To what extent can the oil crisis of 1973-4 be regarded as a turning point in the

development of the international economy?

Before 1973, the world’s nations enjoyed a plentiful supply of inexpensive fossil
fuels for development and their economies were built upon these affordable
resources. However, the oil embargo initiated by the Arab countries making up the
OPEC (Organisation of Petroleum Exporting Countries) in 1973-4 caused developed
and developing nations alike to struggle with the abrupt discontinuation of oil
supply, and thus halted or drastically slowed down development. Although the oil
embargo was directed at the US and its allies in an act of retaliation against US
support for Israel in the Yom Kippur War, countries in the 3rd World suffered severely
as well. This shows the high level of integration and interdependence of countries
in the international economy that causes a problem to be interlinked to all nations.
This oil crisis is a turning point in the development of the global economy in the
severe impact Severe impact is a bit weak & vague. Turning point is a change in
direction. it had on the global economy and the comparatively more stable situation
pre-1973. Yet, it cannot be the only turning point because there were other
contributing factors to the global economic crisis, moreover, the oil crisis had an
unequal impact on different countries.

The oil crisis caused oil prices to surge and thus, a drastic drop in the development
of the global economy although the decline was different in the developed and
developing world. The total embargo imposed on the US and pro-Israel countries
caused these heavily oil-dependent countries to suffer economically. As the US
imports a third of its oil and Japan, a US ally, imports all of its oil, the sudden halt of
oil imports inflicted major damage on their economies, such that GNP growth
decreased by 2.7% from 1974-9. As oil prices worldwide rose 330%, the developed
countries realized the need to protect their own economies through New
Protectionism. But oil crisis was not turning point from GAOC to New Protectionism.
New Protectionism was already a growing phenomenon in developed world in
1970s. Moreover, oil embargo is itself an act of protectionism by oil-producing
developing world. It was just 1 factor that exacerbated it. You also need to explain
that oil price rises caused costs of production of goods in oil-importing countries to
increase. To protect this production & make them competitive, they had to use
protectionism. This can be seen especially in the motor industries of Western
Europe and the US, where demand rose for the cheaper, more fuel-efficient cars of
Japan instead of the gas-guzzling Western vehicles. This led to the 1974 Trade Act
under which the US put 100% tariffs on Japanese cars unless Japan agrees to import
100,000 US-made models yearly. Note that this was only in 1995. Such policies
among the developed nations to protect the interests of their national industries led
to a 5% decrease in world trade in the next decade and caused development of the
international economy to slow down.

As for the developing world, during the period of 1973-4, the OPEC nations
decreased oil production by 25% and this caused the price of oil to quadruple, which
had devastating effects on non-oil producing 3rd world nations because the lending
boom of the 1960s came to an end. Urged into accepting loans based on the theory
that financial fueling would help 3rd world nations to kick-start industralisation and
move towards development in the 1960s, many 3rd world nations suffered heavily
due to the rising oil prices during the crisis. For example, Mexico, a major receiver
of foreign loans experienced an impressive 7% growth per annum and a low 3%
rate of inflation pre-1973. I haven’t taught you this yet but Mexico is also an oil-
producing nation. However, it did engage in heavy borrowing. However, borrowing
at high rates caused Mexico to be unable to pay off their debts when Western banks
recalled loans post-oil crisis in 1981, note that 1981 is closer to Reaganomics than
oil crisis. You can say more accurately that oil crisis forced Western banks to reduce
their lending due to the bop surpluses & inflation they experienced from oil price
shocks. This started phenomenon that finally culminated in them withdrawing loans
& demanding repayments after the other shock of Reaganomics. thus the inflow of
loans stopped abruptly and their total debt was revealed. Because of the mounting
cost of fuel, 3rd world nations had to double or triple their borrowing just to keep
their economies going at pre-1970s levels. Yah, so it cannot be that Western banks
recalled loans post-oil crisis. Moreover the oil-producing Arab OPEC nations now
grew rich from bop surpluses of oil price shocks, & lent Mexico a lot, keeping Mexico
within the myth of economic sustainability. Turning point is when there is an
immediate change in direction, (think in terms of graph) so the impact that you
describe must be v immediate & significant. Economies like Mexico’s then suffered
a recession in 1982 during which the peso was devalued and negative growth of 2%
was experienced. Therefore, the oil crisis that set into motion rapid accumulation of
borrowing and debt in the developing world can be considered a turning point.

