International Political Economy

1
International Political Economy
2
Politics and Markets

• Role of the state in liberal democracies to
  induce economic performance
• Pluralist Approach
• The state is a neutral arena
• Actors have varying particular interests
• State has no intrinsic interests
• The study of politics is about government
  processes
• Class Approach
• There are common class interests
• The ruling class controls the agenda
• It implements policy
• Thereby reducing popular influence

3
Needs of the state

• The state needs satisfactory economic performance
  from private asset controllers for
• Stability
• Revenue
• So the state
• Avoids reducing the confidence of business
• Induces performance with incentives

4
Changing the terms

• Losers in the market can change the rules if they
  have sufficient political influence
• Given the comments of Olson (collective action
  problem) and Lindblom (privileged position of
  business), these will be oligopolistic firms see
  Sugar or Steel

5
Hegemonic Stability Theory

• Central Idea The stability of the International
  System requires a single dominant state to
  articulate and enforce the rules of interaction
  among the most important members of the system.
• To be a Hegemon, a state must have three
  attributes
• The Capability to enforce the rules of the
  system
• The Will to do so
• A Commitment to a system which is perceived as
  mutually beneficial to the major states.
• Capability rests upon three attributes
• A large, growing economy
• Dominance in a leading technological or economic
  sector
• Political power backed up by projective military
  power.

6
The Historical Record

• Portugal 1494 to 1580 (end of Italian Wars to
  Spanish invasion of Portugal) Based on Portugal's
  dominance in navigation
• Hegemonic pretender Spain
• Holland 1580 to 1688 (1579 Treaty of Utrecht
  marks the foundation of the Dutch Republic to
  William of Orange's arrival in England) Based on
  Dutch control of credit and money
• Hegemonic pretender England
• Britain 1688 to 1792 (Glorious Revolution to
  Napoleonic Wars) Based on British textiles and
  command of the High Seas
• Hegemonic pretender France
• Britain 1815 to 1914 (Congress of Vienna to World
  War I) Based on British industrial supremacy and
  railroads
• Hegemonic pretender Germany
• United States 1945 to 1971 Based on Petroleum and
  the Internal Combustion Engine
• Hegemonic pretender the USSR

7
What does the Hegemon Do?

• The system is a collective good which means that
  it is plagued by a "free rider" syndrome. Thus,
  the hegemon must induce or coerce other states to
  support the system The US system tries to produce
  democracy and capitalism, thus it champions human
  rights and free trade. Other nations will try to
  enjoy the benefits of these institutions, but
  will try to avoid paying the costs of producing
  them. Thus, the US must remain committed to free
  trade even if its major trading partners erect
  barriers to trade. The US can erect its own
  barriers, but then the system will collapse.
• Over time, there is an uneven growth of power
  within the system as new technologies and methods
  are developed. An unstable system will result if
  economic, technological, and other changes erode
  the international hierarchy and undermine the
  position of the dominant state. Pretenders to
  hegemonic control will emerge if the benefits of
  the system are viewed as unacceptably unfair.

8
Bretton Woods (1944)

• The Bretton Woods system of international
  monetary management established the rules for
  commercial and financial relations among the
  world's major industrial states. The Bretton
  Woods system was the first example in world
  history of a fully negotiated monetary order
  intended to govern monetary relations among
  independent nation-states.
• Preparing to rebuild the international economic
  system as World War II was still raging, set up a
  system of rules, institutions, and procedures to
  regulate the international monetary system. The
  planners at Bretton Woods established the
  International Bank for Reconstruction and
  Development (IBRD) (now one of five institutions
  in the World Bank Group) and the International
  Monetary Fund (IMF).

9
Bretton Woods (contd)

• The chief features of the Bretton Woods system
  were, first, an obligation for each country to
  adopt a monetary policy that maintained the
  exchange rate of its currency within a fixed
  valueplus or minus one percentin terms of gold
  and, secondly, the ability of the IMF to bridge
  temporary imbalances of payments.
• In the face of increasing strain, the system
  eventually collapsed in 1971, following the
  United States' suspension of convertibility from
  dollars to gold.

