1960s-1970s: Energy geopolitics Jan Osička Lecture outline • The oil shocks of the 1970s: the context, impact mechanism and crossboder cashflow • The effects on developing and developed countries • The long-term consequences • The energy weapon - discussion The road to the crisis (1949-1972) • World‘s energy consumption tripples • World‘s demand for oil increases 5.5 times • U.S. demand for oil increases 3 times • Western Europe‘s demand for oil increases 15 times • Japan‘s demand for oil increases 137 times • 2/3 of the new demand covered by the MENA producers • 1967-1972: U.S. domestic production peaks and import dependence increases from 19% to 36% • 1970-1973: World‘s spare production capacity decreases from 3 mbd to 0.5 mbd (less than 1% of total consumption) 000 020 040 060 080 100 120 1861 1866 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Nominal (USD/b) The oil embargo of 1973 • October 1973: 3 USD/b • March 1974: 12 USD/b 000 020 040 060 080 100 120 140 1861 1866 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Nominal (USD/b) Real (USD2013/b) The oil embargo of 1973 • October 1973: 3 USD/b • March 1974: 12 USD/b The to-do lists and cashflow of the 1970s oil shocks Developing countries • Cheer for OPEC‘s demonstration of power • Pay more for energy • Borrow money from the Western banks • Find yourself unable to pay the debt OPEC • Increase oil prices • Collect additional revenues • Send them to the Western banks Developed countries • Pay more for energy • Collect OPEC deposits • Lend them to domestic subjects (rebuilding) • Lend them to developing countries The 1970s crisis in numbers Saudi Arabia‘s current account surplus: • 1973: 2.5 bn USD • 1974: 23 bn USD Additional costs associated with higher oil prices between 1970 and 1980: 260 bn USD Increase in foreign debt (bn USD): Argentina Brazil Mexico Developing world 1970 5.8 5.7 7.0 72.7 1980 27.2 71.5 57.4 586.7 1984 48.9 103.9 94.8 921.8 Mexico oil production and exports Macroeconomic consequences: developing countries Developing countries (mainly Latin America) hit particularly hard during the 1970s: Internal factors: the „import substitution industrialization“ development strategy • Effective isolation of the national economy from the international markets • Subsidies to selected sectors/industries • Requires imports of goods and capital, compromises exports External factors: oil shocks • Countries unable to reduce demand for oil, decrease imports or increase exports • Non-existent financial reserves to cover the higher energy costs => Massive borrowing from the U. S. and European banks • The investments did not produce anything of economic value sufficient to enable the borrowers to repay their loans • By 1988: the debt costs higher than incoming loans => the „Debt crisis“ The Debt crisis • Inability to pay back the loans + no new loans coming • Risk of another global recession caused by multiple state defaults • The governments turn to the international economic institutions (WB, IMF) for assistance • Until 1985: macroeconomic stabilization • Reduction of government budget deficits: reduction of domestic consumption => reduction of imports, reduction of domestic consumption => unemployment => reduced wages => exports => current account surpluses • After 1985: Structural adjustment • Debts reduced or written-off in exchange for lowering tarrifs, privatizing industries, reducing subsidies and general opening up of the economy. The Debt crisis Developed countries • Macroeconomic effects • International politics • Energy policy Developed countries: macroeconomic effects Structural changes in economies • Japan: moving from energy-intensive industries to electronics; car industry boom • USA and Europe: recycling petro-dollars requires relaxation of capital controls: the beginning of exponential growth of Western capital markets Developed countries: international politics • USA does not alter its support for Israel (several European countries do) • The U.S. obsession with the Middle East/foreign oil begins • The Carter‘s doctrine • YouTube: „American presidents promise security through energy independence“ • Energy is typically tackled as a „crisis issue“ ever since • Establishment of International Energy Agency Developed countries: Energy conservation/diversification Developed countries: Energy conservation/diversification Developed countries: Energy conservation/diversification Energyconservation/diversification Energyconservation/diversification Oil shocks consequences "The oil crisis set off an upheaval in global politics and the world economy. It also challenged America's position in the world, polarized its politics at home and shook the country's confidence“ Daniel Yergin, 2013 • The debt issue placed at the center of North-South relations • U.S. obsession with the Middle East/foreign oil/energy independence begins • Energy conservation and diversification measures take off • Long-term weakening of OPEC begins Discussion: the energy weapon • What other cases of its use do you know? Discussion: the energy weapon • What other cases of its use do you know? • Under which circumstances it can be effective?