Transcript Document

International Political Economy
Politics and Markets
• Role of the state in liberal democracies: to induce
economic performance
• Pluralist Approach
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The state is a neutral arena
Actors have varying particular interests
State has no intrinsic interests
The study of politics is about government processes
• Class Approach
– There are common class interests
– The ruling class controls the agenda
– It implements policy
Needs of the state
• The state needs satisfactory economic
performance from private asset controllers
for
– Stability
– Revenue
• So the state
– Avoids reducing the confidence of business
– Induces performance with incentives
Changing the terms
• Losers in the market can change the rules if
they have sufficient political influence
• Given the comments of Olson (“collective
action problem”) and Lindblom (“privileged
position of business”), these will be
oligopolistic firms see Sugar or Steel
Hegemonic Stability Theory
• Central Idea: The stability of the International System
requires a single dominant state to articulate and enforce
the rules of interaction among the most important members
of the system.
• To be a Hegemon, a state must have three attributes:
– The Capability to enforce the rules of the system;
– The Will to do so;
– A Commitment to a system which is perceived as mutually
beneficial to the major states.
• Capability rests upon three attributes:
– A large, growing economy;
– Dominance in a leading technological or economic sector;
– Political power backed up by projective military power.
The Historical Record
• Portugal 1494 to 1580 (end of Italian Wars to Spanish invasion of
Portugal) Based on Portugal's dominance in navigation
– Hegemonic pretender: Spain
• Holland 1580 to 1688 (1579 Treaty of Utrecht marks the foundation
of the Dutch Republic to William of Orange's arrival in England)
Based on Dutch control of credit and money
– Hegemonic pretender: England
• Britain 1688 to 1792 (Glorious Revolution to Napoleonic Wars)
Based on British textiles and command of the High Seas
– Hegemonic pretender: France
• Britain 1815 to 1914 (Congress of Vienna to World War I) Based on
British industrial supremacy and railroads
– Hegemonic pretender: Germany
• United States 1945 to 1971 Based on Petroleum and the Internal
Combustion Engine
– Hegemonic pretender: the USSR
What does the Hegemon Do?
• The system is a collective good which means that it is plagued by a
"free rider" syndrome. Thus, the hegemon must induce or coerce other
states to support the system The US system tries to produce democracy
and capitalism, thus it champions human rights and free trade. Other
nations will try to enjoy the benefits of these institutions, but will try to
avoid paying the costs of producing them. Thus, the US must remain
committed to free trade even if its major trading partners erect barriers
to trade. The US can erect its own barriers, but then the system will
collapse.
• Over time, there is an uneven growth of power within the system as
new technologies and methods are developed. An unstable system will
result if economic, technological, and other changes erode the
international hierarchy and undermine the position of the dominant
state. Pretenders to hegemonic control will emerge if the benefits of the
system are viewed as unacceptably unfair.
Bretton Woods (1944)
• The Bretton Woods system of international monetary
management established the rules for commercial and
financial relations among the world's major industrial
states. The Bretton Woods system was the first example in
world history of a fully negotiated monetary order intended
to govern monetary relations among independent nationstates.
• Preparing to rebuild the international economic system as
World War II was still raging, set up a system of rules,
institutions, and procedures to regulate the international
monetary system. The planners at Bretton Woods
established the International Bank for Reconstruction and
Development (IBRD) (now one of five institutions in the
World Bank Group) and the International Monetary Fund
(IMF).
Bretton Woods (cont’d)
• The chief features of the Bretton Woods system were, first,
an obligation for each country to adopt a monetary policy
that maintained the exchange rate of its currency within a
fixed value—plus or minus one percent—in terms of gold;
and, secondly, the ability of the IMF to bridge temporary
imbalances of payments.
• In the face of increasing strain, the system eventually
collapsed in 1971, following the United States' suspension
of convertibility from dollars to gold.
Legacy of the Great Depression
• The experience of the Great Depression, when
proliferation of foreign exchange controls and trade
barriers led to economic disaster, was fresh on the minds of
public officials.
• The planners at Bretton Woods hoped to avoid a repeat of
the debacle of the 1930s, when foreign exchange controls
undermined the international payments system that was the
basis for world trade. The "beggar thy neighbor" policies
of 1930s governments—using currency devaluations to
increase the competitiveness of a country's export products
in order to reduce balance of payments deficits—worsened
national deflationary spirals, which resulted in plummeting
national incomes, shrinking demand, mass unemployment,
and an overall decline in world trade.
