Impact of Oil Crisis of 1973 on Barbados Term Paper

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¶ … Oil Crisis of 1973:

Its Impact on Barbados

The oil crisis of 1973 undoubtedly had a strong impact on many countries and a lot of significance for many people. Unfortunately, there has not been that much written about the impact that this crisis had specifically on Barbados. Overall, this paper will discuss the oil crisis of 1973 in general, and then will turn its attention to Barbados and what likely happened to that island based on the oil crisis. Any information about Barbados itself is unfortunately very scarce, but providing insight into how the oil crisis affected the world in general will also provide insight into how it affected Barbados.

For over 25 years there have been many different models that have been introduced to explain the behavior of OPEC (Adelman, 1982a). Most of the studies deal with the OPEC cartel as a profit maximizing cartel which looked for monopoly profits (Adelman, 1982b; Abdalla, 1979; Abraham, 2000; Adelman, 1985). It did this by influencing both production and prices. Others argue that the crude oil market throughout the world is very competitive and increases in oil prices can be explained by various other factors that have nothing to do with the OPEC cartel (Adelman, 1985). There have been statistical studies introduced which helped to examine these models but many of the studies have been exclusively confined to single equations which were introduced by Griffin in 1985 and followed by others in 1985 as well (Adelman, 1985).

In the summer of 1973 the marketing industry for petroleum was already seeing a few tremors of a large change that would soon be taking place (Reid, 2004). In the 1950s and 1960s the supply of oil had been so abundant that it was to the point of gluttony and the prices for this oil were extremely low (Reid, 2004). However, by the end of the 1950s America begin using so much oil that it was not producing all that it needed from its domestic sources (Reid, 2004). This was true of some other countries as well, as some of them did not have enough of their own resources to produce much of their own oil (Reid, 2004). By 1970 the amount of oil America created was only 20% of what it actually used (Reid, 2004). By the year 1973, imported oil was 3.4 million barrels every day or 35% of the supply that was needed (Reid, 2004). Approximately one million barrels every day of this oil came from Arab sources (Reid, 2004).

This shift was beginning to impact the availability of products (Reid, 2004). By June of that year the estimation was that a shortage in the gasoline supply, ranging from 300,000 to 400,000 barrels every day, already existed (Reid, 2004). Those that worked as refiner - suppliers began working with both branded dealers and jobbers on allocation and creating many price protections (Reid, 2004). On October 6th of 1973 the Yom Kippur war was started when Syria and Egypt got together and invaded Israel (Reid, 2004). The war only lasted 16 days but it was enough to seriously shake the world economy (Reid, 2004). Many oil companies were multinational and as problems arose they increasingly lost much of the control that they had over Arab production (Reid, 2004).

The nations that were oil-producing began to find more sophisticated ways to handle their negotiations and they also became much more enforceable (Reid, 2004). The organization of petroleum exporting countries, or OPEC, was formed back in 1960 (Reid, 2004). In 1973 it consisted of Ecuador, Gabon, Algeria, Iran, Iraq, Indonesia, Bolivia, Kuwait, Nigeria, Saudi Arabia, Qatar, United Arab Emirates, and Venezuela (Reid, 2004). During the Yom Kippur war the United States helped out Israel with massive supply systems and his helped turn many of the setbacks that Israel was experiencing into victories (Reid, 2004). OPEC is anchored by the Arab states, which were chiefly led by Saudi Arabia, and they developed a political gesture in retaliation (Reid, 2004).

In order to retaliate against the United States and the Netherlands, which also helped the Israelis, the members of OPEC decided to create an oil embargo on these specific countries (Reid, 2004). The following day, they increased the prices of all of the remaining oil exports by 70% (Reid, 2004). This raised the price of oil from $3.01 to $5.12 per barrel (Reid, 2004). Two days after that OPEC boosted its prices to $11.65 per barrel Even though Barbados was not directly involved in helping Israel, all nations around the world that needed oil had to deal with the increased prices (Reid, 2004). Many of these increases helped cover some of losses that had been faced with the embargo shortfall while also helping to punish Western nations, but the motivations for this type of price increase were much deeper than that.

Several of the OPEC members had already been pushing the strong need to increase the prices (Reid, 2004). This was particularly true of Iran although it was not actually involved in the political aspects of the issue (Reid, 2004). There was no leverage had by the oil consuming nations to counter what the rest were doing and therefore they simply had to pay if they wished to continue to receive oil (Reid, 2004). Many of the Arab supplies for the United States dried out but the need that the United States had was met by various other sources (Reid, 2004). However, the other sources could only do to much due to a reduction in overall supply that the world had (Reid, 2004). This helped impact further the prices internationally (Reid, 2004). The results of this were high interest rates, unemployment, recession, and rampant inflation (Reid, 2004). Barbados was swept up in this and saw these same types of problems during the Yom Kippur war and immediately after it (Reid, 2004).

At the dealer and jobber level the problems with supply began (Reid, 2004). Many of the stations that sold oil or gasoline were only open a few hours each day (Reid, 2004). Because of this many cars lined up to get their daily ration of gasoline and by the end of 1973 approximately 25,000 stations had completely closed (Reid, 2004). The price controls that had been put in place in the year before 1973 prevented dealers and jobbers from enjoying any kind of increase in profits (Reid, 2004). It also prevented them from taking the increased costs that they were dealing with and passing them on to others (Reid, 2004). By March 1974 the government decided to allow some of these retailers to pass along many of the higher production costs and because of this the prices of gasoline and oil actually went up 30% (Reid, 2004).

In a sudden move in that same month the shortage of oil supply came to an end and the long lines that people came to expect simply evaporated (Reid, 2004). It was very difficult to ignore many of the political aspects of not only the price increases but the embargo as well (Reid, 2004). However, the profit-taking issues that came with these problems could also not be overlooked (Reid, 2004). It was reported that in 1973 Exxon's net profit was $2.44 billion (Reid, 2004). This was the highest amount that was ever made by any industrial company within the United States in a single year up to that point in history (Reid, 2004). Texaco reported that it its net earnings had reached $1.6 billion and there were many other companies throughout the United States and the world that reported that their business and profits increased by approximately 50% (Reid, 2004). Some of these increases actually exceeded 100% (Reid, 2004).

In general, however, the public was not stupid and it soon begin to suspect that many of the multinational oil companies and the Arab leaders were simply looking for any excuse they could find to raise the prices (Reid, 2004). The outrage that was originally seen on the streets soon spread to Congress (Reid, 2004). Many of the oil companies rolled out media campaigns that were large and full-scale to help explain the profit issue (Reid, 2004). They said that what they were making were not really profits (Reid, 2004). The public, however, had a very hard time buying this type of message and much of the residue that was left over from that mistrust is still felt today (Reid, 2004). Through the information of members of OPEC it was stated that the goal of the embargo, aside from retaliating, was to force the United States to leverage Israel and get it to withdraw from some of its occupied territories (Reid, 2004).

Much of the result of this was that what these members had too quickly disappeared in the face of much of the practical business ideas and the fact that the oil demand that was previously enjoyed had plummeted drastically when prices begin to sharply increase (Reid, 2004). It can be argued to some extent that an… [END OF PREVIEW] . . . READ MORE

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