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Oil Crisis

In the wake of the Yom Kippur War of October 6 1973 – January 18, 1974, in which Egypt succeeded in regaining territory from Israel in the Sinai, OPEC took advantage of the diplomatic strength resulting from Egypt’s success and the diplomatic efforts of the US and Soviet Union to stop the war, the temporary disruption of supplies due to the war and the ever-increasing demand for oil and declining production in the US to force up the price of oil.

Egypt itself was not an oil producer. After the death in 1970, of Nasser, founding President of the Egyptian Republic and leader of Pan-Arabism, Anwar Sadat had expelled Soviet advisers in July 1972 and was looking for an alliance with the US to open the way for economic aid. The War was necessary to defend his legitimacy and gain bargaining power for the eventual truce with Israel and deal with the US.

The Arab OPEC nations however, led by Saudi Arabia, seized the opportunity to impose a five-month oil embargo on anyone giving aid to Israel. OPEC had already doubled the price of oil to $3 a barrel on the eve of the war and in January 1974 increased the price to $11.60 a barrel. Between 1974 and 1979 the price of oil stabilised, but in 1980 OPEC again pushed the price up to more than $30 a barrel.

Coming in the wake of the break-down of the Bretton Woods arrangements in 1968-73, the sudden escalation of oil prices had a disastrous impact on capitalism. The prices of all “commodities” (i.e. tradeable goods, especially primary produce) was already spiralling as investors and speculators looked for a hedge against runaway inflation. Inflation now really took off.

Decades of cheap oil had led to the growth of heavily energy-dependent industries in the major capitalist countries so the crisis created vast balance-of-payments deficits for industrialised countries, caused a huge transfer in revenues from the oil-importing nations to the oil-exporting countries, and placed massive sums of “petrodollars” in the hands of a few underpopulated Middle Eastern states. These “petrodollars” in turn built up in accounts in Western, especially US, banks, where they generated interest liabilities. This then added to the inflationary crisis, a full-scale recession, and the new phenomenon of “stagflation”. The same process also involved the exporters of other “commodities”.

In order to rescue the world economy from a terminal crisis, the imperialist countries had to find something that they could sell to these underdeveloped, primary producing nations, and consequently they were all convinced to buy large-scale development programs, hoping to use the opportunity to break out of the cycle of “Third World” underdevelopment. Hydro-electric power stations and dams were the most popular, but roads and bridges, urban development and all kinds of new factories were purchased, all of them at a cost which could only be met by continued high incomes from primary produce exports, and almost all of them turned out to be white-elephants which utterly failed to deliver economic development.

Major recessions in the oil-importing countries in 1974-75 and 1980-82, adjustments made to reduce reliance on cheap energy, devaluation of the US dollar and monetarist policies implemented in the US and Britain succeeded in containing oil prices and crashing the price of many other “commodities”. As a result, though the many of the main oil-exporting countries with low populations remained solvent, many other countries, especially in Latin America and Africa, were left utterly destitute with interest payments alone exceeding export earnings. It was particularly in this situation that the IMF developed its new role in taking control of the economies and social policies of the governments of the debtor countries.

Managing the politics of the OPEC countries and taking every opportunity to undermine the unity of OPEC nations remained a question of survival for imperialism, until such time as firm military control could be imposed in the Middle East.