Great Depression (cont’d)
• Trade in the 1930s became largely restricted to currency
blocs (groups of nations that use an equivalent currency,
such as the "Pound Sterling Bloc" of the British Empire).
These blocs retarded the international flow of capital and
foreign investment opportunities. Although this strategy
tended to increase government revenues in the short run, it
dramatically worsened the situation in the medium and
longer run.
• Thus, for the international economy, planners at Bretton
Woods all favored a liberal system, one that relied
primarily on the market with the minimum of barriers to
the flow of private trade and capital. Although they
disagreed on the specific implementation of this liberal
system, all agreed on an open system.
Hegemony
• International economic management relied on the
dominant power to lead the system. The
concentration of power facilitated management by
confining the number of actors whose agreement
was necessary to establish rules, institutions, and
procedures and to carry out management within
the agreed system.
America’s Advantages
• That leader was the United States. The United States had emerged
from the Second World War as the strongest economy in the world,
experiencing rapid industrial growth and capital accumulation. The
U.S. had remained untouched by the ravages of World War II and had
built a thriving manufacturing industry and grown wealthy selling
weapons and lending money to the other combatants; in fact, U.S.
industrial production in 1945 was more than double that of annual
production between the prewar years of 1935 and 1939. In contrast,
Europe and East Asia were militarily and economically shattered.
• As the Bretton Woods Conference convened, the relative advantages of
the U.S. economy were undeniable and overwhelming. The U.S. held a
majority of world investment capital, manufacturing production and
exports. In 1945, the U.S. produced half the world's coal, two-thirds of
the oil, and more than half of the electricity. And the U.S. held 80 %
of the world's gold reserves.
The need to trade
• As the world's greatest industrial power, and one of the few
nations unravaged by the war, the U.S. stood to gain more
than any other country from the opening of the entire
world to unfettered trade. The United States would have a
global market for its exports, and it would have
unrestricted access to vital raw materials. The United
States was not only able, it was also willing, to assume this
leadership role.
• William Clayton, the assistant secretary of state for
economic affairs, was among myriad U.S. policymakers
who summed up this point: "We need markets—big
markets—around the world in which to buy and sell."
The Atlantic Charter
• The Atlantic Charter affirmed the right of all nations to equal access to
trade and raw materials. Moreover, the charter called for freedom of
the seas, the disarmament of aggressors, and the "establishment of a
wider and permanent system of general security."
• As the war drew to a close, the Allies sought to construct what had
been lacking between the two world wars: a system of international
payments that would allow trade to be conducted without fear of
sudden currency depreciation or wild fluctuations in exchange rates—
ailments that had nearly paralyzed world capitalism during the Great
Depression.
• Without a strong European market for U.S. goods and services, most
policymakers believed, the U.S. economy would be unable to sustain
the prosperity it had achieved during the war. In addition, U.S. unions
had only grudgingly accepted government-imposed restraints on their
demand during the war, but they were willing to wait no longer,
particularly as inflation cut into the existing wage scales with painful
force.
The Liberal International
Economic Order
• Free trade relied on the free convertibility of currencies.
Negotiators at the Bretton Woods conference, fresh from
what they perceived as a disastrous experience with
floating rates in the 1930s, concluded that major monetary
fluctuations could stall the free flow of trade.
• The liberal economic system required an accepted vehicle
for investment, trade, and payments. Unlike national
economies, however, the international economy lacks a
central government that can issue currency and manage its
use. Bretton Woods set up a system of fixed exchange rates
managed by a series of newly created international
institutions using the U.S. dollar (which was a gold
standard currency for central banks) as a reserve currency.
Gold Standard
• In the nineteenth and twentieth centuries gold played a key role in
international monetary transactions. The gold standard was used to
back currencies; the international value of currency was determined by
its fixed relationship to gold; gold was used to settle international
accounts. The gold standard maintained fixed exchange rates that were
seen as desirable because they reduced the risk of trading with other
countries.
• Imbalances in international trade were theoretically rectified
automatically by the gold standard.
– A country with a deficit would have depleted gold reserves and would
thus have to reduce its money supply. The resulting fall in demand would
reduce imports and the lowering of prices would boost exports; thus the
deficit would be rectified.
