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Stagflation and the oil crisis

AP.USH:
GEO (Theme)
,
KC‑8.2.III.E (KC)
,
Unit 8: Learning Objective J
Read about the economic downturn of the 1970s and the OPEC oil embargo of 1973-1974. 

Overview

  • In the early 1970s, the post-World War II economic boom began to wane, due to increased international competition, the expense of the Vietnam War, and the decline of manufacturing jobs.
  • Unemployment rates rose, while a combination of price increases and wage stagnation led to a period of economic doldrums known as stagflation. President Nixon tried to alleviate these problems by devaluing the dollar and declaring wage- and price-freezes.
  • The crisis was compounded when oil-rich nations in the Middle East declared an embargo against the United States in retaliation for its support of Israel. The oil embargo had a lasting effect on energy prices.

Economic woes of the 1970s

During the twenty-five years after World War II, the economic power of the United States was unparalleled. Indeed, contemporary observers commented that the postwar United States was in the midst of "the greatest prosperity the world has ever known."start superscript, 1, end superscript The American gross national product (GNP), a measure of all goods and services produced by a country's citizens, increased from $200,000-million in 1940 to more than $500,000-million in 1960 to nearly a trillion dollars by 1970. Thanks to increases in productivity, the American standard of living had doubled between 1945 and 1970. With just six percent of the world's population, the United States enjoyed 40% of the world's wealth.squared
But troubling signs began to emerge in the late 1960s. Unemployment rose by 33% between 1968 and 1970, while the consumer price index went up by 11%. At the same time, real wages began to stagnate. Simultaneous inflation and stagnation, nicknamed stagflation, puzzled economic analysts: usually, when wages fell, prices fell, and when wages increased, prices increased. But not in the 1970s. As a result, Americans had less purchasing power, and increasingly expensive American exports were at a disadvantage in the international market. In 1971, the United States experienced its first unfavorable international trade balance since 1893.cubed
What caused this slump? The massive cost of the war in Vietnam and the expansion of social programs at home without commensurate tax increases helped to drive inflation (the price of goods and services). Meanwhile, US manufacturing (especially automotive manufacturing) had become less competitive over time compared to efficient overseas rivals, particularly in Germany and Japan. More and more American jobs were in the service sector, which had lower wages and fewer benefits than manufacturing jobs. Individuals born on the tail end of the baby boom found themselves competing in a very crowded labor market, especially as more women and immigrants entered the workforce.start superscript, 4, end superscript

The oil embargo

In 1971, Richard Nixon attempted to remedy inflation by imposing a 90-day wage and price freeze. At the same time, he attempted to boost American exports by taking the dollar off the gold standard, devaluing the currency. These measures resulted in a short-term improvement (just long enough to get Nixon reelected in 1972) but did nothing to address the tangled roots of the problem.start superscript, 5, end superscript
Then the energy crisis hit. In October 1973, the United States supported Israel after a surprise attack by Egypt and Syria in the Yom Kippur War. The oil-rich nations of the Middle East, already angry with the United States for devaluing the dollar (the currency used to purchase oil) determined to exact their revenge with an oil embargo. Led by Saudi Arabia, the Organization of the Petroleum Exporting Countries (OPEC) announced an oil shipping embargo against the United States as well as Israel's European allies.start superscript, 6, end superscript
The effects were immediate and dire. The price of oil shot up to $11.65 per barrel, an increase of 387%. Lines miles-long formed at gas stations. The United States consumed one third of the world's oil, and its citizens quickly discovered just how much of daily life depended on cheap oil. Families living in far-flung suburbs depended on automobiles to get everywhere. Even after the embargo ended in March 1974, prices for oil remained about 33% higher than they had been before the crisis.start superscript, 7, end superscript
Black and white photograph showing cars in line for gas.
Line at a gas station in 1979. Image courtesy Library of Congress Prints and Photographs Division.

The end of the postwar economic boom

Stagflation and the oil embargo both seemed to suggest that the American golden age that had followed on the heels of World War II was at an end. First Vietnam and then the Middle East had revealed the limits of US power abroad.
The complex forces which led to the downturn of the 1970s have continued to shape the American economy, particularly globalization (international interdependence of business and culture), which has accelerated as information technology has made communication and coordination easier. For example, many companies have moved manufacturing jobs out of the United States in order to save on labor costs. Today, 80% of all American jobs are in the service industry.start superscript, 8, end superscript
Since the oil embargo, the United States also has worked to reduce its dependence on foreign oil through a variety of means, including reducing energy usage, improving vehicle fuel-efficiency, investing in renewable energy, and increasing domestic oil production.start superscript, 9, end superscript
The quarter century after World War II was a time of incredible growth in the United States which produced the richest nation in human history, as well as a sense of unbridled optimism about the future. By the early 1970s, that chapter of the American adventure had ended. A new, altogether more uncertain era had begun.

What do you think?

What caused the economic problems of the 1970s? Were they avoidable?
Since World War II, the percentage of American jobs in the service sector has grown steadily. What are the benefits and drawbacks of a service-based economy?
How has the US dependence on oil changed since the embargo of 1973? Do you think the United States should do more to reduce its oil consumption?

Want to join the conversation?

