1979 oil crisis

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1979 oil crisis
Top Oil Producing Countries.png
Graph of top oil-producing countries, showing drop in Iran's production [1]
Date1979 (1979)–1980 (1980)
Also known asSecond oil crisis

The 1979 (or second) oil crisis or oil shock occurred in the world due to decreased oil output in the wake of the Iranian Revolution. Despite the fact that global oil supply decreased by only ~4%, widespread panic resulted, driving the price far higher. The price of crude oil more than doubled to $39.50 per barrel over the next 12 months, and long lines once again appeared at gas stations, as they had in the 1973 oil crisis. [2]

Iranian Revolution Revolution in Iran to overthrow the Shah replace him with Ayatollah Khomeini.

The Iranian Revolution, also known as the Islamic Revolution or the 1979 Revolution, was a series of events that involved the overthrow of the last monarch of Iran, Mohammad Reza Shah Pahlavi, and the replacement of his government with an Islamic republic under the Grand Ayatollah Ruhollah Khomeini, a leader of one of the factions in the revolt. The movement against the United States-backed monarchy was supported by various leftist and Islamist organizations and student movements.

The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo was targeted at nations perceived as supporting Israel during the Yom Kippur War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia and South Africa. By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock."

Contents

In 1980, following the outbreak of the Iran–Iraq War, oil production in Iran nearly stopped, and Iraq's oil production was severely cut as well. Economic recessions were triggered in the United States and other countries. Oil prices did not subside to pre-crisis levels until the mid-1980s.

Iran–Iraq War 1980–1988 war between Iran and Iraq

The Iran–Iraq War began on 22 September 1980, when Iraq invaded Iran, and ended on 20 August 1988, when Iran accepted the UN-brokered ceasefire. Iraq wanted to replace Iran as the dominant Persian Gulf state, and was worried that the 1979 Iranian Revolution would lead Iraq's Shi'ite majority to rebel against the Ba'athist government. The war also followed a long history of border disputes, and Iraq planned to annex the oil-rich Khuzestan Province and the east bank of the Arvand Rud.

After 1980, oil prices began a 20-year decline, except for a brief rebound during the Gulf War, eventually reaching a 60 percent fall-off during the 1990s. As with the 1973 crisis, global politics and power balance were impacted. Oil exporters such as Mexico, Nigeria, and Venezuela expanded production; the Soviet Union became the top world producer; North Sea and Alaskan oil flooded the market. It seemed that the United States of America and Norway had much more oil reserves than forecasted in the 1970s. OPEC lost influence.

1980s oil glut oversupply of oil in the 1980s

The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s energy crisis. The world price of oil had peaked in 1980 at over US$35 per barrel ; it fell in 1986 from $27 to below $10. The glut began in the early 1980s as a result of slowed economic activity in industrial countries due to the crises of the 1970s, especially in 1973 and 1979, and the energy conservation spurred by high fuel prices. The inflation-adjusted real 2004 dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986.

Gulf War 1990–1991 war between Iraq and Coalition Forces

The Gulf War, codenamed Operation Desert Shield for operations leading to the buildup of troops and defense of Saudi Arabia and Operation Desert Storm in its combat phase, was a war waged by coalition forces from 35 nations led by the United States against Iraq in response to Iraq's invasion and annexation of Kuwait arising from oil pricing and production disputes. The war is also known under other names, such as the Persian Gulf War, First Gulf War, Gulf War I, Kuwait War, First Iraq War or Iraq War, before the term "Iraq War" became identified instead with the post-2003 Iraq War.

Norway Country in Northern Europe

Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe whose territory comprises the western and northernmost portion of the Scandinavian Peninsula; the remote island of Jan Mayen and the archipelago of Svalbard are also part of the Kingdom of Norway. The Antarctic Peter I Island and the sub-Antarctic Bouvet Island are dependent territories and thus not considered part of the kingdom. Norway also lays claim to a section of Antarctica known as Queen Maud Land.