10
Legacy of the Great Depression

• The experience of the Great Depression, when
  proliferation of foreign exchange controls and
  trade barriers led to economic disaster, was
  fresh on the minds of public officials.
• The planners at Bretton Woods hoped to avoid a
  repeat of the debacle of the 1930s, when foreign
  exchange controls undermined the international
  payments system that was the basis for world
  trade. The "beggar thy neighbor" policies of
  1930s governmentsusing currency devaluations to
  increase the competitiveness of a country's
  export products in order to reduce balance of
  payments deficitsworsened national deflationary
  spirals, which resulted in plummeting national
  incomes, shrinking demand, mass unemployment, and
  an overall decline in world trade.

11
Great Depression (contd)

• Trade in the 1930s became largely restricted to
  currency blocs (groups of nations that use an
  equivalent currency, such as the "Pound Sterling
  Bloc" of the British Empire). These blocs
  retarded the international flow of capital and
  foreign investment opportunities. Although this
  strategy tended to increase government revenues
  in the short run, it dramatically worsened the
  situation in the medium and longer run.
• Thus, for the international economy, planners at
  Bretton Woods all favored a liberal system, one
  that relied primarily on the market with the
  minimum of barriers to the flow of private trade
  and capital. Although they disagreed on the
  specific implementation of this liberal system,
  all agreed on an open system.

12
Hegemony

• International economic management relied on the
  dominant power to lead the system. The
  concentration of power facilitated management by
  confining the number of actors whose agreement
  was necessary to establish rules, institutions,
  and procedures and to carry out management within
  the agreed system.

13
Americas Advantages

• That leader was the United States. The United
  States had emerged from the Second World War as
  the strongest economy in the world, experiencing
  rapid industrial growth and capital accumulation.
  The U.S. had remained untouched by the ravages of
  World War II and had built a thriving
  manufacturing industry and grown wealthy selling
  weapons and lending money to the other
  combatants in fact, U.S. industrial production
  in 1945 was more than double that of annual
  production between the prewar years of 1935 and
  1939. In contrast, Europe and East Asia were
  militarily and economically shattered.
• As the Bretton Woods Conference convened, the
  relative advantages of the U.S. economy were
  undeniable and overwhelming. The U.S. held a
  majority of world investment capital,
  manufacturing production and exports. In 1945,
  the U.S. produced half the world's coal,
  two-thirds of the oil, and more than half of the
  electricity. And the U.S. held 80 of the
  world's gold reserves.

14
The need to trade

• As the world's greatest industrial power, and one
  of the few nations unravaged by the war, the U.S.
  stood to gain more than any other country from
  the opening of the entire world to unfettered
  trade. The United States would have a global
  market for its exports, and it would have
  unrestricted access to vital raw materials. The
  United States was not only able, it was also
  willing, to assume this leadership role.
• William Clayton, the assistant secretary of state
  for economic affairs, was among myriad U.S.
  policymakers who summed up this point "We need
  marketsbig marketsaround the world in which to
  buy and sell."

15
The Atlantic Charter

• The Atlantic Charter affirmed the right of all
  nations to equal access to trade and raw
  materials. Moreover, the charter called for
  freedom of the seas, the disarmament of
  aggressors, and the "establishment of a wider and
  permanent system of general security."
• As the war drew to a close, the Allies sought to
  construct what had been lacking between the two
  world wars a system of international payments
  that would allow trade to be conducted without
  fear of sudden currency depreciation or wild
  fluctuations in exchange ratesailments that had
  nearly paralyzed world capitalism during the
  Great Depression.
• Without a strong European market for U.S. goods
  and services, most policymakers believed, the
  U.S. economy would be unable to sustain the
  prosperity it had achieved during the war. In
  addition, U.S. unions had only grudgingly
  accepted government-imposed restraints on their
  demand during the war, but they were willing to
  wait no longer, particularly as inflation cut
  into the existing wage scales with painful force.

16
The Liberal International Economic Order

• Free trade relied on the free convertibility of
  currencies. Negotiators at the Bretton Woods
  conference, fresh from what they perceived as a
  disastrous experience with floating rates in the
  1930s, concluded that major monetary fluctuations
  could stall the free flow of trade.
• The liberal economic system required an accepted
  vehicle for investment, trade, and payments.
  Unlike national economies, however, the
  international economy lacks a central government
  that can issue currency and manage its use.
  Bretton Woods set up a system of fixed exchange
  rates managed by a series of newly created
  international institutions using the U.S. dollar
  (which was a gold standard currency for central
  banks) as a reserve currency.