  • leaf orange style avatar for user Maurício F. Bento
    "The American gross national product (GNP), a measure of all goods and services produced in the country"

    Isn't this the definition of GDP instead of GNP?
    (14 votes)
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  • leaf orange style avatar for user Maurício F. Bento
    The price of oil has decreased a lot during the last years but as OPEC still extists, what explains this lack of power compared to the 70s?

    Improvements of vehicle fuel-efficiency, investments in renewable energy, and increasing domestic oil production explain all?
    (10 votes)
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  • leaf orange style avatar for user Jeff Kelman
    Which member nation of OPEC (Organization of the Petroleum Exporting Countries), was the founding member? In other words, which nation decided to start the group and convinced the others to join and form OPEC? What's the back story there?
    (9 votes)
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    • leafers ultimate style avatar for user William H
      Iran and Venezuela were the countries that decided to invite Iraq, Kuwait, and Saudi Arabia to form OPEC, as they were interested in forming a group that could coordinate prices and thus insure that profit was maximized and that oil prices would not wildly fluctuate, hurting their business.
      (12 votes)
  • piceratops tree style avatar for user Tyler Thornton
    What are the benefits and drawbacks of a service economy?
    (3 votes)
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    • blobby green style avatar for user Tiffany
      Benefits of a service economy
      - Can become a competitive advantage for a country (India's IT services, US Financial Services, Filipino Nurses)
      - Lower costs (no need to buy machinery or inventory) which generally yields higher wages
      - Humans can adapt to changing demands
      - Some service jobs are essential, hard to replicate, and unlikely to be affected by economic downturn or automation, etc. (Doctors, nurses, firefighters, caretakers)

      Drawbacks
      - Can be difficult to quantify
      - The price of a service worker varies around the world
      - Some service jobs can easily be automated or outsourced
      (4 votes)
  • blobby green style avatar for user londonurieeii
    I still don't get how a war causes inflation... who can help me with this?
    (1 vote)
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    • old spice man green style avatar for user Jonathan Ziesmer
      Countries often print more money to allow the government to buy more equipment without going into debt. It often works in the short term but can be disastrous in the long run. For example, Germany was completely bankrupt after both World Wars due to hyperinflation. Their currency was literally worthless; not worth the paper it was printed on.
      (4 votes)
  • starky seedling style avatar for user jorge landa
    How has the US dependence on oil changed since the embargo of 1973?
    (2 votes)
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    • aqualine tree style avatar for user David Alexander
      The US economy is still dependent on fossil-fuel generated electricity, and fossil-fuel powered transportation. Some changes are as follows:
      1) The US established a strategic oil reserve. Instead of just declaring certain domestic oil fields as "naval reserves", the government contracted with owners of underground hollow places along the gulf coast to use these as storage spaces, and began purchasing oil from domestic and foreign markets to fill them.
      2) Technology to get more oil out of wells that had been regarded too low-producing to pump was created.
      3) Drilling increased on shore and off shore
      4) Areas previously left undrilled because of delicate environments were declared open to exploration and production.
      5) Natural gas deposits were exploited and offset some of the need for petroleum.
      6) Canadian Oil resources were exploited, and though "foreign", were regarded as "North American" in some reporting schemes.

      The results have been environmental disasters like the oil well blowout in the Gulf of Mexico a few years ago, Earthquakes in Oklahoma in recent years, and the displacement of coal miners whose jobs were eliminated because natural gas became so cheap.
      (2 votes)
  • leaf orange style avatar for user Jeff Kelman
    What caused the economic problems of the 1970s? Were they avoidable?

    I think the post-WW2 success in the USA was largely a result of the fact that the rest of the developed world had been bombed and cleared. This created an inherent lag for nations such as England and Germany to catch up. During this time, the USA effectively had a monopoly on labor and capital and was able to grow in spite of the burdensome and counter-to-progress programs such as the New Deal and the Great Society. Those sorts of welfare state laws inevitably would pull a nation down, however, the USA has such a strong lead on capital infrastructure that for the time being the USA was able to overcome these downsides. In the long run, we may see that trend fully reverse, and nations across the globe may continue to make economic strides at far faster rates, provided they maintain relatively freer markets than the USA.
    (0 votes)
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    • duskpin ultimate style avatar for user Harriet Buchanan
      Jeff, I'm not sure why you continue to insist that we have "welfare state laws", when most industrialized nations have far more social programs than we do. The problem is more that the Republican Congresses tend to cut taxes for the wealthy instead of using the money to pay for the social programs. That goes for Congress during the George W. Bush administration as well as what the Republican Congress wants to do now.
      (7 votes)
  • piceratops seed style avatar for user iila mazie
    why was there unemployment?
    (1 vote)
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  • duskpin ultimate style avatar for user Handsome_Ransom_Studios (PAUSED)
    Why would Nixon devalue the USD, wouldn't that mean that less people buy it, meaning it will make the country go into depression?

    Is this another "Ransom is too smart seems dumb"?
    (1 vote)
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    • aqualine tree style avatar for user David Alexander
      Devaluation makes the goods and services produced by a nation that controls the value of its own currency cheaper abroad, because now it takes fewer units of local currency to purchase them. Devaluation spurs exports. Devaluation also makes things purchased from outside more expensive, because it takes more units of local currency to purchase those imports. So devaluation dampens the drive to import things.
      (1 vote)
  • blobby green style avatar for user Johanne  Antoine
    The article discusses Richard Nixon's attempts to stop stagflation, but what about Gerald Ford's actions?
    (1 vote)
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