Opec Oil Embargo's Effects on the Macro Economy

2031 WordsApr 10, 20139 Pages
Drew Haley Overview The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to unify the policies of oil exporting countries in the Middle East (About Us). During the 1973 Arab-Israeli War, the United States and Netherlands helped Israel in this war with supplies. This angered OPEC countries and acted as a catalyst for the 1973 oil embargo (Reid). Many countries in OPEC and most notably Saudi Arabia, wanted Israel to retreat from territories they gained during the war (Reid). The embargo that resulted caught many Western countries flat footed and sparked a global recession. Economic Effects In October of 1973, OPEC announced that it would increase the price of oil by 70% by cutting production by 25%…show more content…
Another policy that United States implemented was that oil already extracted could only sell for a certain price while oil that was yet to be extracted could sell at market prices (Origins). This caused the old oil to withdraw from the market. The reason for this policy was to encourage new exploration that would help increase the oil supply. This policy unfortunately hurt the economy because the price of the same commodity was different and not universal. The withdrawal of old oil hurt the supply of oil and increased the price as a result. There already was incentive to explore for oil because of the already high price. This is where the government should of let the market self-correct. Oil that had a marginal cost too high before the oil embargo, now has a positive net present value because the marginal revenue increased. A third policy that America implemented was a universal 55mph speed limit (Origins). The reason for this policy is that cars use less gas at lower speeds. This policy was also resulted in fewer fatal crashes as well. One policy that didn’t last too long was the change to a constant day lights savings (Origins). This policy didn’t last because parents complained that their kids had to go catch the school bus in the dark. This policy would of helped decrease the demand for oil because at the time power plants used oil

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