17
Gold Standard

• In the nineteenth and twentieth centuries gold
  played a key role in international monetary
  transactions. The gold standard was used to back
  currencies the international value of currency
  was determined by its fixed relationship to gold
  gold was used to settle international accounts.
  The gold standard maintained fixed exchange rates
  that were seen as desirable because they reduced
  the risk of trading with other countries.
• Imbalances in international trade were
  theoretically rectified automatically by the gold
  standard.
• A country with a deficit would have depleted gold
  reserves and would thus have to reduce its money
  supply. The resulting fall in demand would reduce
  imports and the lowering of prices would boost
  exports thus the deficit would be rectified.
• Any country experiencing inflation would lose
  gold and therefore would have a decrease in the
  amount of money available to spend. This decrease
  in the amount of money would act to reduce the
  inflationary pressure.

18
Reserve Currency

• Supplementing the use of gold in this period was
  the British pound. Based on the dominant British
  economy, the pound became a reserve, transaction,
  and intervention currency. But the pound was not
  up to the challenge of serving as the primary
  world currency, given the weakness of the British
  economy after the Second World War.
• The only currency strong enough to meet the
  rising demands for international liquidity was
  the US dollar. The strength of the US economy,
  the fixed relationship of the dollar to gold (35
  an ounce), and the commitment of the U.S.
  government to convert dollars into gold at that
  price made the dollar as good as gold. In fact,
  the dollar was even better than gold it earned
  interest and it was more flexible than gold.

19
Pegged Rates

• What emerged was the "pegged rate" currency
  regime. Members were required to establish a
  parity of their national currencies in terms of
  gold (a "peg") and to maintain exchange rates
  within 1 , plus or minus, of parity (a "band")
  by intervening in their foreign exchange markets
  (that is, buying or selling foreign money).
• In practice, however, since the principal
  "reserve currency" would be the U.S. dollar, this
  meant that other countries would peg their
  currencies to the U.S. dollar, andonce
  convertibility was restoredwould buy and sell
  U.S. dollars to keep market exchange rates within
  1, plus or minus, of parity.
• Meanwhile, in order to bolster faith in the
  dollar, the U.S. agreed separately to link the
  dollar to gold at the rate of 35 per ounce of
  gold. At this rate, foreign governments and
  central banks were able to exchange dollars for
  gold.

20
Institutions

• International Monetary Fund (IMF)
• International Bank for Reconstruction and
  Development (IBRD)

21
IMF

• The IMF was to be the keeper of the rules and the
  main instrument of public international
  management. IMF approval was necessary for any
  change in exchange rates. It advised countries on
  policies affecting the monetary system.
• The big question at the Bretton Woods conference
  with respect to the institution that would emerge
  as the IMF was the issue of future access to
  international liquidity and whether that source
  should be akin to a world central bank able to
  create new reserves at will or a more limited
  borrowing mechanism.
• The IMF was born with an economic approach and
  political ideology that stressed controlling
  inflation and introducing austerity plans over
  fighting poverty. This left the IMF severely
  detached from the realities of Third World
  countries struggling with underdevelopment from
  the onset.

22
Subscriptions and quotas

• a fixed pool of national currencies and gold
  subscribed by each country as opposed to a world
  central bank capable of creating money.
• The Fund was charged with managing various
  nations' trade deficits so that they would not
  produce currency devaluations that would trigger
  a decline in imports.
• The IMF was provided with a fund, composed of
  contributions of member countries in gold and
  their own currencies. When joining the IMF,
  members were assigned "quotas" reflecting their
  relative economic power, and, as a sort of credit
  deposit, were obliged to pay a "subscription" of
  an amount commensurate to the quota.
• The subscription was to be paid 25 in gold or
  currency convertible into gold and 75 in the
  member's own money.
• The IMF set out to use this money to grant loans
  to member countries with financial difficulties.
• Each member was then entitled to be able to
  immediately withdraw 25 of its quota in case of
  payment problems.