– Any country experiencing inflation would lose gold and therefore would
have a decrease in the amount of money available to spend. This decrease
in the amount of money would act to reduce the inflationary pressure.
Reserve Currency
• Supplementing the use of gold in this period was the British pound.
Based on the dominant British economy, the pound became a reserve,
transaction, and intervention currency. But the pound was not up to the
challenge of serving as the primary world currency, given the
weakness of the British economy after the Second World War.
• The only currency strong enough to meet the rising demands for
international liquidity was the US dollar. The strength of the US
economy, the fixed relationship of the dollar to gold ($35 an ounce),
and the commitment of the U.S. government to convert dollars into
gold at that price made the dollar as good as gold. In fact, the dollar
was even better than gold: it earned interest and it was more flexible
than gold.
Pegged Rates
• What emerged was the "pegged rate" currency regime. Members were
required to establish a parity of their national currencies in terms of
gold (a "peg") and to maintain exchange rates within 1 %, plus or
minus, of parity (a "band") by intervening in their foreign exchange
markets (that is, buying or selling foreign money).
• In practice, however, since the principal "reserve currency" would be
the U.S. dollar, this meant that other countries would peg their
currencies to the U.S. dollar, and—once convertibility was restored—
would buy and sell U.S. dollars to keep market exchange rates within
1%, plus or minus, of parity.
• Meanwhile, in order to bolster faith in the dollar, the U.S. agreed
separately to link the dollar to gold at the rate of $35 per ounce of gold.
At this rate, foreign governments and central banks were able to
exchange dollars for gold.
Institutions
• International Monetary Fund (IMF)
• International Bank for Reconstruction and
Development (IBRD)
IMF
• The IMF was to be the keeper of the rules and the main instrument of
public international management. IMF approval was necessary for any
change in exchange rates. It advised countries on policies affecting the
monetary system.
• The big question at the Bretton Woods conference with respect to the
institution that would emerge as the IMF was the issue of future access
to international liquidity and whether that source should be akin to a
world central bank able to create new reserves at will or a more limited
borrowing mechanism.
• The IMF was born with an economic approach and political ideology
that stressed controlling inflation and introducing austerity plans over
fighting poverty. This left the IMF severely detached from the realities
of Third World countries struggling with underdevelopment from the
onset.
Subscriptions and quotas
• a fixed pool of national currencies and gold subscribed by each
country as opposed to a world central bank capable of creating money.
• The Fund was charged with managing various nations' trade deficits so
that they would not produce currency devaluations that would trigger a
decline in imports.
• The IMF was provided with a fund, composed of contributions of
member countries in gold and their own currencies. When joining the
IMF, members were assigned "quotas" reflecting their relative
economic power, and, as a sort of credit deposit, were obliged to pay a
"subscription" of an amount commensurate to the quota.
• The subscription was to be paid 25% in gold or currency convertible
into gold and 75% in the member's own money.
• The IMF set out to use this money to grant loans to member countries
with financial difficulties.
• Each member was then entitled to be able to immediately withdraw
25% of its quota in case of payment problems.
Financing trade deficits
• In the event of a deficit in the current account, Fund members, when
short of reserves, would be able to borrow needed foreign currency
from this fund in amounts determined by the size of its quota
(contribution).
• Members were obligated to pay back debts within a period of eighteen
months to five years. In turn, the IMF embarked on setting up rules and
procedures to keep a country from going too deeply into debt, year
after year.
• IMF loans were not comparable to loans issued by a conventional
credit institution. Instead, it was effectively a chance to purchase a
foreign currency with gold or the member's national currency.
• The IMF was designed to advance credits to countries with balance of
payments deficits. Short-run balance of payment difficulties would be
overcome by IMF loans, which would facilitate stable currency
exchange rates.
• This flexibility meant that member states would not have to induce a
depression automatically in order to cut its national income down to
such a low level that its imports will finally fall within its means.
• Thus, countries were to be spared the need to resort to the classical
medicine of deflating themselves into drastic unemployment when
faced with chronic balance of payments deficits. Before the Second
World War, European nations often resorted to this, particularly
Britain.
• Moreover, the planners at Bretton Woods hoped that this would reduce
the temptation of cash-poor nations to reduce capital outflow by
restricting imports. In effect, the IMF extended Keynesian measures—
government intervention to prop up demand and avoid recession—to
protect the U.S. and the stronger economies from disruptions of
international trade and growth.
