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Economic effects

A man at a service station reads about the gasoline rationing system in an afternoon newspaper; a sign in the background states that no gasoline is available. 1974

Between 1973 and 1977, the revenues collected by oil producing countries grew to $140 billion.

Some of the income was dispensed in the form of aid to other underdeveloped nations whose economies had been caught between higher oil prices and lower prices for their own export commodities, amid shrinking Western demand. Much went for arms purchases that exacerbated political tensions, particularly in the Middle East. Saudi Arabia spent over 100 billion dollars in the ensuing decades for helping spread its fundamentalist interpretation of Islam, known as Wahhabism, throughout the world, via religious charities such al-Haramain Foundation, which often also distributed funds to violent Sunni extremist groups such as Al-Qaeda and the Taliban.

Control of oil became known as the "oil weapon." It came in the form of an embargo and production cutbacks from the Arab states. The weapon was aimed at the United States, Great Britain, Canada, Japan and the Netherlands. These target governments perceived that the intent was to push them towards a more pro-Arab position. Production was eventually cut by 25%. However, the affected countries did not undertake dramatic policy changes.

In the United States, scholars argue that there already existed a negotiated settlement based on equality between both parties prior to 1973. The possibility that the Middle East could become another superpower confrontation with the USSR was of more concern to the US than oil. Further, interest groups and government agencies more worried about energy were no match for Kissinger's dominance. In the US production, distribution and price disruptions "have been held responsible for recessions, periods of excessive inflation, reduced productivity, and lower economic growth." Some researchers regard the 1973 "oil price shock" and the accompanying 1973–74 stock market crash as the first discrete event since the Great Depression to have a persistent effect on the US economy.

The embargo had a negative influence on the US economy by causing immediate demands to address the threats to U.S. energy security. On an international level, the price increases changed competitive positions in many industries, such as automobiles. Macroeconomic problems consisted of both inflationary and deflationary impacts. The embargo left oil companies searching for new ways to increase oil supplies, even in rugged terrain such as the Arctic. Finding oil and developing new fields usually required five to ten years before significant production.

Gas stealers beware, 1974

OPEC-member states raised the prospect of nationalization of oil company holdings. Most notably, Saudi Arabia nationalized Aramco in 1980 under the leadership of Saudi oil minister Ahmed Zaki Yamani. As other OPEC nations followed suit, the cartel's income soared. Saudi Arabia undertook a series of ambitious five-year development plans. The biggest began in 1980, funded at $250 billion. Other cartel members also undertook major economic development programs.

US retail price gas prices rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. State governments requested citizens not to put up Christmas lights. Oregon banned Christmas and commercial lighting altogether. Politicians called for a national gas rationing program. Nixon requested gasoline stations to voluntarily not sell gasoline on Saturday nights or Sundays; 90% of owners complied, which produced long queues.

The embargo was not uniform across Europe. Of the nine members of the European Economic Community (EEC), the Netherlands faced a complete embargo, the UK and France received almost uninterrupted supplies (having refused to allow America to use their airfields and embargoed arms and supplies to both the Arabs and the Israelis), while the other six faced partial cutbacks. The UK had traditionally been an ally of Israel, and Harold Wilson's government supported the Israelis during the Six-Day War. His successor, Ted Heath, reversed this policy in 1970, calling for Israel to withdraw to its pre-1967 borders.

The EEC was unable to achieve a common policy during the first month of the War. It issued a statement on November 6, after the embargo and price rises had begun. It was widely viewed as pro-Arab supporting the Franco-British line on the war. OPEC duly lifted its embargo from all EEC members. The price rises had a much greater impact in Europe than the embargo.

Despite being relatively unaffected by the embargo, the UK nonetheless faced an oil crisis of its own—a series of strikes by coal miners and railroad workers over the winter of 1973–74 became a major factor in the change of government. Heath asked the British to heat only one room in their houses over the winter. The UK, Germany, Italy, Switzerland and Norway banned flying, driving and boating on Sundays. Sweden rationed gasoline and heating oil. The Netherlands imposed prison sentences for those who used more than their ration of electricity.

A few months later, the crisis eased. The embargo was lifted in March 1974 after negotiations at the Washington Oil Summit, but the effects lingered throughout the 1970s. The dollar price of energy increased again the following year, amid the weakening competitive position of the dollar in world markets.