23
Financing trade deficits

• In the event of a deficit in the current account,
  Fund members, when short of reserves, would be
  able to borrow needed foreign currency from this
  fund in amounts determined by the size of its
  quota (contribution).
• Members were obligated to pay back debts within a
  period of eighteen months to five years. In turn,
  the IMF embarked on setting up rules and
  procedures to keep a country from going too
  deeply into debt, year after year.
• IMF loans were not comparable to loans issued by
  a conventional credit institution. Instead, it
  was effectively a chance to purchase a foreign
  currency with gold or the member's national
  currency.
• The IMF was designed to advance credits to
  countries with balance of payments deficits.
  Short-run balance of payment difficulties would
  be overcome by IMF loans, which would facilitate
  stable currency exchange rates.

24

• This flexibility meant that member states would
  not have to induce a depression automatically in
  order to cut its national income down to such a
  low level that its imports will finally fall
  within its means.
• Thus, countries were to be spared the need to
  resort to the classical medicine of deflating
  themselves into drastic unemployment when faced
  with chronic balance of payments deficits. Before
  the Second World War, European nations often
  resorted to this, particularly Britain.
• Moreover, the planners at Bretton Woods hoped
  that this would reduce the temptation of
  cash-poor nations to reduce capital outflow by
  restricting imports. In effect, the IMF extended
  Keynesian measuresgovernment intervention to
  prop up demand and avoid recessionto protect the
  U.S. and the stronger economies from disruptions
  of international trade and growth.

25
Changing the par value

• The IMF sought to provide for occasional
  exchange-rate adjustments (changing a member's
  par value) by international agreement with the
  IMF.
• Member nations were permitted first to depreciate
  (or appreciate in opposite situations) their
  currencies by 10 . This tends to restore
  equilibrium in its trade by expanding its exports
  and contracting imports. This would be allowed
  only if there was what was called a "fundamental
  disequilibrium."
• (A decrease in the value of the country's money
  was called a "devaluation" while an increase in
  the value of the country's money was called a
  "revaluation".)
• It was envisioned that these changes in exchange
  rates would be quite rare.

26
US Dominance

• The IMF allocates voting rights among governments
  not on a one-state, one-vote basis but rather in
  proportion to quotas.
• Since the U.S. was contributing the most, U.S.
  leadership was the key implication. Under the
  system of weighted voting the U.S. was able to
  exert a preponderant influence on the IMF. With
  one-third of all IMF quotas at the outset, enough
  to veto all changes to the IMF Charter on its
  own.

27
IBRD

• It had been recognized in 1944 that the new
  system could come into being only after a return
  to normalcy following the disruption of World War
  II.
• It was expected that after a brief transition
  periodexpected to be no more than five yearsthe
  international economy would recover and the
  system would enter into operation.
• To promote the growth of world trade and to
  finance the postwar reconstruction of Europe, the
  planners at Bretton Woods created another
  institution, IBRDnow known as the World Bank.
• The IBRD had an authorized capitalization of 10
  billion and was expected to make loans of its own
  funds to underwrite private loans and to issue
  securities to raise new funds to make possible a
  speedy postwar recovery.
• The IBRD (World Bank) was to be a specialized
  agency of the United Nations charged with making
  loans for economic development purposes.

28
Trifflins Dilemma

• American economist Robert Triffin had first
  identified the problem of fundamental imbalances
  in the Bretton Woods system in 1960.
• The number of U.S. dollars in circulation soon
  exceeded the amount of gold backing them up. By
  the early 1960s, an ounce of gold could be
  exchanged for 40 in London, even though the
  price in the U.S. was 35. This difference showed
  that investors knew that dollar was overvalued.
• There was a solution to Triffin's dilemma for the
  U.S. - reduce the number of dollars in
  circulation by cutting the deficit and raise
  interest rates to attract dollars back into the
  country. Both these tactics, however, would drag
  the U.S. economy into recession, a prospect new
  President John F. Kennedy found intolerable.
• In August 1971, President Richard Nixon
  acknowledged that the Bretton Woods system was
  finished. He announced that the dollar could no
  longer be exchanged for gold. The "gold window"
  was closed.