Changing the par value
• The IMF sought to provide for occasional exchange-rate adjustments
(changing a member's par value) by international agreement with the
IMF.
• Member nations were permitted first to depreciate (or appreciate in
opposite situations) their currencies by 10 %. This tends to restore
equilibrium in its trade by expanding its exports and contracting
imports. This would be allowed only if there was what was called a
"fundamental disequilibrium."
• (A decrease in the value of the country's money was called a
"devaluation" while an increase in the value of the country's money
was called a "revaluation".)
• It was envisioned that these changes in exchange rates would be quite
rare.
US Dominance
• The IMF allocates voting rights among
governments not on a one-state, one-vote basis but
rather in proportion to quotas.
• Since the U.S. was contributing the most, U.S.
leadership was the key implication. Under the
system of weighted voting the U.S. was able to
exert a preponderant influence on the IMF. With
one-third of all IMF quotas at the outset, enough
to veto all changes to the IMF Charter on its own.
IBRD
• It had been recognized in 1944 that the new system could come into
being only after a return to normalcy following the disruption of World
War II.
• It was expected that after a brief transition period—expected to be no
more than five years—the international economy would recover and
the system would enter into operation.
• To promote the growth of world trade and to finance the postwar
reconstruction of Europe, the planners at Bretton Woods created
another institution, IBRD—now known as the World Bank.
• The IBRD had an authorized capitalization of $10 billion and was
expected to make loans of its own funds to underwrite private loans
and to issue securities to raise new funds to make possible a speedy
postwar recovery.
• The IBRD (World Bank) was to be a specialized agency of the United
Nations charged with making loans for economic development
purposes.
Trifflin’s Dilemma
• American economist Robert Triffin had first identified the problem of
fundamental imbalances in the Bretton Woods system in 1960.
• The number of U.S. dollars in circulation soon exceeded the amount of
gold backing them up. By the early 1960s, an ounce of gold could be
exchanged for $40 in London, even though the price in the U.S. was
$35. This difference showed that investors knew that dollar was
overvalued.
• There was a solution to Triffin's dilemma for the U.S. - reduce the
number of dollars in circulation by cutting the deficit and raise interest
rates to attract dollars back into the country. Both these tactics,
however, would drag the U.S. economy into recession, a prospect new
President John F. Kennedy found intolerable.
• In August 1971, President Richard Nixon acknowledged that the
Bretton Woods system was finished. He announced that the dollar
could no longer be exchanged for gold. The "gold window" was
closed.
The Nixon Shock
• By the early 1970s, as the Vietnam War accelerated inflation, the
United States was running not just a balance of payments deficit but
also a trade deficit (for the first time in the twentieth century).
• The crucial turning point was 1970, which saw U.S. gold coverage
deteriorate from 55% to 22%, leading holders of the dollar to lose faith
in the U.S. ability to cut its budget and trade deficits.
• In 1971 more and more dollars were being printed in Washington, then
being pumped overseas, to pay for the nation's military expenditures
and private investments.
• In the first six months of 1971, assets for $22 billion fled the United
States. In response, on August 15, 1971, Nixon unilaterally imposed
90-day wage and price controls, a 10% import surcharge, and most
importantly "closed the gold window," making the dollar inconvertible
to gold directly, except on the open market.
• By the year’s end, a general revaluation of major currencies allowed
2.25 % devaluations from the agreed exchange rate. But even the more
Transition to Supportership
• By March 1976, all the world's major currencies were
floating.
• Over the next two decades, the system will be renegotiated
taking into account the post-WWII recovery of Europe and
the Far East.
• This will be the WTO (1995).
WTO
Mission of the WTO
• The WTO aims to increase international trade by promoting lower
trade barriers and providing a platform for the negotiation of trade and
to resolve disputes between member nations, when they arise.
• Principles of the trading system:
• 1. A trading system should be discrimination-free in a sense that a
country cannot favor another country or discriminate against foreign
products or services.
•
2. A trading system should be more free where there should be little
trade barriers (tariffs and non-tariff barriers).
•
3. A trading system should be predictable where foreign companies
and governments can be sure that trade barriers would not be raised
and markets will remain open.
•
4. A trading system should be more competitive.
•
5. A trading system should be more accommodating for less
developed countries, giving them more time to adjust, greater
flexibility, and more privileges.
