Tuesday, June 24, 2014

IV. October 1973: Aftermath

The 1973 war, the oil embargo, and a world-wide shortage of oil allowed the Arab nations to seize full control of their oil resources, and control prices.  The resulting four-fold price increase plunged the developed nations into an intense recession and prolonged inflation.  Within a couple of years, the recession eased, but inflation continued.

If the results were bad in the developed world, they were catastrophic for the non oil rich developing world.

The group that suffered the most from the price increases were those developing countries that were not fortunate in having been blessed with oil. The price shock was the most devastating blow to economic development in the 1970s. Not only were those developing nations hit by the same recessionary and inflationary shocks, but the price increases also crippled their balance of payments, constraining their ability to grow, or preventing growth altogether. They suffered further from the restrictions on world trade and investment. The way out for some was to borrow, and therefore, a goodly number of those OPEC surplus dollars were “recycled” through the banking system to these developing countries. Thus, they coped with the oil shock by the expedient of going into debt. But a new category also had to be invented—the “fourth world”— to cover the lower tier of developing countries, which were knocked flat on their backs.

Yergin, Daniel (2011-04-05). The Prize: The Epic Quest for Oil, Money & Power (p. 617). Free Press. Kindle Edition.