Iran

Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil sector, with production being greatly curtailed and exports suspended. In November 1978, a strike by 37,000 workers at Iran's nationalized oil refineries initially reduced production from 6 million barrels (950,000 m3) per day to about 1.5 million barrels (240,000 m3). [3] Foreign workers (including skilled oil workers) fled the country. On January 16, 1979, the Shah and his wife left Iran at the behest of Prime Minister Shapour Bakhtiar (a longtime opposition leader himself), who sought to calm the situation. [4]

Pahlavi dynasty Dynasty that ruled Iran from 1925 until 1979

The Pahlavi dynasty was the last ruling house of the Imperial State of Iran from 1925 until 1979, when the Monarchy of Iran was overthrown and abolished as a result of the Iranian Revolution. The dynasty was founded by Reza Shah Pahlavi in 1925, a former brigadier-general of the Persian Cossack Brigade, whose reign lasted until 1941 when he was forced to abdicate by the Allies after the Anglo-Soviet invasion of Iran. He was succeeded by his son, Mohammad Reza Pahlavi, the last Shah of Iran.

Mohammad Reza Pahlavi the last shah of Iran

Mohammad Reza Pahlavi, also known as Mohammad Reza Shah, was the last Shah of Iran from 16 September 1941 until his overthrow by the Iranian Revolution on 11 February 1979. Mohammad Reza Shah took the title Shahanshah on 26 October 1967. He was the second and last monarch of the House of Pahlavi. Mohammad Reza Shah Pahlavi held several other titles, including that of Aryamehr and Bozorg Arteshtaran ("Commander-in-Chief"). His dream of what he referred to as a "Great Civilisation" in Iran led to a rapid industrial and military modernisation, as well as economic and social reforms.

Ayatollah high-ranking title given to Usuli Twelver Shī‘ah clerics

Ayatollah or ayatullah is a high-ranking Usuli Twelver Shī‘ah cleric. Those who carry the title are experts in Islamic studies such as jurisprudence, Quran reading, and philosophy and usually teach in Islamic seminaries. The next lower clerical rank is Hujjat al-Islam.

Effects

Other OPEC members

Fluctuations of OPEC net oil export revenues since 1972 Opecrev.gif
Fluctuations of OPEC net oil export revenues since 1972

The rise in oil price benefited other OPEC members, which made record on profits. When oil exports were later resumed under the new Iranian government, they were inconsistent and at a lower volume, pushing the prices up. Saudi Arabia and other OPEC nations, under the presidency of Mana Al Otaiba, increased production to offset most of the decline, and in early 1979 the overall loss in worldwide production was about 4 percent. [7]

Saudi Arabia Country in Western Asia

Saudi Arabia, officially the Kingdom of Saudi Arabia, is a sovereign state in Western Asia constituting the bulk of the Arabian Peninsula. With a land area of approximately 2,150,000 km2 (830,000 sq mi), Saudi Arabia is geographically the largest sovereign state in the Middle East, the second-largest in the Arab world, the fifth-largest in Asia, and the 12th-largest in the world. Saudi Arabia is bordered by Jordan and Iraq to the north, Kuwait to the northeast, Qatar, Bahrain, and the United Arab Emirates to the east, Oman to the southeast and Yemen to the south; it is separated from Israel and Egypt by the Gulf of Aqaba. It is the only nation with both a Red Sea coast and a Persian Gulf coast, and most of its terrain consists of arid desert, lowland and mountains. As of October 2018, the Saudi economy was the largest in the Middle East and the 18th largest in the world. Saudi Arabia also enjoys one of the world's youngest populations; 50 percent of its 33.4 million people are under 25 years old.

OPEC international organization of petroleum-exporting countries

The Organization of the Petroleum Exporting Countries is an intergovernmental organization of 14 nations, founded in 1960 in Baghdad by the first five members, and headquartered since 1965 in Vienna, Austria. As of September 2018, the then 14 member countries accounted for an estimated 44 percent of global oil production and 81.5 percent of the world's "proven" oil reserves, giving OPEC a major influence on global oil prices that were previously determined by the so called "Seven Sisters” grouping of multinational oil companies.

