Monday, June 27, 2016
Oil Shock I (1973) and the American Automobile Industry
Oil Shock I
In October 1973, OPEC (Oil Producing and Exporting Countries) placed an embargo on oil shipped to the U.S. as a result of American support to Israel during the October 1973 Yom Kippur War. Gasoline, already in short supply since the United States had reached its peak of oil production in 1970, suddenly became very scarce and more costly. Lines formed at virtually every gas station that had gas. At a number of stations, color-coded signs or flags indicated availability. Eventually, even-odd license plate rationing took place, as did a federally mandated reduction in the interstate highway speed limit to 55 miles per hour. Gas station customers, once accustomed to service that included the washing of windshields and oil checks, now waited three hours or more. The situation led to shortened tempers and fistfights, even in laid-back southern California.
OPEC thus used oil as a weapon, and it was a weapon used well. The embargo not only brought the United States to its knees in terms of unemployment and inflation, but also increased the profits of OPEC members nearly seven-fold between 1972 and 1977. Gas prices, responding to a nervous spot market, climbed 70 percent. Along with the embargo and further price increases, OPEC announced a cut in oil production. Leonardo Maugeri recounted that, “Total Arab oil production in September 1973 had reached 19.4 million barrels per day; in November, 15.4 million.”
Conspiracy theories abounded as the price of gas ran up. Were the Arabs or the oil companies at the heart of the problem? As studies subsequently demonstrated, it was neither. Rather, the decrease in supply wasn’t the chief cause of Oil Shock I and its impact. Looking back to that time of fear and confusion, Maugeri claimed that “considering as well additional output from other parts of the world, there was never a shortfall in supply. It was not loss of supply, but fear of possible loss that drove up the price.”
Federal government action in response to the oil embargo of 1973 and 1974 was largely ineffectual, and indeed even made things worse. In response to the inflation that followed, the Federal Reserve Board attempted to contract the economy by raising interest rates, and in so doing only deepened the recession. President Nixon, already facing a crisis in confidence over Watergate, called for a $410 billion “Project Independence,” based on American efforts to develop synthetic rubber during WWII. Nixon’s proposal sought to make America energy independent by 1985, a worthy goal that none of the energy experts in Washington thought possible. Nixon’s successor, Gerald Ford, emphasized supply rather than a curtailment of demand on the part of Americans, and thus encouraged the development of nuclear power plants, an initiative that that hit a brick wall after the Three Mile Island accident in 1979. Politicians were adverse to placing blame for the energy crisis on those who were most responsible, namely the American consumer, who used a disproportionate percentage of the world’s petroleum supplies and owned more automobiles per family compared to other developed nations.
The oil shocks of 1973 and 1979 did more to forcefully influence Detroit’s direction in the manufacture of more fuel-efficient automobiles than federal government Corporate Average Fuel Economy (CAFE) standards and the 1978 Gas Guzzler Tax. Indeed, the shortage of petroleum products and the rise in the cost of gasoline, along with foreign competition carried more weight in transforming automotive technologies than consumer demand or government regulation.
 The definitive history of the oil companies remains Daniel Yergin, The Prize (New York: Simon and Schuster, 1991), 606-666;. See also Alvin Alm and Robert J. Weiner, Oil Shock (Cambridge: Ballinger, 1984); David Frum, How We Got Here: The 70’s (New York: Basic Books, 2000); Leonardo Maugeri, The Age of Oil: The Mythology, History, and the Future of the World’s Most Controversial Resource (Westport: Prager, 2006); David E. Nye, Consuming Power: A Social History of American Energies (Cambridge, MA: MIT Press, 2001); T. M. Rybczynski, The Economies of the Oil Crisis (New York: Holmes and Meier Publishers, 1976).
 Leonardo Maugeri, The Age of Oil, 113.