Opec Oil Embargo's Effects on the Macro Economy
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% and a production cut of 5% each month after (Yurgin). At the time, oil was selling for $3. This shock caused the price to increase to $5.12 (Reid). Two days after this initial shock, the price increased again to $11.65. This would cause a new aggregate supply curve left of the original supply curve (decrease in supply). This didn’t have a great effect on demand because oil demand was calculated at the time to have a -.3 to -.35 slope (Issawi). The slope is otherwise known as inelastic demand. The price of oil would increase without there being much of an effect in demand. The price of oil increased by four times, but the world oil output only decreased 7%. In the classical sense this should have only had a minor effect. The classical economics view is completely supply side. It specifically states that changes in price level do not cause changes in output because the aggregate supply curve is a vertical line. Clearly this is not the cause of what happened. Classical economics states that only real factors affect output, such as workers preference. Unfortunately, this does not hold to this particular instance because the embargo caused unemployment due to companies laying off workers or reducing worker hours (Origin).
Oil
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% and a production cut of 5% each month after (Yurgin). At the time, oil was selling for $3. This shock caused the price to increase to $5.12 (Reid). Two days after this initial shock, the price increased again to $11.65. This would cause a new aggregate supply curve left of the original supply curve (decrease in supply). This didn’t have a great effect on demand because oil demand was calculated at the time to have a -.3 to -.35 slope (Issawi). The slope is otherwise known as inelastic demand. The price of oil would increase without there being much of an effect in demand. The price of oil increased by four times, but the world oil output only decreased 7%. In the classical sense this should have only had a minor effect. The classical economics view is completely supply side. It specifically states that changes in price level do not cause changes in output because the aggregate supply curve is a vertical line. Clearly this is not the cause of what happened. Classical economics states that only real factors affect output, such as workers preference. Unfortunately, this does not hold to this particular instance because the embargo caused unemployment due to companies laying off workers or reducing worker hours (Origin).
Oil