Mana Al Otaiba Emirati writer, businessman and politician

Mana Al Otaiba was born on 15 May 1946 to Saeed Al Otaiba in Abu Dhabi in the United Arab Emirates. Little else is known about Al Otaiba's personal life. Al Otaiba is the former Minister of Petroleum and Mineral Resources of the United Arab Emirates under the Presidency of Sheikh Zayed bin Sultan Al Nahyan. Al Otaiba then became his Personal Adviser until the president's death, after which he became the Private Advisor to Sheikh Khalifa bin Zayed Al Nahyan, as well as a member of the Royal Moroccan Academy under King Hassan II. His son is Yousef Al Otaiba.

OPEC failed to hold on to its prominent position, especially after Iran and Iraq went to war in 1980 and caused a further 10% drop in worldwide production – and by 1981, OPEC production was surpassed by other exporters like the USA. Additionally, its own member nations were divided among themselves. Saudi Arabia, a "swing producer" trying to gain back market share after 1985, increased production and caused downward pressure on prices, making high-cost oil production facilities less profitable or even unprofitable.

Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare production capacity. A swing producer is able to increase or decrease commodity supply at minimal additional internal cost, and thus able to influence prices and balance the markets, providing downside protection in the short to middle term. Examples of swing producers include Saudi Arabia in oil, Russia in potash fertilizers, and, historically, the De Beers Company in diamonds.

United States

Line at a gas station in Maryland, United States, June 15, 1979. Line at a gas station, June 15, 1979.jpg
Line at a gas station in Maryland, United States, June 15, 1979.

The oil crisis had mixed effects in the United States, due to some parts of the country being oil-producing regions and other parts being oil-consuming regions. Richard Nixon had imposed price controls on domestic oil. Gasoline controls were repealed, but controls on domestic US oil remained.

The Jimmy Carter administration began a phased deregulation of oil prices on April 5, 1979, when the average price of crude oil was US$15.85 per barrel (42 US gallons (160 L)). Starting with the Iranian revolution, the price of crude oil rose to $39.50 per barrel over the next 12 months (its all-time highest real price until March 3, 2008.) [8] Deregulating domestic oil price controls allowed U.S. oil output to rise sharply from the large Prudhoe Bay fields, while oil imports fell sharply.

And although not directly related, the near-disaster at Three Mile Island on March 28, 1979, also increased anxiety about energy policy and availability. [9]

Due to memories of oil shortage in 1973, motorists soon began panic buying, and long lines appeared at gas stations, as they had six years earlier during the 1973 oil crisis. [10]

As the average vehicle of the time consumed between two and three liters (about 0.5–0.8 gallons) of gasoline (petrol) an hour while idling, it was estimated that Americans wasted up to 150,000 barrels (24,000 m3) of oil per day idling their engines in the lines at gas stations. [11]

Gas coupon printed but not issued during the 1979 energy crisis Gascoupon.png
Gas coupon printed but not issued during the 1979 energy crisis

During the period, many people believed the oil companies artificially created oil shortages to drive up prices, rather than factors beyond human control or the US's own price controls. The amount of oil sold in the United States in 1979 was only 3.5 percent less than the record set for oil sold the year previously. [12] A telephone poll of 1,600 American adults conducted by the Associated Press and NBC News and released in early May 1979 found that only 37% of Americans thought the energy shortages were real, 9% were not sure, and 54% thought the energy shortages were a hoax. [13]

Many politicians proposed gas rationing; one such proponent was Harry Hughes, Governor of Maryland, who proposed odd-even rationing (only people with an odd-numbered license plate could purchase gas on an odd-numbered day), as was used during the 1973 Oil Crisis. Several states actually implemented odd-even gas rationing, including California, Pennsylvania, New York, New Jersey, Oregon, and Texas. Coupons for gasoline rationing were printed but were never actually used during the 1979 crisis. [14]

