NCPA - National Center for Policy Analysis

Inflation Caused Oil Price Hike In The 1970s

October 19, 1998

The first Arab oil embargo resulted from Egypt's attack on Israel on October 6, 1973. In retaliation for President Richard Nixon's decision to provide $2.5 billion in arms to Israel, Saudi Arabia imposed an embargo on oil exports to the U.S. on October 19. Most other Arab oil exporting countries quickly followed suit. Although the embargo was lifted on March 18, 1974, the price of oil did not fall back to its pre-embargo level, remaining at about twice its previous level.

Many people believe this increase in oil prices set off the great inflation of the 1970s. However, the Arabs were simply convenient scapegoats for inflation. The true cause was excessive money growth by the Federal Reserve. Indeed, the rise in the price of oil was more a consequence of inflation than its cause. Inflation began to take off well in advance of the oil embargo.

  • Between 1960 and 1965, the price level in the U.S. rose by a total of 6.4 percent, an average of 1.3 percent per year.
  • Between 1965 and 1972, however, the price level rose by one-third, averaging 4.2 percent per year.
  • Even during the period when price controls were in effect, consumer prices rose more than 3 percent annually (see figure).

As early as 1970, the Organization of Petroleum Exporting Countries (OPEC) began warning that continued inflation would lead to an increase in the price of oil. Similar warnings were issued in 1971, 1972 and 1973.

Although the general public probably still holds OPEC responsible for inflation, economists generally do not. Once the Federal Reserve began pursuing an anti-inflation monetary policy in the 1980s, the price of oil collapsed. Today the real price of oil is little higher than it was in 1961.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 19, 1998.


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