29
The Nixon Shock

• By the early 1970s, as the Vietnam War
  accelerated inflation, the United States was
  running not just a balance of payments deficit
  but also a trade deficit (for the first time in
  the twentieth century).
• The crucial turning point was 1970, which saw
  U.S. gold coverage deteriorate from 55 to 22,
  leading holders of the dollar to lose faith in
  the U.S. ability to cut its budget and trade
  deficits.
• In 1971 more and more dollars were being printed
  in Washington, then being pumped overseas, to pay
  for the nation's military expenditures and
  private investments.
• In the first six months of 1971, assets for 22
  billion fled the United States. In response, on
  August 15, 1971, Nixon unilaterally imposed
  90-day wage and price controls, a 10 import
  surcharge, and most importantly "closed the gold
  window," making the dollar inconvertible to gold
  directly, except on the open market.
• By the years end, a general revaluation of major
  currencies allowed 2.25 devaluations from the
  agreed exchange rate. But even the more flexible
  official rates could not be defended against the
  speculators.

30
Transition to Supportership

• By March 1976, all the world's major currencies
  were floating.
• Over the next two decades, the system will be
  renegotiated taking into account the post-WWII
  recovery of Europe and the Far East.
• This will be the WTO (1995).

31
WTO
32
Mission of the WTO

• The WTO aims to increase international trade by
  promoting lower trade barriers and providing a
  platform for the negotiation of trade and to
  resolve disputes between member nations, when
  they arise.
• Principles of the trading system
• 1. A trading system should be discrimination-free
  in a sense that a country cannot favor another
  country or discriminate against foreign products
  or services.
• 2. A trading system should be more free where
  there should be little trade barriers (tariffs
  and non-tariff barriers).
• 3. A trading system should be predictable
  where foreign companies and governments can be
  sure that trade barriers would not be raised and
  markets will remain open.
• 4. A trading system should be more
  competitive.
• 5. A trading system should be more
  accommodating for less developed countries,
  giving them more time to adjust, greater
  flexibility, and more privileges.

33
Conflict Resolution

• Apart from hosting negotiations on trade rules,
  the WTO also acts as an arbiter of disputes
  between member states over its rules. And unlike
  most other international organizations, the WTO
  has significant power to enforce its decisions
  through the authorization of trade sanctions
  against members which fail to comply with its
  decisions.
• Member states can bring disputes to the WTO's
  Dispute Settlement Body if they believe another
  member has breached WTO rules.
• Disputes are heard by a Dispute Settlement Panel,
  usually made up of three trade officials. The
  panels meet in secret and are not required to
  alert national parliaments that their laws have
  been challenged by another country.
• If decisions of the Dispute Settlement Body are
  not complied with, it may authorize "retaliatory
  measures" - trade sanctions - in favor of the
  member(s) which brought the dispute. While such
  measures are a strong mechanism when applied by
  economically powerful states like the United
  States or the European Union, when applied by
  weak states against stronger ones, they can often
  be ignored.

34
Energy Crisis

• The 1973 oil crisis began in earnest on October
  17, 1973, when Arab members of the Organization
  of Petroleum Exporting Countries (OPEC), during
  the Yom Kippur War, announced that they would no
  longer ship petroleum to nations that had
  supported Israel in its conflict with Syria and
  Egypt -- that is, to the United States and its
  allies in Western Europe. The Arab-Israeli
  conflict triggered an energy crisis in the
  making.
• Between 1945 and the late 1970s, the West and
  Japan consumed more oil and minerals than had
  been used in all previous recorded history. Oil
  consumption in the United States had more than
  doubled between 1950 and 1974. With only 6 of
  the world's population, the U.S. was consuming
  33 of the world's energy.