On July 15, 1979, President Carter outlined his plans to reduce oil imports and improve energy efficiency in his "Crisis of Confidence" speech (sometimes known as the "malaise" speech). [15] It is often said that during the speech, Carter wore a cardigan (he actually wore a blue suit) [16] and encouraged citizens to do what they could to reduce their use of energy. He had already installed solar hot water panels on the roof of the White House and a wood-burning stove in the living quarters. However, the panels were removed in 1986, reportedly for roof maintenance, during the administration of his successor, Ronald Reagan. [17]

Carter's speech argued the oil crisis was "the moral equivalent of war". Critics, then and now, argued that his varied proposals would make the situation worse, not better. [18] In November 1979, Iranian revolutionaries seized the American Embassy, and Carter imposed an embargo against Iranian oil. [19] In January 1980, he issued the Carter Doctrine, declaring: "An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States." [20] Additionally, as part of his administration's efforts at deregulation, Carter proposed removing price controls that had been imposed by the administration of Richard Nixon before the 1973 crisis. Carter agreed to remove price controls in phases; they were finally dismantled in 1981 under Reagan. [21] Carter also said he would impose a windfall profit tax on oil companies. [22] While the regulated price of domestic oil was kept to $6 a barrel, the world market price was $30. [22]

In 1980, the U.S. Government established the Synthetic Fuels Corporation to produce an alternative to imported fossil fuels.

When the price of West Texas Intermediate crude oil increased 250 percent between 1978 and 1980, the oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming, and Alaska began experiencing an economic boom and population inflows. [23]

Other oil-consuming nations

In response to the high oil prices of the 1970s, industrial nations took steps to reduce their dependence on OPEC oil. [8] Electric utilities worldwide switched from oil to coal, natural gas, or nuclear power; [24] national governments initiated multibillion-dollar research programs to develop alternatives to oil; [25] [26] and commercial exploration developed major non-OPEC oilfields in Siberia, Alaska, North Sea, and Gulf of Mexico. [27] By 1986, daily worldwide demand for oil dropped by 5 million barrels, non-OPEC production rose by an even-larger amount, [28] and OPEC's market share sank from 50% in 1979 to just 29% in 1985. [29]

Automobile fuel economy

At the time, Detroit's "Big Three" automakers (Ford, Chrysler, GM) were marketing downsized full-sized automobiles like the Chevrolet Caprice, the Ford LTD Crown Victoria and the Dodge St. Regis which met the CAFE fuel economy mandates passed in 1978. Detroit's response to the growing popularity of imported compacts like the Toyota Corolla and the Volkswagen Rabbit were the Chevrolet Citation, and the Ford Fairmont; Ford replaced the Ford Pinto with the Ford Escort and Chrysler, on the verge of bankruptcy, introduced the Dodge Aries K. GM was having unfavorable market reactions to the Citation, and introduced the Chevrolet Corsica and Chevrolet Beretta in 1987 which did sell better. GM also replaced the Chevrolet Monza, introducing the 1982 Chevrolet Cavalier which was better received. Ford experienced a similar market rejection of the Fairmont, and introduced the front wheel drive Ford Tempo in 1984.

Checker Motors, known for its iconic Marathon sedans used for the taxicab livery, ceased its automotive production in 1982 transitioning to stamping sheetmetal for GM. American Motors, the final independent manufacturer outside of Detroit's Big Three, entered into a joint venture with Renault where its mass market automobiles were sold alongside the remaining AMC product lineup which have declined in sales while AMC's Jeep division was profiting, especially with the introduction of its downsized XJ sport utilities which led to the company's demise (its homegrown compacts dating back to 1970 – they were phased out in 1983 (with the exception of the Eagle 4WD wagon making it the final AMC designed product) and financial woes with the Renault partnership ended the reign of the final independent. Renault ended up owning 100% of AMC in 1982 (resulting in the divestment of AM General) until late 1986 where they sold AMC's shares to Chrysler Corporation. They later absorbed AMC in late 1987 where the Jeep division is now part of Chrysler (now FCA automobiles).

