Increase In Energy Costs example essay topic

In this paper, I am going to discuss how the oil cartel known as OPEC (Organization of Petroleum Exporting Countries) impacted the United States economy in the 1970's, how the effects of this are still felt today, and how their power should continue to influence our thinking where foreign policy and energy policy are concerned. First I will explain what OPEC is, its history and how this concerns every citizen in the United States. Then I will discuss how leaders of the past dealt with the pressures concerning the further effects on the economy at the time, which brought to light the need for energy policy as well as pressing foreign policy issues that need to be addressed, as both are certainly detrimental to our economic well being. The Organization of Petroleum Exporting Countries has a membership of 11 countries ranging from United Arab Emirates to the Socialist People's Libyan Arab. The members of OPEC currently supply more than 40 per cent of the world's oil and they possess about 78 per cent of the world's total proven crude oil reserves. Our world economy depends upon petroleum; petroleum, in fact, has shaped the modern world.

It has dictated production technologies and methods. It has facilitated the emergence of a worldwide transportation network. It has allowed cites to grow and expand, and determined the spatial landscape of regions. Due to our great need for petroleum, the scope of OPEC's power surpasses our prowess as an economic superpower, considering OPEC regulates the output and the price of oil from their reserves.

Twice a year, the OPEC MCs meet in Vienna, Austria to coordinate their oil production policies in order to help stabilize the oil market and to help oil producers (the involved countries) achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil. In 1984, the world consumed 58.9 million barrels per day. (A barrel of oil is equal to 42 gallons of petroleum.) In that same year, the United States consumed 15.7 million barrels of oil per day or 30 percent of the total global consumption. This figure continues to grow.

According to the Transportation Statistics Annual Report of 1996, transportation has become the fastest growing sector of the world economy. Energy demand in this sector has grown at an average annual rate of 1.8 percent per year in industrialized economies. Transportation has been the only growth sector for oil demand over the past twenty ears and will continue to be the principal reason for growing world oil demand in the next twenty years. Among all modes of transportation, highway vehicles continue to dominate transportation energy use and petroleum is the energy source of choice (89). The transportation sector was obviously the most affected by the 1973 oil embargo. Beginning in 1973, OPEC that at the time already had its dominant share of the world oil market, began to flex its muscles.

The price of a barrel of crude oil quadrupled between 1973 and 1975. Particularly disruptive was the oil embargo that followed the Arab-Israeli war in 1973. The result was long lines at gas pumps rationing by waiting time rather than by price (Walton 616). This was to be known as the "energy crisis" and the increasing fear that the U.S. economy was stagnating. This experience touched off a debate on how to meet the "energy crisis". Should it be through government actions-rationing, subsidies for the poor, and federal expenditures for new sources of energy-or by relying on market forces?

Advocates of the price system held that higher prices would produce the most efficient results: higher prices would reduce demand (by making smaller, fuel-efficient cars more attractive, for example) and increase supplies. For the United States, it has been estimated that the OPEC price increases from the first embargo in 1973 to 1975 resulted in a decrease in gross national product of 6 percent. The stagflation of the 1970's to an extent had its roots in the emerging energy crisis. This energy crisis was characterized by not only an increase in energy costs but and increasing demand for petroleum. These rising costs were the reason for worsening the U.S. economic conditions, due to what is referred to by economists, as supply-side or cost-push inflation. Prior to the OPEC embargo in 1973 the United States did not have a formal energy program or policy.

The embargo and ensuing instability generated an atmosphere within which the Nixon administration attempted to respond to immediate and long-run energy problems of the nation. Nixon attempted with legislation to increase control over energy production, pricing, imports and policy in response to the energy crisis. Nixon founded the Energy Research and Development Administration (ERD A) and the Federal Energy Administration (FEA) in hopes to solve the immediate and long run problems of the nation's oil import. Finally, Nixon announced Project Independence, a program whose sole purpose was to eliminate imported oil by 1980. Unfortunately for Nixon, Congress transformed Nixon's astronomically priced and economically unfeasible legislation to the point of altering Nixon's intent. As Nixon resigned, the "energy crisis" was one of the many problems inherited by the Ford administration.

