OPEC: 10 Years After the Arab Oil Boycott

Report Outline
Opec's New Dilemma
Birth of the Cartel
Opec's Uncertain Future
Special Focus

Opec's New Dilemma

Fluctuating Situation Since 1973 Embargo

Nearly a decade has passed since a small group of developing nations precipitated the most profound economic crisis of the postwar period and began what was to become the greatest transfer of wealth in history. The industrialized nations, which had based their economies on the assumption of limitless supplies of oil, were caught by surprise when the then little-known Organization of Petroleum Exporting Countries (OPEC) exercised its newly acquired authority as the world's main supplier of crude to raise the price for its “black gold.”

Observers of the events leading to the first oil shock did not immediately grasp their significance. Outraged by Israel's territorial gains in the 1973 Yom Kippur War, Arab oil producers, led by Saudi Arabia, announced Oct. 17 that they were cutting back their production of crude and imposing an embargo against Israel's main ally, the United States. This was followed by a significant increase in OPEC oil prices. It was an act of shrewd timing, as the industrialized nations were in the midst of an economic upswing that had further whetted their thirst for oil. Prices on the spot market, where oil not covered by long-term contracts is sold, soared to the then unprecedented level of $20 a barrel, permitting OPEC to double its official price from the pre-embargo level of $2.18 to $5.12 by the end of October. By January 1974, when the embargo was lifted and shipments to the United States were resumed, the official OPEC price had settled at $10.95 a barrel.

The quadrupling of oil prices in 1973–74 threw the world into its worst recession since the 1930s and brought to a close the postwar economic boom that had been fueled in part on readily available supplies of cheap oil. With seemingly limitless power over the world oil market, OPEC continued for the next five years to jack up its benchmark price.