Detroit was not well prepared for the sudden rise in fuel prices, and imported brands (primarily the Asian marques which were mass marketed and had a lower manufacturing cost as opposed to British and West German brands - the rising value of the Deutsche Mark and English Pound resulted in the transition to the rise of Japanese manufacturers where exporting their product from Japan at a lower cost would yield profitable gains despite accusations of price dumping) were now more widely available in North America and had developed a loyal customer base - the Japanese Big Three launched their respective advertisement campaigns (Honda with its 'We Make It Simple' tagline, Datsun (Nissan after 1984) with the tagline 'We Are Driven', and Toyota with 'Oh What A Feeling' (they ran a previous ad campaign prior to 1979 where the company mocked the Plymouth Volare with the tagline 'You Asked For It – You Got It') – luring away traditional Big Three consumers (Subaru in the late 1970s ran an ad campaign where former owners of a Big Three automobile drove their products – one TV ad started with the tagline 'Ford drives Subaru').

A year after the 1979 Iranian Revolution, Japanese manufacturers surpassed Detroit's production totals becoming first in the world. Japanese exports would later displace the automotive market once dominated by lower tier European manufacturers (Alfa Romeo, Fiat, Opel, Peugeot, MG, Triumph, Citroen). Some would declare bankruptcy (e.g. Triumph, Simca) or withdraw from the U.S. market, especially in the wake of grey market automobiles or the inability of the vehicle to meet DOT requirements (from emission requirements to automotive lighting). Many imported brands utilized fuel saving technologies such as fuel injection and multi-valve engines over the common use of carburetors. Also, the imported brands used their innovative business ethic e.g. a just-in-time inventory system but the U.S. Government imposed import quotas where the Japanese brands (later extended to South Korean and European marques) began outsourcing their operations by opening assembly plants in the United States (especially the Southern U.S. where import automakers were not on friendly terms with labor unions from the Rust Belt states), Canada, and Mexico to produce their mass market automobiles and light trucks. The Japanese (and later South Korean) brands which assembled its automobiles on U.S. soil had exterior dimensions which were sized to its domestic counterparts and engine displacement over 2.0 liters for the USA market (Japanese regulations on vehicle sizing and engine displacement determines the road tax paid on an annual basis which is not practiced in the US and Canada).

Import brands also complied with local content laws where an import automobile must have a percentage of automotive components (in the United States automobiles with 70 percent local content manufacture is considered a domestic build regardless of manufacturer) sourced from the United States, Canada, or Mexico (prior to the establishment of NAFTA) and the American Automobile Labeling Act of 1994 which mandated the percentage of automotive parts content printed on the Monroney sticker of an automobile sold through a dealership. The import quota resulted in the Japanese automakers importing a limited amount of automobiles but to comply with the U.S. Government imposition of the 1981 Voluntary Export Restraints, the automakers established their respective luxury marques (Acura, Lexus, Infiniti) but run respectively by their parent manufacturers (Honda, Toyota, Nissan). GM's Cadillac division experimented with their V8-6-4 power plant (the ancestor of the modern-day Active Fuel Management and/or variable displacement), which was a market failure. [30] Nonetheless, overall fuel economy increased, which was one factor leading to the subsequent 1980s oil glut.

See also

Further reading

Related Research Articles

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1970s energy crisis

The 1970s energy crisis was a period when the major industrial countries of the world, particularly the United States, Canada, Western Europe, Japan, Australia, and New Zealand, faced substantial petroleum shortages, real and perceived, as well as elevated prices. The two worst crises of this period were the 1973 oil crisis and the 1979 energy crisis, when the Yom Kippur War and the Iranian Revolution triggered interruptions in Middle Eastern oil exports.

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For the economic effects refer to Economy of Iran.

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