Conflict Resolution
• Apart from hosting negotiations on trade rules, the WTO also acts as
an arbiter of disputes between member states over its rules. And unlike
most other international organizations, the WTO has significant power
to enforce its decisions through the authorization of trade sanctions
against members which fail to comply with its decisions.
• Member states can bring disputes to the WTO's Dispute Settlement
Body if they believe another member has breached WTO rules.
• Disputes are heard by a Dispute Settlement Panel, usually made up of
three trade officials. The panels meet in secret and are not required to
alert national parliaments that their laws have been challenged by
another country.
• If decisions of the Dispute Settlement Body are not complied with, it
may authorize "retaliatory measures" - trade sanctions - in favor of the
member(s) which brought the dispute. While such measures are a
strong mechanism when applied by economically powerful states like
the United States or the European Union, when applied by weak states
against stronger ones, they can often be ignored.
Energy Crisis
• The 1973 oil crisis began in earnest on October 17, 1973, when Arab
members of the Organization of Petroleum Exporting Countries
(OPEC), during the Yom Kippur War, announced that they would no
longer ship petroleum to nations that had supported Israel in its conflict
with Syria and Egypt -- that is, to the United States and its allies in
Western Europe. The Arab-Israeli conflict triggered an energy crisis in
the making.
• Between 1945 and the late 1970s, the West and Japan consumed more
oil and minerals than had been used in all previous recorded history.
Oil consumption in the United States had more than doubled between
1950 and 1974. With only 6% of the world's population, the U.S. was
consuming 33% of the world's energy.
• Oil, especially from the Middle East, was paid for at prices fixed in
dollars. Nixon ended the convertibility of the US dollar into gold,
thereby ending the Bretton Woods system that had been in place since
the end of World War II, allowing its value to fall in world markets.
The dollar was devalued by 8% in relation to gold in December 1971,
and devalued again in 1973.
• The devaluation resulted in increased world economic and political
uncertainty. This set the stage for the struggle for control of the world's
natural resources and for a more favorable sharing of the value of these
resources between the rich countries and the oil-exporting nations of
OPEC.
• OPEC devised a strategy of counter-penetration, whereby it hoped to
make industrial economies that relied heavily on oil imports vulnerable
to Third World pressures. Dwindling foreign aid from the United States
and its allies, combined with the West's pro-Israeli stance in the Middle
East, angered the Arab nations in OPEC.
• The effects of the embargo were immediate. OPEC forced the oil
companies to increase payments drastically. The price of oil
quadrupled by 1974 to nearly US$12 per 42 US gallon barrel (75
US$/m³).
Oil Prices
•
•
This increase in the price of oil had a dramatic effect on oil exporting nations,
for the countries of the Middle East who had long been dominated by the
industrial powers were seen to have acquired control of a vital commodity. The
traditional flow of capital reversed as the oil exporting nations accumulated
vast wealth. Some of the income was dispensed in the form of aid to other
underdeveloped nations whose economies had been caught between higher
prices of oil and lower prices for their own export commodities and raw
materials amid shrinking Western demand for their goods. Much of it,
however, fell into the hands of elites who reinvested it in the West or enhanced
their own well-being. Much was absorbed in massive arms purchases that
exacerbated political tensions, particularly in the Middle East.
OPEC-member states in the developing world withheld the prospect of
nationalization of the companies' holdings in their countries. Most notably, the
Saudis acquired operating control of Aramco, fully nationalizing it in 1980
under the leadership of Ahmed Zaki Yamani. As other OPEC nations followed
suit, the cartel's income soared. Saudi Arabia, awash with profits, undertook a
series of ambitious five-year development plans, of which the most ambitious,
begun in 1980, called for the expenditure of $250 billion. Other cartel
members also undertook major economic development programs.
•
Meanwhile, the shock produced chaos in the West. In the United States, the
retail price of a gallon of gasoline rose from a national average of 38.5 cents in
May 1973 to 55.1 cents in June 1974. Meanwhile, New York Stock Exchange
shares lost $97 billion in value in six weeks.
•
With the onset of the embargo, U.S. imports of oil from the Arab countries
dropped from 1.2 million barrels (190,000 m³) a day to a mere 19,000 barrels
(3,000 m³). Daily consumption dropped by 6.1 % from September to February,
and by the summer of 1974, by 7 % as the United States suffered its first fuel
shortage since the Second World War.