President Ford's response came in December of 1975 in the form of the Energy Policy and Conservation Act (EPCA). Despite being heavily criticized and greatly compromised, Ford's EPCA was finally passed in Congress. Nevertheless, this legislation did represent the continued and increased involvement of the federal government in determining energy policy and in all aspects of energy decision making. After his inauguration, President Carter proposed the first part of a national energy plan to encourage conservation, foster conversion from oil to coal and natural gas, and reduce oil imports. This bureaucratic response was unable to curb the crisis. A federal energy administration was established in 1974, and a Cabinet-level Department of Energy followed in 1977.

Spending on a wide range of federal energy projects was increased; but in the end much of the painful adjustment was the response to higher prices. Americans cut their energy consumption by buying smaller cars, insulating their homes, and investing in more fuel-efficient productive processes. On the supply side, higher prices led to a rapid increase in oil production in countries outside of OPEC, undermining its oligopoly power. (Walton 616) This was Carter's severely criticized National Energy Program (NEP). While conservatives grumbled about the intrusion of the government in the energy marketplace, liberals felt that the NEP was not aggressive enough in support of conservation and renewable energy.

Others were offended by the hidden agenda, the major support for the expansion of nuclear energy. Environmentalists were worried about the expansion of the coal sector. From a purely political perspective, liberals criticized the plan because it failed to confront the power of the oil industry The NEP had four parts. (1) It promoted the expansion of efforts to encourage energy conservation. (2) It proposed a rational pricing policy for depleatable oil and natural gas, which involved a gradual, phased deregulation of prices, allowing oil prices to rise to their true replacement cost. For domestic oil, this meant letting the price rise to world levels by September 1981.

(3) It provided for a windfall profits tax to capture a portion of the revenues that would automatically accrue to the oil industry as a result of the phased decontrol of domestic prices. (4) It proposed programs to increase domestic supplies of energy, principally through increased production of domestic oil and natural gas, expansion of nuclear power, development of synthetic fuels (liquid fuels from coal and oil shale), and the development of solar and renewable energy resources. (Pirog 23) These policies brought to the forefront the pressing concerns regarding energy policy in order to lessen any future blows the oil industry was to throw. However, when Reagan was elected, most of these programs were cut and the budget and staff of the Department of Energy were reduced significantly. Later on, oil prices declined as some OPEC countries increased their production and supply increased beyond their regulated reserve requirement. It wasn't until the Iraqi invasion of Kuwait in 1990 that oil was brought to our immediate attention, this time it concerned our national security and foreign policy.

Just as it was so in the last price hikes, a political decision or event caused prices to rise in a short time in 1990 and the economic repercussions were felt throughout the economy for years to come, in the form of a recession. The United States' reliance on imported oil let alone its dependence on petroleum appears to be the weak link in our economic security (Yamani 4). When some political event occurs in the unstable Middle East or other Arab nations decide to restrict output, our economy, so heavily reliant on their oil, faces increased costs across the board, especially in the transportation sector. Given that this sector uses the most and the demand continues to grow, another big hike will increases prices and at worst cause inflation. GDP would decrease and everyone would be affected by a slumping economy. In conclusion, OPEC is an all-powerful entity in the global economy.

Due to the fact many of the involved countries are politically unstable, it seems strange our own government has not pressed forward with further research on alternative fuels and has not increased the Corporate Average Fuel Economy rules in cars for years. President Carter was on the right track, but Reagan undid any progress that may have been made. We are still so reliant on OPEC, which stems from our dependence on oil. I have discussed why this is so and the past should show us that volatile prices cause many problems: economic, political, and environmental. Work Cited 1. web Pirog, Robert L., and Stephen C. Stamos Jr. Energy Economics Theory, SC Prentice-Hall, Inc, 19873.

Stein, Jonathan B., "OPEC" World Book Encyclopedia, 1989 ed. 4. Walton, Gary M. and Hugh Rock off, History of the American Economy, Fort Worth, Dryden 19935. Yamani, Ahmad Zaki. The Gulf Crisis: Oil Fundamentals, Market Perceptions and Political Realities. The Energy Journal, Volume 12.

Number 2. March 1992.