Oil Crisis

Oil provides the main source of energy for advanced industrial economies. A sudden rise in the price of oil due to, for example, speculation or to a severe disturbance in the existing relationship between supply and demand can therefore create an oil crisis. This can endanger economic and political stability throughout the global capitalist economy. In the postwar period there have been two major oil crises. The prospects for further crises cannot be discounted.

The first major oil crisis of the postwar era occurred in 1973. This was caused when Arab members of the Organization of Petroleum Exporting Countries (OPEC) decided to quadruple the price of oil to almost $12 a barrel. Oil exports to the United States, Japan, and Western Europe, which together consumed more than half the world's energy, were also prohibited. This decision was made in retaliation for Western support for Israel in the Yom Kippur War with Egypt and in response to a persistent decline in the value of the U.S. dollar (the denominated currency for oil sales), which had eroded the export earnings of OPEC states. With the global capitalist economy already experiencing difficulties, these actions precipitated a steep recession accompanied by rising inflation. This forced capitalist nations to embark on a process of economic restructuring in order to reduce their dependency on oil and prompted fears that the United States might take military action in order to secure free access to its energy supplies. Although the oil embargo was lifted in 1974, oil prices remained high, and the capitalist world economy continued to stagnate throughout the 1970s.

The second major oil crisis occurred in 1979 as a result of the Iranian revolution. High levels of social unrest severely damaged the Iranian oil industry, leading to a large loss of output and a corresponding rise in prices. This became even worse following the outbreak of the Iran-Iraq War, which further added to the level of instability throughout the region. In 1981, the price of oil was stabilized at $32 per barrel. By 1983, however, with major capitalist economies having adopted more efficient methods of production, the problems of the 1970s had been transformed into a relative oversupply of oil rather than a shortage.

At the present time, world oil prices have reached record levels. This is primarily due to political instability in the Middle East and to a growing demand for oil from developing nations. Despite this, the emergence of another severe energy crisis has so far been averted. This is due to the historically low levels of interest rates being maintained in advanced capitalist economies in response to the onset of a world recession from the turn of the millennium. Nevertheless, the prospect of a future crisis cannot be discounted, especially given the ongoing expansion of the international economy coupled with the finite stock of world oil.