The dominance of the US in the international economy also experienced a

significant decline after the oil crisis that was gained in the benefit of the countries
in the OPEC. While the US struggled with oil price rationing and oil conservation
techniques post-oil crisis, as well as stagflation in the remaining years of the
decade, the Arab OPEC was enjoying an astronomical turnover of profits from the
increased price of oil. The traditional flow of capital could be seen as reversed as
the oil-exporting nations accumulated vast wealth, seen in their $114 billion
Balance of Trade surplus from 1974-1980. In fact, the US banks that were major
lenders to the 3rd world were forced to recall or decrease loans in 1980 due to the
lack of financial stability in the US, thus losing their grip and decisive power on the
3rd world nations that they had been financing. On the other hand, the Arab OPEC
who had their earnings in Western banks were eager to invest their ‘petrodollars’ in
profitable loans, which selectively went to developing nations like Mexico,
Venezuela, Nigeria and Indonesia. This gave the Arab nations a comparative
advantage over the Western countries in determining the conditions that the 3rd
world loan recipients would be bound by, thus giving them more influence and
control compared to the West. The oil crisis thus caused a tipping of the balance of
power of the US in the international economy over to the Arab nations, which makes
it a turning point. Yes, but note that oil crisis is short-lived, so this turning point was
also short-lived. Arab OPEC nations eg Iran grew only momentarily rich. After that
they themselves faced economic problems due to economic mismanagement &
corruption. The point you can make is that oil price shocks is another sign of the
decline of US dominance which already began with the end of BWS in Feb 1973 &
the growing competitiveness of Europe & Japan economies. The difference here is
that now the developing world was also now rattling its teeth to challenge the US.
However they could not do this as strongly & as sustainably as non-US G7 nations.

However, the oil crisis of 1973-4 was not the only significant change that led to the
global economic problems of the 1980s. Yes, actually this view is the stronger one.
For the developed world, the rise of New Protectionism in the US in the 1970s in
response to US’ decreased dominance of the global economy was not only caused
by the oil shocks and the damage suffered by Western motor industries. Show that
new protectionism is a turning point by contrasting it with golden age of capitalism
& US-induced free trade that was so prominent b4 1970s. It was also due to the
recovery and increased competitiveness of Europe and Japan and multi-polar
economic powerhouses. Not only did these two countries upgrade their technical
systems, they had lower labour costs and contributed a large number of MNCs to
the world. Protectionist policies in Europe, such as the Common Agricultural Policy
to support European farmers, closed their markets to US goods. When did this
happen? B4 or after oil crisis? Give dates. Other pluralistic regional competitors
such as ASEAN in 1967 and CIS in 1991 Better to state events that happened b4 oil
crisis. Mention EEC in 1957. also emerged, causing the US to experience trade and
balance of payment deficits as they exported less than they had to import. Give
stats This phenomenon of protectionism among countries signified the convergence
of the 1st world economy as countries become more similar in industrial character
and lose their comparative advantage, thus resorting to mutual protectionism. This
is where you should note that oil crisis was just yet another eg of protectionism that
was fast becoming a phenomenon. It’s also group protectionism like EEC, since its
collaboration of Arab OPEC nations.

Need to argue that 3rd world debt crisis was also a turning point. A change in
direction. That b4 3W debt crisis they were in myth of sustainable economic growth
& belief that they could long-term rely on extended loans, after that few countries
were ever able to repay debt. In 1982 debt crisis began, in 1996 42 countries could
still be classified as heavily indebted poor countries! As for the 3rd world debt crisis
in the 1980s, the oil crisis was also not the only turning point as domestic factors in
the loan receiving countries also culminated in the debt crisis. This is namely, the
inappropriate use of loans received in the developing country that have eventually
caused the nation’s debt to snowball to the point that the recipient country is
unable to make even regular interest payments. Although the loans received by the
3rd world nations might have been used to maintain essential government services
such as public transport, port facilities and power lines, countries like Zaire and the
Philippines had their loans absorbed by the wealthy proportion of Third World
citizens. For example, in Zaire under Mobutu’s rule, a kleptocratic and tyrannical
regime was observed. Mobutu himself siphoned state funds to amass a personal
fortune of $10 billion, needless to say, infrastructural development was neglected.
In the Philippines, an estimated $30 billion was worth in capital flight from the
country from 1950-1985, which exceeded the country’s debt itself. With the loans
being used for inappropriate spending and little on the country’s development,
countries like Zaire eventually chalked up a budget deficit so large to the point of
bankruptcy, leading to the debt crisis. Therefore, domestic factors in the LDCs also
contributed very significantly to the problems experienced in the 1980s and cannot
be attributed to just the oil crisis. Zaire was a HIPC in 1996.

Moreover, the oil crisis had an uneven impact on different countries that makes it a
turning point with long-term effects for some, and a significant but temporary
change for others, thus it is not a turning point for all of the separate economies.
For the US, although the oil crisis shifted the power balance in the international
economy away from them, it was a temporary change. The US managed to recover
from the oil shocks sufficiently by adapting their economies to suit the shortage and
high price of oil. Similarly, Europe and Japan implemented stable economic policies
to favour themselves and switch to high-technology industries, thus recovering from
the oil shocks. Although the Arab OPEC experienced flourishing economies after the
oil shocks, their wealth did not last long due to the squandering of resources in the
1980s and they did not receive lasting benefit. As for the 3rd world nations, they
never managed to recover as they were badly affected due to the existing domestic
problems. in addition to the oil crisis, then resulting in the 3rd world debt crisis. As
the impact of the oil shocks varied quite differently among regions of nations, the oil
crisis cannot be a turning point for all economies in the international economic
network.

In conclusion, the oil shocks were very impactful as a trigger to the exposure of
existing problems that led to larger issues for the developed countries and
developing countries. However, the effects of the oil shocks vary in degree and
period of time for every regional block of countries and the secondary factors
contributing to the problems of the 1980s must also be considered when weighing
the significance of the oil shocks in 1973.

Charmaine Chan
6C (02)
11th February 2010