Examples of supply shocks include unusually bad (good) weather which reduces (increases) the supply of a commodity such as wheat.
For example, a tax cut reduces the amount of money that taxpayers owe the government and frees up money for personal spending. This money is then used by taxpayers to consume certain products and services, which bids up their prices.
Some historians believe the windfall in oil revenues during this period kept the Soviet Union in existence for a considerably longer period of time than would otherwise have occurred................ This project, focused on producing ethanol from sugar cane, is still ongoing and has reduced the oil importation needs of the country, and also has decreased the price of gasoline in that nation
focused on China and the Soviet Union, but the latent challenge to U.S. hegemony coming from the Third World became evident. U.S. power was under attack even in Latin America........this change further strained the Western alliance system, for the United States, which imported only 12% of its oil from the Middle East (compared with 80% for the Europeans and over 90% for Japan), remained staunchly committed to backing Israel.
deciding that inflation was a secondary concern.....
Never had the price of an essential commodity risen so quickly and dramatically. The vulnerability of the Western world had truly been revealed...The era of economic growth which had been in effect since World War II had now ended.......... and large heavy bodies were no longer made in order to preserve oil and boost the economy.
After 1980, oil prices began a six-year decline that culminated with a 46 percent price drop in 1986. This was due to reduced demand and over-production that produced a glut on the world market. This caused OPEC to lose its unity. OPEC net oil export revenues fell in the 1980s.At the same time, the drop in prices represented a serious problem for oilproducingcountries in northern Europe and the Persian Gulf region. For ahandful of heavily populated, impoverished countries, whose economies were largely dependent on oil — including Mexico, Nigeria, Algeria, andLibya — governments and business leaders failed to prepare for a market reversal, the price drop placed them in wrenching, sometimes desperatesituations.When reduced demand and overproductionproduced a glut on the world market in the mid1980s,oil prices plummeted and the cartel lost its unity.Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded in the 1970s, were plunged into nearbankruptcy,and evenSaudi Arabian economic power was significantly weakened. The divisions within OPEC made subsequent concerted action more difficult.
Contents<br />Energy Crisis.<br />Arab-Israel Conflict. <br />1973 Yom Kippur War. <br />Demand & supply shock. <br />1973 Oil crisis... <br />Immediate economic impact of the embargo.<br />Macroeconomic effects.<br />Long term effects. <br />Iran.<br />1979 (or second) oil crisis. <br />Effect on OPEC<br />2<br />
Energy Crisis<br />An energy crisis is any great bottleneck in the supply of energy resources to an economy.<br />It usually refers to the shortage of oilor other natural resources. <br />Energy crisis may be referred to as an oil crisis, petroleum crisis, energy shortage, electricity shortage or electricity crisis.<br />3<br />
Causes of Energy Crisis<br />Over-consumption, <br />Ageing infrastructure,<br />Bottlenecks at oil refineries,<br />Port facilities that restrict fuel supply.<br />4<br />
Arab-Israel Conflict<br />Zionist Jews expressed their desire to create a modern state in the ancient land of the Israelites.<br />After World War II Israel, was created on 56% of the land that was formerly known as Palestine.<br />This state served as a homeland for Jews.<br />Arabs were enraged because Palestinian land had been taken to create this state. <br />5<br />
Various Conflicts<br />Arab refused to acknowledge Israel as an independent state.<br />Suez-Sinai War: Nationalizing the Suez Canal.<br />1967 Israel launched the Six-Day War, claiming much land.<br />7<br />
SUPPLY SHOCK<br />Sudden event that increases or decreases the supply of a particular product.<br /> Positive supply shock – Increases the supply – Lowers the price.<br />Negative supply shock – Decreases the supply – Raises the price.<br />8<br />
YOM-KIPPUR WAR<br />On 6 October 1973 Egypt, Syria & Iraq launched a surprise attack against Israel. <br />It was Yom Kippur, the Day of Atonement, the holiest day of the Jewish year.<br />The war was brief, but it was hard fought in its early stages when the combined forces of Egypt and Syria, armed with Soviet weapons, nearly overwhelmed the Israeli forces. <br />But with the resupply of Israeli weapons by the United States and the U.S. warning to the Soviet Union to stay out of the conflict, Israeli forces rallied and Arab states were defeated.<br />12<br />
70’s Crisis<br />Two crisis during 1970’s.<br />1973 Oil Crisis- Yom-Kippur War.<br />1979 Energy Crisis- Iranian Revolution.<br />13<br />
1973 Oil Crisis…<br />Began on 17th October, 1973 when OPEC announced that they would not ship oil to US, European & Dutch Nations.<br />Netherlands supplied arms & Americans used Dutch airfields to supply guns.<br />The Arab oil embargo.<br />Price increase to reduce demand to the new lower level of supply.<br />15<br />
Economic Impact of the Embargo<br />The oil companies in the west were forced to increase payments drastically. <br />The price of oil quadrupled by 1974 to nearly US$12 per barrel.<br />The traditional flow of capital reversed. <br />Saudi Arabia, undertook a series of ambitious five-year development plans. <br />16<br />
Continued…<br />Negative supply shock -U.S. imports of oil from the Arab countries dropped from 1.2 million barrels per day to 19,000 barrels. <br /> Daily consumption dropped by 7% during summer of 1974.<br /> The retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974.<br />New York Stock Exchange shares lost $97 billion in value in six weeks. <br />17<br />
Search for Alternatives<br />Greater interest in renewable energy, spurred research in solar & wind power. <br />Greater pressure to exploit North American oil sources.<br />The Brazilian government implemented a very large project called "Proálcool" (pro-alcohol).<br />23<br />
Effects on International Relations<br />The Cold War policies of the Nixon administration also suffered a major blow.<br />Western Europe and Japan began switching from pro-Israel to more pro-Arab policies.<br />The Soviet economy had stagnated for several years, and the increase in the price of oil had a beneficial effect.<br />24<br />
MACROECONOMIC EFFECTS<br /><ul><li> Major factor in Japan's economy shifting away from oil intensive industries, resulted in huge Japanese investments in industries such as electronics.
Central banks sharply cut interest rates to encourage growth.
LONG TERM EFFECTS<br />Economic recession throughout the world.<br />Inflation remained above ten percent and unemployment was at its record high.<br />Ended the common belief that economic prosperity reflected oil consumption statistics.<br />Exploration and development of resources within the U.S. increased dramatically.<br />27<br />
Iranian Revolution(1978-79)<br />Iran (2nd largest producer)- “…it's only fair that, from now on, you should pay more for oil. Let's say ten times more…”- SHAH.<br />November 1978- strike by 37,000 workers.<br />1979-Shah of Iran left IRAN.<br />Ayatollah Khomeini declared Iran an Islamic republic.<br />31<br />
Continued…<br />Demonstrations held in protest to the new rules.<br />Foreign skilled oil workers fled due to the unrest.<br />Result-Rise in oil price which made record profits.<br />32<br />
DECLINE OF OPEC<br />1980’s Oil Glut<br />Price Decline & Over Production.<br />Internal Disunity among its members.<br />By 1981- Western countries produced more.<br />Increase in the use of alternative sources of energy.<br />37<br />