Opinion Editorial | |
| Monday, October 19, 1998 | |
Inflation Caused Oil Price Hike in the 1970s |
Today marks the 25th anniversary of the first Arab oil embargo. That 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. To this day, there are many people who believe that this increase in the price of oil is what set off the great inflation of the 1970s. Certainly, the Ford and Carter Administrations believed this, arguing frequently that the higher oil price pushed up other prices, owing to the central role of oil in the production of almost everything. The truth, however, is that 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. It is important to remember that inflation began to take off well in advance of the oil embargo.
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. It passed a resolution saying that "in case of changes in the parity of monies of major industrialized countries which would have an adverse effect on the purchasing power of Member Countries' oil revenues, posted or tax-reference prices should be adjusted to reflect such changes." Similar warnings were issued in 1971, 1972 and 1973. Although the general public probably still holds OPEC responsible for inflation, economists generally do not. Writes economist Michael Parkin: "OPEC with its oil price rise in the Fall of 1973 did not cause the inflation of the 1970s. That inflation was caused by the monetary policies pursued by individual governments in the years leading up to 1973." The proof of this proposition is that 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. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