35

• Oil, especially from the Middle East, was paid
  for at prices fixed in dollars. Nixon ended the
  convertibility of the US dollar into gold,
  thereby ending the Bretton Woods system that had
  been in place since the end of World War II,
  allowing its value to fall in world markets. The
  dollar was devalued by 8 in relation to gold in
  December 1971, and devalued again in 1973.
• The devaluation resulted in increased world
  economic and political uncertainty. This set the
  stage for the struggle for control of the world's
  natural resources and for a more favorable
  sharing of the value of these resources between
  the rich countries and the oil-exporting nations
  of OPEC.
• OPEC devised a strategy of counter-penetration,
  whereby it hoped to make industrial economies
  that relied heavily on oil imports vulnerable to
  Third World pressures. Dwindling foreign aid from
  the United States and its allies, combined with
  the West's pro-Israeli stance in the Middle East,
  angered the Arab nations in OPEC.
• The effects of the embargo were immediate. OPEC
  forced the oil companies to increase payments
  drastically. The price of oil quadrupled by 1974
  to nearly US12 per 42 US gallon barrel (75
  US/m³).

36
Oil Prices
37

• This increase in the price of oil had a dramatic
  effect on oil exporting nations, for the
  countries of the Middle East who had long been
  dominated by the industrial powers were seen to
  have acquired control of a vital commodity. The
  traditional flow of capital reversed as the oil
  exporting nations accumulated vast wealth. Some
  of the income was dispensed in the form of aid to
  other underdeveloped nations whose economies had
  been caught between higher prices of oil and
  lower prices for their own export commodities and
  raw materials amid shrinking Western demand for
  their goods. Much of it, however, fell into the
  hands of elites who reinvested it in the West or
  enhanced their own well-being. Much was absorbed
  in massive arms purchases that exacerbated
  political tensions, particularly in the Middle
  East.
• OPEC-member states in the developing world
  withheld the prospect of nationalization of the
  companies' holdings in their countries. Most
  notably, the Saudis acquired operating control of
  Aramco, fully nationalizing it in 1980 under the
  leadership of Ahmed Zaki Yamani. As other OPEC
  nations followed suit, the cartel's income
  soared. Saudi Arabia, awash with profits,
  undertook a series of ambitious five-year
  development plans, of which the most ambitious,
  begun in 1980, called for the expenditure of 250
  billion. Other cartel members also undertook
  major economic development programs.

38

• Meanwhile, the shock produced chaos in the West.
  In the United States, the retail price of a
  gallon of gasoline rose from a national average
  of 38.5 cents in May 1973 to 55.1 cents in June
  1974. Meanwhile, New York Stock Exchange shares
  lost 97 billion in value in six weeks.
• With the onset of the embargo, U.S. imports of
  oil from the Arab countries dropped from 1.2
  million barrels (190,000 m³) a day to a mere
  19,000 barrels (3,000 m³). Daily consumption
  dropped by 6.1 from September to February, and
  by the summer of 1974, by 7 as the United
  States suffered its first fuel shortage since the
  Second World War.
• Underscoring the interdependence of the world
  societies and economies, oil-importing nations in
  the noncommunist industrial world saw sudden
  inflation and economic recession. In the
  industrialized countries, especially the United
  States, the crisis was for the most part borne by
  the unemployed, the marginalized social groups,
  certain categories of aging workers, and
  increasingly, by younger workers. Schools and
  offices in the U.S. often closed down to save on
  heating oil and factories cut production and
  laid off workers. In France, the oil crisis spelt
  the end of the Trente Glorieuses, 30 years of
  very high economic growth, and announced the
  ensuing decades of permanent unemployment.

39

• The embargo was not blanket in Europe. Of the
  nine members of the European Economic Community,
  the Dutch faced a complete embargo (having voiced
  support for Israel and allowed the Americans to
  use Dutch airfields for supply runs to Israel),
  the United Kingdom and France received almost
  uninterrupted supplies (having refused to allow
  America to use their airfields and embargoed arms
  and supplies to both the Arabs and the Israelis),
  whilst the other six faced only partial cutbacks.
  The UK had traditionally been an ally of Israel,
  and Harold Wilson's government had supported the
  Israelis during the Six Day War, but his
  successor, Ted Heath, had reversed this policy in
  1970, calling for Israel to withdraw to its
  pre-1967 borders. The members of the EEC had been
  unable to achieve a common policy during the
  first month of the Yom Kippur War. The Community
  finally issued a statement on 6 November, after
  the embargo and price rises had begun widely
  seen as pro-Arab, this statement supported the
  Franco-British line on the war and OPEC duly
  lifted its embargo from all members of the EEC.
  The price rises had a much greater impact in
  Europe than the embargo, particularly in the UK
  (where they combined with industrial action by
  coal miners to cause an energy crisis over the
  winter of 1973-74, a major factor in the
  breakdown of the post-war consensus and
  ultimately the rise of Thatcherism).
• Unlike any other oil-importing developed nation,
  Japan fared particularly well in the aftermath of
  the world energy crisis of the 1970s. Japanese
  automakers led the way in an ensuing revolution
  in car manufacturing. The large automobiles of
  the 1950s and 1960s were replaced by far more
  compact and energy efficient models. (Japan,
  moreover, had cities with a relatively high
  population density and a relatively high level of
  transit ridership.)

