The 1973 embargo “did not imply that we could reduce imports to the United States…[T]he world is really just one market. So the embargo was more symbolic than anything else.” Those were the words of Saudi oil minister Sheik Yamani, in response to the impact of the 1973 Arab (“Arab” is mentioned because non-Arab countries like Iran did not participate) oil embargo on the United States. The U.S. imported every bit as much (in truth, more) oil after the embargo was announced as before; the only difference being that Americans purchased the “Arab oil” from those not embargoed. It's a basic economic truth that there's no accounting for the final destination of any good.
So what happened in 1973? Why did oil prices spike? The better question would be one of why did commodities across the board spike? The simple truth is that there were no “oil shocks” in the early ‘70s as much as President Nixon's fateful decision to sever the dollar's historical link to gold resulted in the greenback plummeting in value. Wheat, meat, soybeans, oil, and every other commodity priced in dollars spiked. Notable here is that per Robert Bartley's brilliant 1992 book, The Seven Fat Years, OPEC officials sent out an early ‘70s communique that signaled their inability to control the price of oil; their implicit point that a change in the value of the dollar would by definition have a profound impact on a commodity once again priced in dollars. In short, the “oil shocks” of the early ‘70s were not. They were dollar shocks. Nothing more, nothing less.
Read Full Article »