The Influence of the 1973 Oil Embargo on the United States Economy

The Influence of the 1973 Oil Embargo on the United States Economy

In 1967, Israel was invaded by Syria, Egypt, and Jordan, Arab states that were determined to weaken its economy. The invasion resulted in a six-day war, whose outcome was Israel seizing Syria’s Golan Heights, Jordan’s West Bank, and Egypt’s Sinai Peninsula. Jordan, Syria, and Egypt were angered at the capturing of their prime regions, an aspect that prompted them to plan retaliation six years later. In 1973, the above Arab states invaded Israel’s northern and southern borders through a surprise attack and nearly overpowered the country’s army (Corbett, 2013). The United then-president, Nixon, decided to intervene and supplied Israel’s army with weapons.

On witnessing the same, the Soviet Union decided to equip the Arab states with more weapons as a way of countering the move by the United States. Former President Nixon was unfazed; he increased the level of support to Israel’s army to 4 out of the usual five that the United States military employs in wars. This war that Israel, Egypt, Syria, and Jordan engaged in 1973 was named the Yom Kippur War (Corbett, 2013). Three weeks into the fight, the United Nations intervened, and the Yom Kippur war ceased. However, the impacts of the war impacted the United States significantly as friends of the Arab States involved in the 1973 war responded.

The Arab states that formed the Organization of the Petroleum Exchange Countries (OPEC) decided to place an oil embargo on the crude oil supply meant for the United States. OPEC nations did this to punish the United States for helping Israel, yet they perceived it as an enemy. The effect of the oil embargo placed on the United States was an oil price hike from $2 per barrel of crude oil to $11 and a 40% price increase in gas in gas stations (Schneider, n.d.). Oil demand rose rapidly as oil became a rare commodity in the United States; OPEC had nearly succeeded in weakening the position of the United States as a superpower for President Nixon’s decision to involve the country in the Yom Kippur War of 1973.

The outcomes of the above instance can be explained using an economic approach. In a typical economy, the price of goods and services is determined by forces of supply and demand. If the store is more than the demand for a product, the costs of the good or service decline, and if the order is higher than the supply, the price rises. The forces of demand and supply often can control the cost to an equilibrium point, where the quantity supplied equals that demanded. The United States must have been enjoying this equilibrium price before the oil embargo, and if there were increases or decreases in supply or demand, they must have had little impact.

However, in 1973, the external forces of OPEC countries influenced a spike in oil the prices as they intentionally caused a commodity deficit in the United States. As the oil supply in the country reduced significantly because of the oil embargo placed on it as a punitive measure, the quantity demanded rose sharply (Schneider, n.d.). This economic event created disequilibrium because the quantity supplied of oil was lower than that required by gas stations. Moreover, the state of disequilibrium caused oil prices in the region to rise rapidly, and this nearly weakened the United States economy.

References

Corbett, B. (2013, November 22). Oil shock of 1973–74. Federal Reserve History. https://www.federalreservehistory.org/essays/oil-shock-of-1973-74

Schneider, G. L. (n.d.). The 1973 oil crisis and its economic consequences. Bill of Rights Institute. https://billofrightsinstitute.org/essays/the-1973-oil-crisis-and-its-economic-consequences

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Write a 350- to 700-word analysis assessing how 1 of the following major economic events influenced supply, demand, and economic equilibrium in the US economic activity:

Rapid price increases, such as caused by the 1973 oil embargo or the aftermath of a major hurricane
Dramatic employment drops, such as the combined impact of the 2006 housing bubble burst and the subsequent Great Recession
Crippling interest rates by the Federal Reserve, such as those of the 1975 – 1985 time period
The collapse of the Soviet Union in 1991, the end of the Cold War, and the “peace dividend.”
The dot-com bubble from 1994 to 2000 and the subsequent dot-com crash