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In 1973-74, OPEC established an oil embargo against the US and several other countries that had aided Israel during the Yom Kippur War. As US oil production capacity had been dropping for years and there were fewer alternate sources of oil than what there are today, the embargo caused serious pain.
Somewhat agreed, and I'm repping this post.
For virtually the first time in history all of the countries of the world were in an economic boom in 1972-3. This was fueled by the U.S. Fed's aggressive easy money policy and the departure from the gold standard. Demand was pressing against short-term supply limits. Some oil-producing countries were operating over rated oil-field capacities. Refineries were also operating at 103% of capacity. If I recall correctly during a brief period of the summer of 1972, and for April-August 1973 there were spot shortages of gasoline. All oil companies allocated their stations to limit them to prior year's sales or a bit under prior year sales. So that summer you saw some sales limits at stations that had to be 24 hours, such as on highways. Neighborhood stations cut their hours back. In both cases the cuts were not as severe and disruptive as during the embargo. These were signs that there wasn't much room for an accident or error.
The OPEC countries were keenly aware of their leverage. The excuse for the 10% or 20% production cuts was the oil embargo against certain countries' sales to the U.S. and the Netherlands. The real reason was the need to maintain the fields. Production was actually restored in December 1973, at the mid-point of the embargo but coincident with a quadrupling of the posted prices for oil. Those posted prices later turned out to be a fiction, since they basically followed the spot market.
Most of the disruption to which you referred from the oil embargo, such as the long gas lines, where caused by the inability of the oil companies to immediately pass along the price increases. I don't think they staged the shortage, but they were flatly unwilling to sell at a "controlled" price that was less than the cost to replace oil they sold. As a result there were severe shortages at the latter parts of the months of December 1973, January 1974 and February 1974. Sometime in March the kinks actually worked out. I remember one station, a company operated station in my town, went from $.0475 to $.0568 in one day and then up another penny or two before peaking and prices dropped a bit that fall. That was an extreme case since company operated stations were permitted to take $0.03 in margin given to private stations earlier that winter.
Quote:
Originally Posted by Pub-911
The 1979-80 oil crisis was not so much of a crisis at all. The Iran-Iraq War led to declines in production out of those two major suppliers, but much of the trouble in the US was brought about by people expecting a return to the conditions of 1973-74 when there was no actual reason to.
1979-80 (more correctly 1978-9) was less dramatic than 1973-4 but a bit worse than you make out, at least in the New York area and urban parts of California. In the winter of 1977-8 prices were driven down by a momentary "glut" of oil. The drop was even more dramatic when compared to inflation. A price of $.059 during 1974 (a pretty good average for post-shortage prices in my area) was, in real terms, $0.78. See inflation adjuster I use (link). The actual prices during the summer of 1978 ranged from the same $.059 or slightly less to around $0.62, before slow increases responsive to the Iran situation started. So in inflation-adjusted terms those prices were actually equal to 1972 levels before the increases started.
Iran under the Shah in late 1977 and early 1978, before disruptions began was pumping close to 4,000,000 to 6,000,000 a day, not that far under Saudi levels, which fluctuated between 8,000,000 and 9,000,000 a day. When Iran was effectively taken offline by the Khomeni revolution, the glut was absorbed fast and the market suddenly tightened. Again, with shortages, U.S. price controls worked their magic much like they did in 1973-4, by retarding the ability of oil companies to pass along price increases. The situation was even more convoluted since there were now three tiers of crude pricing: 1) old oil, controlled at roughly $5.75; 2) new oil, priced at roughly $10 (I may be wrong on that number); and 3) "new new" oil, coming into production from 1976 on, uncontrolled. Add to that similarly bizarre price controls in natural gas. So this combustible mixture really blew up in May 1979, when California suffered serious gas lines, and the U.S. Northeast later than month into July.
The situation improved with Carter's phased decontrol and then Reagan's overnight abolition of controls in January 1981, and gasoline prices actually dropped. After an initial spike to around $1.49 prices of leaded regular in my area were as low as $.085 when leaded regular was phased out. Unleaded regular, for a period in 1986, was slightly under a dollar, a price reached again in late 1998 and early 1999.
