope of Alaska began to contribute significantly to world crude oil supplies. By 1985, non-OPEC production comprised 69 percent of total world production, up from 50 percent in 1978.

These trends allowed U. S. Refiners to tap new sources of non-OPEC supply. ; The rapid increase in non- OPEC production caused OPEC, led by Saudi Arabia, to defend its official price of $34 per barrel by cutting output further. Between 1978 and 1985, OPEC production fell from 29. 9 million barrels per day to 16. 6 million barrels per day. Over the same period, as U. S. Refiners imported proportionately more crude oil from Canada, Mexico, the United Kingdom, and other non-OPEC countries, Pope’s share of U.

S. Crude oil imports fell from 82 percent to 41 percent. Results: The higher oil prices depressed U. S. Petroleum consumption and encouraged applications, and industrial processes, appliances, equipment, and motors were dad more efficient. These developments had a large impact on U. S. Petroleum demand, which from 1978 to 1983 fell from 18. 8 to 15. 2 million barrels per day, the lowest level since 1971. ; World demand for petroleum also fell steeply in response to the rising crude oil prices. From 63. Million barrels per day in 1980, world petroleum demand slid to 60. 1 million barrels per day in 1985, a drop of 5 percent. ; Western Europe, with petroleum demand almost as high as U. S. Levels, reacted with equally strong reductions. Distillate and residual fuel oils, the primary components of Western European demand when it reached its peak in 1979, showed the greatest declines. (23) In countries in the Far East and Oceania, declines in petroleum use as a result of conservation and fuel-switching were largely offset by other factors.

China, Japan, and other countries with low-cost materials, labor, and in some cases more efficient production methods, were successfully competing with the United States in energy-intensive industries. As a result, in the Far East, there was a growing demand for petroleum for use in steel production, petrochemicals, metals mining, and other energy-intensive industries. 24) Persian Gulf Crisis of 1990-1991 ; Iraq invaded Kuwait on August 2, 1990, causing crude oil and product prices to rise suddenly and sharply for the third time in 17 years.

After the United Nations approved an embargo on all crude oil and products originating from either country, fears of shortfalls similar to the magnitude of those in 1979 caused the rapid price escalation. Between the end of July and August 24, 1990, the world price of crude oil climbed from about $16 per barrel to more than $28 per barrel. The price escalated further in September, reaching about $36 per barrel. ; When the United Nations proved the use of force against Iraq in October 1990, prices began falling.

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