40

• A few months later, the crisis eased. The embargo
  was lifted in March 1974 after negotiations at
  the Washington Oil Summit, but the effects of the
  energy crisis lingered on throughout the 1970s.
  The price of energy continued increasing in the
  following year, amid the weakening competitive
  position of the dollar in world markets and no
  single factor did more to produce the soaring
  price inflation of the 1970s in the United
  States.
• The crisis was further exacerbated by government
  price controls in the United States, which
  limited the price of "old oil" (that already
  discovered) while allowing newly discovered oil
  to be sold at a higher price, resulting in a
  withdrawal of old oil from the market and
  artificial scarcity. The rule had been intended
  to promote oil exploration. This scarcity was
  dealt with by rationing of gasoline (which
  occurred in many countries), with motorists
  facing long lines at gas stations. In the U.S.,
  drivers of vehicles with license plates having an
  odd number as the last digit were allowed to
  purchase gasoline for their cars only on
  odd-numbered days of the month, while drivers of
  vehicles with even-numbered license plates were
  allowed to purchase fuel only on even-numbered
  days. The rule did not apply on the 31st day of
  those months containing 31 days, or on February
  29 in leap years the latter never came into
  play as the restrictions had been abolished by
  1976.

41

• The 1973 oil crisis was a major factor in
  Japanese economy shift away from oil-intensive
  industries and resulted in huge Japanese
  investments in industries like electronics.
• The Western nations' central banks decided to
  sharply cut interest rates to encourage growth,
  deciding that inflation was a secondary concern.
  Although this was the orthodox macroeconomic
  prescription at the time, the resulting
  stagflation surprised economists and central
  bankers, and the policy is now considered by some
  to have deepened and lengthened the adverse
  effects of the embargo.
• Long-term effects of the embargo are still being
  felt. Public suspicion of the oil companies, who
  were thought to be profiteering or even working
  in collusion with OPEC, continues unabated (seven
  of the fifteen top Fortune 500 companies in 1974
  were oil companies, with total assets of over
  100 billion)

42

• Since 1973, OPEC failed to hold on to its
  preeminent position, and by 1981, its production
  was surpassed by that of other countries.
  Additionally, its own member nations were divided
  among themselves. Saudi Arabia, trying to gain
  back market share, increased production and
  caused downward pressure on prices, making
  high-cost oil production facilities less
  profitable or even unprofitable. The world price
  of oil, which had reached a peak in 1979, at more
  than US80 a barrel (503 US/m³) in 2004 dollars,
  decreased during the early 1980s to US38 a
  barrel (239 US/m³). In real prices, oil briefly
  fell back to pre-1973 levels. Overall, the
  reduction in price was a windfall for the
  oil-consuming nations Japan, Europe and
  especially the Third World.
• When reduced demand and over-production produced
  a glut on the world market in the mid-1980s, oil
  prices plummeted and the cartel lost its unity.
  Oil exporters such as Mexico, Nigeria, and
  Venezuela, whose economies had expanded
  frantically, were plunged into near-bankruptcy,
  and even Saudi Arabian economic power was
  significantly weakened. The divisions within OPEC
  made subsequent concerted action more difficult.

43

• In thirty-year-old British government documents
  released in January 2004, it was revealed that
  the United States considered invading Saudi
  Arabia and Kuwait during the crisis and seizing
  the oil fields in those countries. According to
  the BBC, other possibilities, such as the
  replacement of Arab rulers by "more amenable"
  leaders, or a show of force by "gunboat
  diplomacy," were rejected as unlikely