Quote:
Originally Posted by Pub-911
OPEC's days as a feared international cartel are long over, but their actions can and do continue to influence prices.
See above. Once Reagan decontrolled oil prices in January 1981 and in the years thereafter natural gas prices, OPEC became a debating society interesting mostly for the costumes worn by ministers from more exotic countries, and press releases that mostly made a virtue out of necessity when production levels were mostly untouched (despite announcements to the contrary) and price moves were ratified.
US shale producers are in a very good position to gain market share due to technological advances in efficiency and how long it takes to drill.
North Dakota oil is not yet anywhere near a position of being able to compete at a profit when pump prices for gasoline are at $2.50 per gallon. The fracking party is over in the Bakken region, and no one knows when (or even if) it will ever get started again.
Arcane minutiae are not within the the province of big picture overviews. The proximate cause of the 1973-74 crisis was the Arab oil embargo, while those of the 1979-80 crisis were a combination of the Iran-Iraq War and US consumer over-reaction.
Quote:
Originally Posted by jbgusa
Once Reagan decontrolled oil prices in January 1981...
As noted, it was Jimmy Carter who had begun the phased deregulation of oil and gas prices in November 1978. All the ever-reckless Reagan did was scrap the "phased" part. Meanwhile, much was changing for OPEC over those years as North Sea and North Slope potential and production became increasingly significant. They also began to realize that their collective well-being would be better served in cooperating with Western nations rather than antagonizing them.
PS. The "costumes" worn by OPEC oil ministers are not at all a relevant notion, and you might wish to consider use of a GDP-based price deflator as opposed to a CPI-based measure.
Arcane minutiae are not within the the province of big picture overviews. The proximate cause of the 1973-74 crisis was the Arab oil embargo, while those of the 1979-80 crisis were a combination of the Iran-Iraq War and US consumer over-reaction.
The fact that the oil market was effectively "sold-out" by the summer of 1973 (and indeed really from the summer of 1972 on) is hardly arcane minutiae. Supply and demand were in knife-edge balance, made worse by U.S. price controls. The rest of the economy besides oil was effectively decontrolled on or about January 11, 1973 but oil remained controlled. It did not take long for shortages to develop.
Quote:
Originally Posted by Pub-911
As noted, it was Jimmy Carter who had begun the phased deregulation of oil and gas prices in November 1978. All the ever-reckless Reagan did was scrap the "phased" part.
As far as OPEC goes, I think that the abrupt decontrol worked quite well. Prices spiked by about $0.05 within a day or two after decontrol and then started plunging. I did not vote for Reagan in that election, but I have to say he was one of our great Presidents.
What I think happened was that the distortions in our price control system encouraged imports even when they weren't needed. There were various other items such as "small refiner bias" that encouraged imports. Refiners and to some extent wholesalers simply got a check from other producers to the extent that they overpaid for OPEC oil. I remember those days well; you seem not to remember them.
Quote:
Originally Posted by Pub-911
Meanwhile, much was changing for OPEC over those years as North Sea and North Slope potential and production became increasingly significant. They also began to realize that their collective well-being would be better served in cooperating with Western nations rather than antagonizing them.
The lion never laid down with the lamb. They were emasculated, as you pointed out, by North Sea and North Slope potential and production, since those producers were outside of OPEC and, unlike Mexico or Russia didn't even give lip service to cooperation with OPEC. the OPEC nations were gleeful participants in windfalls that resulted from disruptions in other OPEC and non-OPEC countries. The fact that they largely squandered their wealth is a subject for another day and another thread, Wither Venezuela? Wither Congo? Wither "Self-Determination"?.
Quote:
Originally Posted by Pub-911
PS. The "costumes" worn by OPEC oil ministers are not at all a relevant notion, and you might wish to consider use of a GDP-based price deflator as opposed to a CPI-based measure.
The "costumes" were a side joke; and do you have a link to a better deflator than the one to which I linked? I'd welcome it.
North Dakota oil is not yet anywhere near a position of being able to compete at a profit when pump prices for gasoline are at $2.50 per gallon. The fracking party is over in the Bakken region, and no one knows when (or even if) it will ever get started again.
Not nearly as familiar with Bakken as the Permian and Eagle Ford, but it would the latter locations that would profit first.
