January 10th, 2018
Effects of 1973 Oil Shock and 1979 Energy Crisis on South Africa’s Economy – part2
The 1970s marked the start of a repetitive sequence where oil price increases are followed by global economic downturns. The 1973 crisis was mainly an outcome of the Arab Israel war – ‘Yom Kippur war’ (Wakeford 2006; Rose 2004; Van der Merwe & Meijer 1990). Following the October war the oil embargo proclaimed by OPEC Arab members as a reactionary measure against the United States’ military support to Israel (Barsky & Kilian 2004; Rose 2004) was characterized by significant adverse effects to countries across the globe. With the embargo spreading to any other country that was deemed to be lenient to the Israel, crude oil prices increased greatly from an annual amount slightly above $10 to amounts greater than $ 50 per barrel (‘Crude oil prices 1861-2006’ cited in: Fofana, Chitiga & Mabugu 2009, p. 5510). The recession that followed this sharp increase in oil prices was noted to have been the longest that had ever occurred since the World War II recessions (Brown & Yucel 2002).
The second crisis, the 1979/1980 energy crisis, was also associated with a decline in oil supplies. First the Iranian revolution in 1978 then Iran-Iraq war the following year greatly depleted world’s supply of crude oil (‘Oil squeeze’ 1979; Van der Merwe & Meijer 1990; Wakeford 2006). This period was also marked by sharp increases in the oil prices. Since Iran was a leading supplier of oil to non-producers at the time the near stoppage of its oil in this period had the potential of crippling the economies of most oil-dependent countries (‘Oil squeeze’ 1979; Wakeford 2006). For South Africa prior to the 1973 oil shock and in subsequent years Iran was the major supplier of oil with Saudi Arabia and the Gulf States filling up for the remainder consumption (Rogers 1974). Though marginal decline in oil prices had been achieved after the 1973 shock, the 1979 crisis reverted the decline by pushing oil prices to amounts above $ 80 (‘Crude oil prices 1861-2006’ cited in: Fofana, Chitiga & Mabugu 2009, p. 5510). This increase in oil prices also impacted negatively on global economy and mainly on importing countries. Though earlier projections (Roger 1974) and studies (Dagut 1978) suggested that the impact of such oil crises to have significant adverse effects on the South African Economy; recent studies (PROVIDE 2005; Bellamy 2006; Kohler 2006; Wakeford 2006) have suggested that the impact to the economy was minimal due to compensatory effect of gold price – which South Africa churned out in large quantities – and its use of coal as the main energy source.
Prior to 1973 however, not much of research was focused on the impacts that fluctuations in oil prices would have on the economies of different countries. With the demonstration that oil producing countries could control the prices of the commodity after the OPEC Arab members’ embargo proclamation (Rose 2004); the necessity to evaluate impacts of such oil shocks was generated. One of the earliest opinions that projected the impacts that the embargo would have on the South African economy was that by Rogers (1974). It was for example noted then that irrespective of the government having established safeguards against economic and military threats in response to the “Sharpeville and boycott movement of the early 1970s” by storage of oil in ‘tank farms and disused coal-mines’; such preparedness was not adequate to prevent adverse effects to the economy following the OPEC oil embargo (Rogers 1974, p. 3). The reserves at the time were projected to have been only sufficient for six months against contrary indications of three years from other quarters (Rogers 1974). South Africa energy requirements were however mainly shouldered by coal (Wakeford 2006).
Rogers (1974) also provided possible scenarios incase the oil embargo was to lead to exhaustion of South Africa’s reserves. For instance it was suggested that the country would have to tap on western friends’ largesse for it to import adequate oil supplies for its domestic consumption (Rogers 1974). Success of such a strategy however would be limited since most of the western countries that would have otherwise come to the aid of the country also faced serious domestic threats from the oil generated macroeconomic shocks (Mboweni 2000; Barsky & Kilian 2004). A second alternative that also presented some problems was to seek more supplies from its probable collaborator – Iran. This option as Rogers (1974) noted was however discouraged by the fact that the Organization of African Unity (OAU) – an organization that included more vital customers for Iran – had already successfully lobbied for imposition of an UN embargo on South Africa in its attempts to liberate Southern African counterparts that were still under colonial rule (Rogers 1974). Later research further identified impacts of the oil shock on South Africa Economy. Dagut (1978) for instance provided theoretical and practical implications of the oil shock and observed that gold was only a temporal safeguard against global economic fallout that would follow.