A warhorse argument about our economic history—a big entry in the Conventional Wisdom—is that energy became expensive thanks the Arabian “oil shock” of 1973. It goes like this. The United States got addicted to gas guzzling cars in the late 1960s and early 1970s. The United States supported Israel in the Yom Kippur War in the fall of 1973. Fed up with supplying its nemesis, Arab nations tripled the price of oil.
To be certain, the price of oil did go way up from late 1973 to early 1974, from around $3, where it had been for decades, to over $10 per barrel.
The argument continues in this vein: Reeling from the Arab move, the United States tumbled into stagflation, the nearly decade-long period of minimal economic growth coupled with staggering price inflation at times above 10% per year. Oil was such a primary product in the American economy, and Americans were using it with such abandon in consumerist activities—commuting, polluting, going to the mall, cruising—that it had become our Achilles’ heel. And whatever the uneven economic recoveries of the 1980s and 1990s, this country’s economy has never really gotten its groove back from before the Arab oil shock. The high tide of American prosperity was on or about 1973, when a canny adversary exposed and exploited a great vulnerability of ours.
This argument, warhorse in our discourse as it may be, has always struggled to make sense. For example, Citicorp’s CEO in the 1970s, Walter Wriston, observed that Arab nations were depositing all the new oil money in the Western banking system. Therefore, there was an abundance of capital for investment and supply, giving no berth to the elements of stagflation, unemployment and inflation. They came anyway. The argument that the Arab oil producers socked it to U.S. consumerism, and to the American Dream itself, solidified into a verity.
Let’s reopen the question. This means calling on the sources of the time, such as asking: What did the big oil exporters’ trading body, OPEC (Organization of the Petroleum Exporting Countries), say was the reason it raised prices so much in 1973-74? In 1984, Rep. William Dannemeyer of California put this query to OPEC. It responded with a folio of statements from OPEC officials not from 1973—but from 1970 and 1971.
The first was a remark from the OPEC Secretary General, published in the industry’s prominent trade journal five days after the United States went off the gold standard in August 1971: “If the current monetary crisis results in a direct or indirect devaluation of the US dollar, member countries of OPEC will take the necessary steps to adjust crude oil posted prices accordingly.”
This firmed up an OPEC statement of August 17, 1971, thirty-six hours after the U.S. had said goodbye to gold. It provided that “member states would automatically adjust crude oil posted prices calculated in dollars if a change in dollar parity emerged from the present monetary crisis.”
OPEC’s repetition of August 1971 stemmed from a resolution the group had publicly made the year before in Venezuela, namely this: “taking into consideration that the value of the U.S. Dollar…constitutes an essential element for the determination of the fiscal revenue of Member Countries…[and] that the maintenance of the real level of this revenue is of paramount importance for the…Organization….[and] that the purchasing power of the revenue per barrel of Member Countries has continued to deteriorate due to the continuous inflation in prices felt by the economies of the industrialized countries….”