What this lesson teaches
I can judge how oil crises, protectionism and debt crises hurt the global economy from the 1970s.
Syllabus 9174, Paper 1, Theme II, Learning Outcomes. evaluate the challenges that affected the global economy over time
Make a guess
In October 1973 Arab oil producers cut output and embargoed the USA. What do you think happened to oil prices?
- They stayed the same, since the embargo hit just two countries.
- They fell, as other producers rushed to fill the gap.
- They nearly quadrupled, ending the era of cheap energy.
Show the answer
They nearly quadrupled, ending the era of cheap energy.
Post-war growth had run on cheap oil. Higher prices pushed up costs and inflation and slowed growth.
In 1973 Arab oil producers used oil as a weapon. Prices nearly quadrupled, which ended the cheap energy that had fuelled post-war growth.
Post-war growth ran on cheap oil. By the early 1970s Western Europe and Japan imported most of their oil, much of it from the Middle East. The Organization of the Petroleum Exporting Countries (OPEC), founded in 1960, wanted a larger share of oil profits.
In October 1973 Egypt and Syria attacked Israel. Arab oil producers cut output and placed an embargo on the USA and the Netherlands for supporting Israel. OPEC raised its prices at the same time.
By January 1974 the price of oil had nearly quadrupled, from about 3 dollars to almost 12 dollars a barrel. Oil importers faced higher costs across their economies.
The result was "stagflation": high inflation and rising unemployment together. Britain's inflation reached about 24 per cent in 1975. The industrial economies fell into recession in 1974-1975, and growth never returned to Golden Age rates.
The crisis also moved money around the world. Oil exporters earned far more than they could spend and deposited much of it in Western banks. The banks lent these "petrodollars" to developing countries, which prepared the ground for the debt crisis.
- Oct 1973
- Arab oil embargo during the Yom Kippur War.
- Price rise
- From about 3 to almost 12 dollars a barrel by January 1974.
- Stagflation
- High inflation plus rising unemployment.
Real examples to use
Posted price raised, 16 October 1973
Gulf producers raised the price by about 70 per cent in one step, ten days into the Yom Kippur War.
Car-free Sundays, November 1973
The Netherlands and West Germany banned most Sunday driving to save fuel, showing how deep the shock went in Europe.
British inflation, 1975
Prices rose about 24 per cent in a year, a clear case of stagflation.
Worked example: Trigger or cause?
Did the oil crisis end the Golden Age?
- Before 1973: inflation was already rising and Bretton Woods had collapsed.
- Trigger: the oil shock pushed costs up sharply and suddenly.
- Effect: stagflation and recession in 1974-1975.
- Judgement: the oil crisis triggered a slowdown that had deeper causes.
Watch out for this
OPEC's actions alone ended the post-war boom.
Inflation was rising and fixed exchange rates had collapsed before October 1973. The oil shock made a weakening situation much worse.
Check your understanding
What was "stagflation"?
- Falling prices and rising output at the same time
- A weak stock market that left the rest of the economy growing
- High inflation and rising unemployment at the same time
Show the answer
High inflation and rising unemployment at the same time
Right. Old policies struggled to fix both.