The Impact of Rapid Price Increases and Dramatic Employment Drops on U

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Jan 9, 2024

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Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 1

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The Impact of Rapid Price Increases and Dramatic Employment Drops on U.S. Economic Activity The U.S. economy has witnessed several major economic events that have significantly influenced supply, demand, and economic equilibrium. This analysis will focus on two pivotal events: the 1973 oil embargo, which led to rapid price increases, and the combined impact of the 2006 housing bubble burst and the subsequent Great Recession, which resulted in dramatic employment drops. We will examine how these events affected various sectors of the economy and explore the measures taken by the government and businesses to restore economic equilibrium. I. The 1973 Oil Embargo and Rapid Price Increases: The 1973 oil embargo was a pivotal event in the history of the U.S. economy, caused by OPEC's decision to halt oil exports to countries that supported Israel during the Yom Kippur War. This abrupt disruption in the supply of oil led to a significant increase in oil prices and cascading effects on various industries, such as transportation, manufacturing, and agriculture. “The onset of the embargo contributed to an upward spiral in oil prices with global implications. The price of oil per barrel first doubled, then quadrupled, imposing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. Since the embargo coincided with a devaluation of the dollar, a global recession seemed imminent.” (OOTH, nd.) 2

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 The extensive ramifications of the embargo, encompassing heightened inflation and economic stagnation among oil-importing nations, emerged as a result of a intricate interplay of factors that extended beyond the immediate actions taken by the Arab member nations of OPEC. The waning influence of U.S. and European oil corporations, commonly referred to as the "Seven Sisters," which had previously contributed to stabilizing the global oil market, coupled with the diminishing surplus capacity of East Texas oil fields, and the recent decision to allow the U.S. dollar's value to fluctuate freely in international currency exchanges, all contributed to the exacerbation of the crisis. As these overarching factors began to take effect across the United States, they instigated a series of additional measures that went beyond the efforts made in April and November of 1973, which had primarily focused on energy conservation and the development of domestic energy resources. Among these measures were the establishment of the Strategic Petroleum Reserve, the implementation of a national speed limit of 55 miles per hour on U.S. highways, and subsequently, the imposition of fuel economy standards during President Gerald R. Ford's administration. This sequence of events also gave rise to the proposal for the creation of the International Energy Agency, championed by Henry Kissinger. 1. Impact on Supply and Demand: 3

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 “The U.S. monthly average import price for crude oil stood at $2.75 per barrel in January 1973; by September it had increased 23% to $3.38. In October 1973 the Persian Gulf members of OPEC doubled the price of their crude oil, then in January 1974 doubled it again. By that time the average price in the U.S. for imported oil had more than doubled to $6.92 per barrel, and by March it had increased to $11.10. Prices drifted upward during the next four years and held around $13.50 per barrel throughout 1978.” (Hervey. 1994.) The sudden reduction in oil supply caused a spike in energy costs, forcing businesses to bear higher production expenses. As a result, producers had to pass these increased costs onto consumers through higher prices for goods and services, thus creating inflationary pressures in the economy. With consumers facing higher costs of living, their purchasing power diminished, leading to a decrease in overall demand for goods and services. 2. Economic Equilibrium: The oil embargo's impact on the U.S. economy was severe and threatened the economic equilibrium. The rise in oil prices, coupled with reduced consumer spending, created stagflation - a combination of high inflation and unemployment. Policymakers faced a challenging task of stabilizing the economy while tackling the inflationary spiral. 3. Government Response: 4

Jenifer Kephart ECOCB/535 Competency 1 July 15, 2023 To mitigate the impact of the oil shock, the U.S. government implemented several measures. The Federal Reserve tightened monetary policy to curb inflation, which resulted in higher interest rates. Additionally, President Richard Nixon imposed price controls to limit the increase in consumer prices. However, these measures had limited success, and the economy experienced a period of economic uncertainty until the oil prices stabilized. Price per barrel of oil per year: 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 $2.24 $2.48 $3.29 $11.58 $11.53 $12.80 $13.92 $14.02 $31.61 $36.83 II. The 2006 Housing Bubble Burst and the Great Recession: The U.S. housing market experienced a massive bubble leading up to 2006, fueled by lax lending practices and speculative investments. When the bubble burst, it triggered a severe financial crisis that affected not only the housing market but the entire economy, leading to a dramatic drop in employment. “The recession and crisis followed an extended period of expansion in US housing construction, home prices, and housing credit. This expansion began in the 1990s and continued unabated through the 2001 recession, accelerating in the mid-2000s. Average home prices in the United States more than doubled between 1998 and 2006, the 5

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