The first oil price explosion 1971-1974

Abstract

The 1970 price of Saudi Light crude was $1.21, of which 89 cents was excise tax. By end-1974, the price was about $11, of which 30-50 cents was a fee paid to the former owners, now operators. The detailed history of the change does not support any model of resource scarcity, nor of an over- and under-investment cycle, nor any transient shortage. What happened was learning by doing. A nascent cartel gained experience and confidence by repeated success in raising prices. Despite excess supply (deficient demand) in 1971 and 1972, repeated excise tax increases raised the price. The expectation of continued tax/price increases, plus the threats of Saudi cutbacks, account for most of the excess demand in the first nine months of 1973, when the tax was raised to $3. The Arab producers' cutbacks in October 1973 amounted to roughly 340 million barrels, 9 percent of world non-Communist consumption during November/December. The momentary explosion in spot prices was made permanent by a ratchet: OPEC increasing the excise from $3 to $7. The "embargo" was a non-event. All consuming countries suffered about the same loss of supply. "Access" to oil, and good or bad relations with the producing nations, were irrelevant. The 1974 tax/price increase, of roughly 50 percent, was achieved in spite of deficient demand, overflowing storage, much discounting, and a buildup of excess producing capacity to over 10 million barrels daily, a third of output. Saudi Arabia was a price "moderate" in words, in fact a leader.