...do you have a link to a better deflator than the one to which I linked? I'd welcome it.
The GDP deflator is a product of the Bureau of Economic Analysis that is inherent in its production of the National Income and Product Accounts. It is a fundamental measure that can be found all over the place. The BLS article below discusses some of the differences between the CPI and GDP measures....
The GDP deflator is a product of the Bureau of Economic Analysis that is inherent in its production of the National Income and Product Accounts. It is a fundamental measure that can be found all over the place. The BLS article below discusses some of the differences between the CPI and GDP measures....
I asked if you have a good online tool such as the one I linked. Can you eyeball how the deflator would have differed?
================================================== ========================
Edited to ask, how's this one (link)?
As an experiment, let's try my original post (font changed) on this issue, using the GNP deflator as suggested by Pub911:
1979-80 (more correctly 1978-9) was less dramatic than 1973-4 but a bit worse than you make out, at least in the New York area and urban parts of California. In the winter of 1977-8 prices were driven down by a momentary "glut" of oil. The drop was even more dramatic when compared to inflation. A price of $.059 during 1974 (a pretty good average for post-shortage prices in my area) was, in real terms, $0.79 ($0.78 under index I used). See inflation adjuster suggested by Pub 911 (link). The actual prices during the summer of 1978 ranged from the same $.059 or slightly less to around $0.62, before slow increases responsive to the Iran situation started. So in inflation-adjusted terms those prices were actually equal to 1972 levels before the increases started ($0.60 reached with Pub911's index, $0.62 reached with one I used).
Iran under the Shah in late 1977 and early 1978, before disruptions began was pumping close to 4,000,000 to 6,000,000 a day, not that far under Saudi levels, which fluctuated between 8,000,000 and 9,000,000 a day. When Iran was effectively taken offline by the Khomeni revolution, the glut was absorbed fast and the market suddenly tightened. Again, with shortages, U.S. price controls worked their magic much like they did in 1973-4, by retarding the ability of oil companies to pass along price increases. The situation was even more convoluted since there were now three tiers of crude pricing: 1) old oil, controlled at roughly $5.75; 2) new oil, priced at roughly $10 (I may be wrong on that number); and 3) "new new" oil, coming into production from 1976 on, uncontrolled. Add to that similarly bizarre price controls in natural gas. So this combustible mixture really blew up in May 1979, when California suffered serious gas lines, and the U.S. Northeast later than month into July.
The situation improved with Carter's phased decontrol and then Reagan's overnight abolition of controls in January 1981, and gasoline prices actually dropped. After an initial spike to around $1.49 prices of leaded regular in my area were as low as $.085 when leaded regular was phased out. Unleaded regular, for a period in 1986, was slightly under a dollar, a price reached again in late 1998 and early 1999.
The proximate cause of the 1973-74 crisis was the Arab oil embargo, while those of the 1979-80 crisis were a combination of the Iran-Iraq War and US consumer over-reaction.
The suggestion to consider a GDP-based price index as opposed to a CPI-based one was made because the former covers a broader basket of goods and is the more appropriate of the two under various circumstances.
The proximate cause of the 1973-74 crisis was the Arab oil embargo, while those of the 1979-80 crisis were a combination of the Iran-Iraq War and US consumer over-reaction.
The suggestion to consider a GDP-based price index as opposed to a CPI-based one was made because the former covers a broader basket of goods and is the more appropriate of the two under various circumstances.
Did you read my recalculation of my numbers based on the GDP Deflater index. Not much changed.
As far as the embargoes go, I get tired of the implication that Israel caused the world's suffering with the embargo. We were headed into a brick wall at that point no matter what. And as far as 1978-9 (you keep getting your years wrong) I don't know why you credit that mostly to consumer panic? First of all the Iran-Iraq war didn't start until long after the shortage. Second of all price controls did play a major role.
Are you determined to defend price controls at any cost?
Their goal is to keep oil out of the gutter where it was, but under the "OMG LETS GO FRACK AND MAKE BANK" prices. They were making bank at $120 a barrel, they probably can't survive and it certainly isn't' worth the environmental risk anywhere near $60.
Going to be a delicate balance.
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