We have already considered three global financial crises. Two stories began with a situation in the USA. Today there will not be much information about the United States, because the crisis began because of OPEC and oil. By the way, this is the first energy crisis. Although many don`t consider this event as widescale as the Great Depression or the Long Depression. However, we decided to talk about this crisis, because it clearly reflects today’s dependence of the world on black gold. Moreover, this is perhaps the first crisis not related to over-lending.
By tradition, we will approach the subject carefully and snuck up to the crisis itself.
Hydrocarbon addiction began to manifest itself 200 years ago. Since 1870, humanity has actively begun to search for oil fields, and then try to actively increase the speed and volume of production. Actively developed cities near the deposits. At that time, oil, or rather its fraction of kerosene was used to illuminate city streets. This is not just illuminated night streets and as a result a decrease in crime, it is a complete change in the rhythm of life. After all, people changed the length of the day, especially in the winter. In Russia, kerosene was still a luxury, because the economy was weak, as well as the purchasing power of the population.
In 1882, Thomas Edison commissioned the world’s first power plant. It seemed that then the era of oil would end. But it was just beginning. After all, an internal combustion engine appeared.
• In 1896, Henry Ford made the first car.
• In 1903, the Wright brothers made their first flight to Kitty Hawk.
• In 1907, the first gas station was opened.
• In 1913, the Cracking process was patented (oil refining that increases the quality of gasoline).
Demand for gasoline multiplies, fuel oil market begins to develop. Well, closer to our time, you already know everything. Countries unite to control oil quotes (this is what interests us). OPEC is trying to control oil prices, the level of its production, black gold has become a resource of strategic importance. All recent wars are mainly due to oil.
What is OPEC?
The Organization of the Petroleum Exporting Countries (OPEC) – is a union of oil exporting countries. Their main tasks include controlling oil production and global raw material pricing.
The organization was created in 1960 by five oil-producing countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Then there was an overabundance of oil on world markets and these countries wanted to begin to control the quotations of energy resources on which they depend. Then a collective vision of oil production was developed and the Organization Secretariat was created. In 1968, they adopted the Declaration on the Oil Policy of OPEC Member Countries. It stated that each country has permanent sovereignty over its natural resources.
During the 1960s, the number of OPEC member countries doubled. Qatar, Indonesia, Libya, the UAE and Algeria were added.
In the 1970s, OPEC became a fairly influential organization in the oil market, whose policy mainly depended on the cost of raw materials. This period interests us. However, more on that later.
The British Mandate for Palestine was ended on May 14, 1948. Then Ben-Gurion announced the creation of a new state – Israel. Immediately after this, the forces of the Arab League: Egypt, Jordan, Syria and Lebanon began military operations already against the new state. War on Israel was also declared by Saudi Arabia and Yemen.
Initially, Arabs gained dominance in hostilities, but then the situation changed. In 1948, a 10-day offensive by the Jews neutralized the forces of the Arabs. By the beginning of 1949, Israel was able to occupy the entire territory of Palestine.
On January 13, both sides of the conflict began to talk and concluded a truce. However, the conflict remained open.
Well, we won`t torment you with history. We will only say briefly that hostilities were initiated more than once. So, let’s move on to 1973.
The Arabs team enlisted the support of the USSR and again attacked Israel, on both sides. They fought and fought, and as a result, each country declares that it won then. But it isn’t the point.
Against the background of the Arab-Israeli war in 1973, OPEC countries decided to reduce oil production until Israeli soldiers leave the occupied territories. In response, American and European arms shipments to Israel have intensified. Then OPEC decided to take radical measures and completely turn off the supply of black gold to the States and Europe.
Immediately after this, everyone found out that Western countries are significantly dependent on oil supplies. Arab countries with Gulf countries immediately decided to increase oil prices. For 1973-1974, the cost of this raw material increased 4 times – from 3 to 12 dollars per barrel.
Actually, this provoked the beginning of a significant decline in the economies of several countries.
• The stock price of leading US companies fell by 30%.
• Taxes on petroleum products were increased.
• Industrial production fell 13%.
• Gasoline and natural gas grew by 70%.
• Automakers had to refocus on creating more economic models.
• Energy consumption standards have been introduced for the public.
• The restriction on the use of coal has been lifted.
• Things were not going well either in Europe.
• Heavy industry has fallen significantly in the UK. Miners and railway workers went on strike, demanding higher wages.
• France has launched a tough energy conservation policy.
• Demand for bicycles has increased in Germany and the Netherlands, since a ban on the use of motor vehicles on weekends has been introduced.
• The stock market crashed in the UK and France.
• The number of unemployed has tripled in France. In the UK- doubled.
• The total industry of Europe fell by 14%.
Who benefited from all this? The Soviet Union, because at that time the West Siberian deposits were being developed. As a result, the share of oil in Soviet exports almost doubled in 2 years. In addition, oil prices were rising. State revenues grew 4 times by the end of the 70s. Foreign exchange grew 15 times. The peak of the Union’s dominance in the energy market came in 1984.
By the way, today many analysts believe that this «oil needle rigging» ultimately led to the collapse of the Soviet Union.
The second oil crisis.
Not many talk about it and not many know, but there was another oil crisis that hit 1979-1980. Iran’s oil industry almost stopped at that time, and then the Iran-Iraq war broke out, which affected Iraq’s industry. For 2 years, oil prices rose by about 300%, reaching $ 32-36 per barrel. Japanese companies were supposed to pay about $ 50.
For the United States, this was a blow to inflation, which rose to double digits. As a result, interest rates began to rise sharply. As a result, the American stock market in real prices showed a result comparable to the Great Depression.
Such a decline was the last, after which a rapid twenty-year growth began, continuing until 2000. It ended with the dot-com bubble, which we will probably talk about in a future article.