The economic impact of the oil shock

U.S. foreign policy as well, persuading Nixon to name him secretary of state in the weeks just prior to the outbreak of the October Yom Kippur War. Indicative of his central role in events, Kissinger retained both titles, as head of the White House National Security Council and as secretary of state, something no other individual has ever done, before or since. No other single person during the last months of the Nixon presidency wielded as much absolute power as did Henry Kissinger. To add insult to injury, Kissinger was given the 1973 Nobel Peace Prize.

Following a meeting in Teheran on January 1, 1974, a second price increase of more than 100 per cent brought OPEC benchmark oil prices to $11.65. This was done on the surprising demand of the Shah of Iran, who had been secretly put up to it by Henry Kissinger. Only months earlier, the Shah had opposed the OPEC increase to $3.01 for fear that this would force Western exporters to charge more for the industrial equipment the Shah sought to import for Iran’s ambitious industrialization. The support of Washington and the West for Israel in the October War had fed OPEC anger at the meetings. Even Kissinger’s own State Department had not been informed of his secret machinations with the Shah.6

From 1949 until the end of 1970, Middle East crude oil prices had averaged approximately $1.90 per barrel. They had risen to $3.01 in early 1973, at the time of the fateful Saltsjöbaden meeting of the Bilderberg group, which discussed an imminent 400 per cent future rise in OPEC’s price. By January 1974, that 400 per cent increase was a fait accompli.

THE ECONOMIC IMPACT OF THE OIL SHOCK

The social impact of the oil embargo on the United States in late 1973 could be described as panic. Throughout 1972 and early 1973, the large multinational oil companies, led by Exxon, had pursued a curious policy of creating a short supply of domestic crude oil. They were allowed to do this under an unusual series of decisions made by President Nixon on the advice of his aides. When the embargo hit in November 1973, therefore, the impact could not have been more dramatic. At the time, the White House was responsible for controlling U.S. oil imports under the provisions of a 1959 U.S. trade agreements act.

In January 1973, Nixon had appointed Treasury Secretary George Shultz to be assistant to the president for economic affairs as well. In

this post, Shultz oversaw White House oil import policy. His deputy treasury secretary, William E. Simon, a former Wall Street bond trader, was made chairman of the important Oil Policy Committee, which determined U.S. oil import supply in the critical months leading up to the October embargo.

In February 1973, Nixon was persuaded to set up a special ‘energy triumvirate,’ which included Shultz, White House aide John Ehrlichman, and National Security Adviser Henry Kissinger, to be known as the White House Special Energy Committee. The scene was quietly being set for the Bilderberg plan, though almost no one in Washington or elsewhere realized the fact. By October 1973, U.S. stocks of domestic crude oil were already at alarmingly low levels. The OPEC embargo triggered panic buying of gasoline among the public, calls for rationing, endless gas lines and a sharp economic recession.7

The most severe impact of the oil crisis was on the United States’ largest city, New York. In December 1974, nine of the world’s most powerful bankers, led by David Rockefeller’s Chase Manhattan, Citibank, and the London–New York investment bank, Lazard Freres, told New York Mayor Abraham Beame, an old-line machine politician, that unless he turned over control of the city’s huge pension funds to a committee of the banks, the Municipal Assistance Corporation, the banks and their infl uential friends in the media would ensure the fi nancial ruin of the city. Not surprisingly, the overpowered mayor capitulated and New York City was forced to slash spending for roadways, bridges, hospitals and schools in order to service their bank debt, and to lay off tens of thousands of city workers. The nation’s greatest city had begun its descent into a scrap heap. Felix Rohatyn of Lazard Freres became head of the new bankers’ collection agency, dubbed ‘Big MAC’ by the press.

In western Europe, the shock of the oil price rise and the embargo on supplies was equally dramatic. From Britain to the Continent, country after country felt the effects of the worst economic crisis since the 1930s. Bankruptcies and unemployment across Europe rose to alarming levels.

Germany’s government imposed an emergency ban on Sunday driving, in a desperate effort to save imported oil costs. By June 1974, the effects of the oil crisis had contributed to the dramatic collapse of Germany’s Herstatt-Bank and a crisis in the Deutschmark as a result. As Germany’s imported oil costs increased by a staggering 17 billion Deutschmarks in 1974, with half a million people reckoned

to be unemployed due to the effects of the oil crisis, infl ation levels reached an alarming 8 per cent. The shock effects of a sudden 400 per cent increase in the price of Germany’s basic energy feedstock were devastating to industry, transport, and agriculture. Key industries such as steel, shipbuilding and chemicals went into a deep crisis.

Willy Brandt’s government was effectively defeated by the domestic impact of the oil crisis, as much as by the revelations of the Stasi affair against his close adviser, Günther Guillaume. By May 1974, Brandt had offered his resignation to Federal President Heinemann, who then appointed Helmut Schmidt as chancellor. Most of the governments of Europe fell during this period, victims of the consequences of the oil crisis on their economies.

But for the less developed economies of the world, the impact of an overnight price increase of 400 per cent in their primary energy source was staggering. The vast majority of the world’s less developed economies, without signifi cant domestic oil resources, were suddenly confronted with an unexpected and unpayable 400 per cent increase in the cost of energy imports, to say nothing of the cost of chemicals and fertilizers derived from petroleum. During this time, commentators began speaking of ‘triage,’ the wartime idea of survival of the fi ttest, and introduced the vocabulary of ‘Third World’ and ‘Fourth World’ (the non-OPEC countries).

India in 1973 had a positive balance of trade, a healthy situation for a developing economy. But by 1974, India had total foreign exchange reserves of $629 millions with which to pay—in dollars—an annual oil import bill of almost double that, or $1,241 million. Sudan, Pakistan, the Philippines, Thailand and country after country throughout Africa and Latin America were faced in 1974 with gaping defi cits in their balance of payments. According to the IMF, developing countries in 1974 incurred a total trade defi cit of $35 billion, a colossal sum in that day, and, not surprisingly, a defi cit four times as large as in 1973—precisely in proportion to the oil price increase. Following the several years of strong industrial and trade growth of the early 1970s, the severe drop in industrial activity throughout the world economy in 1974–75 was greater than any such decline since the war.

But while Kissinger’s 1973 oil shock had a devastating impact on world industrial growth, it had an enormous benefi t for certain established interests—the major New York and London banks, and the Seven Sisters oil multinationals of the United States and Britain. By 1974, Exxon had overtaken General Motors as the largest American