•
Underscoring the interdependence of the world societies and economies, oilimporting nations in the noncommunist industrial world saw sudden inflation
and economic recession. In the industrialized countries, especially the United
States, the crisis was for the most part borne by the unemployed, the
marginalized social groups, certain categories of aging workers, and
increasingly, by younger workers. Schools and offices in the U.S. often closed
down to save on heating oil; and factories cut production and laid off workers.
In France, the oil crisis spelt the end of the Trente Glorieuses, 30 years of very
high economic growth, and announced the ensuing decades of permanent
unemployment.
•
•
The embargo was not blanket in Europe. Of the nine members of the European
Economic Community, the Dutch faced a complete embargo (having voiced
support for Israel and allowed the Americans to use Dutch airfields for supply
runs to Israel), the United Kingdom 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), whilst the other six faced
only partial cutbacks. The UK had traditionally been an ally of Israel, and
Harold Wilson's government had supported the Israelis during the Six Day
War, but his successor, Ted Heath, had reversed this policy in 1970, calling for
Israel to withdraw to its pre-1967 borders. The members of the EEC had been
unable to achieve a common policy during the first month of the Yom Kippur
War. The Community finally issued a statement on 6 November, after the
embargo and price rises had begun; widely seen as pro-Arab, this statement
supported the Franco-British line on the war and OPEC duly lifted its embargo
from all members of the EEC. The price rises had a much greater impact in
Europe than the embargo, particularly in the UK (where they combined with
industrial action by coal miners to cause an energy crisis over the winter of
1973-74, a major factor in the breakdown of the post-war consensus and
ultimately the rise of Thatcherism).
Unlike any other oil-importing developed nation, Japan fared particularly well
in the aftermath of the world energy crisis of the 1970s. Japanese automakers
led the way in an ensuing revolution in car manufacturing. The large
automobiles of the 1950s and 1960s were replaced by far more compact and
energy efficient models. (Japan, moreover, had cities with a relatively high
population density and a relatively high level of transit ridership.)
• A few months later, the crisis eased. The embargo was lifted in March
1974 after negotiations at the Washington Oil Summit, but the effects
of the energy crisis lingered on throughout the 1970s. The price of
energy continued increasing in the following year, amid the weakening
competitive position of the dollar in world markets; and no single
factor did more to produce the soaring price inflation of the 1970s in
the United States.
• The crisis was further exacerbated by government price controls in the
United States, which limited the price of "old oil" (that already
discovered) while allowing newly discovered oil to be sold at a higher
price, resulting in a withdrawal of old oil from the market and artificial
scarcity. The rule had been intended to promote oil exploration. This
scarcity was dealt with by rationing of gasoline (which occurred in
many countries), with motorists facing long lines at gas stations. In the
U.S., drivers of vehicles with license plates having an odd number as
the last digit were allowed to purchase gasoline for their cars only on
odd-numbered days of the month, while drivers of vehicles with evennumbered license plates were allowed to purchase fuel only on evennumbered days. The rule did not apply on the 31st day of those months
containing 31 days, or on February 29 in leap years — the latter never
came into play as the restrictions had been abolished by 1976.
• The 1973 oil crisis was a major factor in Japanese economy shift away
from oil-intensive industries and resulted in huge Japanese investments
in industries like electronics.
• The Western nations' central banks decided to sharply cut interest rates
to encourage growth, deciding that inflation was a secondary concern.
Although this was the orthodox macroeconomic prescription at the
time, the resulting stagflation surprised economists and central
bankers, and the policy is now considered by some to have deepened
and lengthened the adverse effects of the embargo.
• Long-term effects of the embargo are still being felt. Public suspicion
of the oil companies, who were thought to be profiteering or even
working in collusion with OPEC, continues unabated (seven of the
fifteen top Fortune 500 companies in 1974 were oil companies, with
total assets of over $100 billion)
• Since 1973, OPEC failed to hold on to its preeminent position, and by
1981, its production was surpassed by that of other countries.
Additionally, its own member nations were divided among themselves.
Saudi Arabia, trying to gain back market share, increased production
and caused downward pressure on prices, making high-cost oil
production facilities less profitable or even unprofitable. The world
price of oil, which had reached a peak in 1979, at more than US$80 a
barrel (503 US$/m³) in 2004 dollars, decreased during the early 1980s
to US$38 a barrel (239 US$/m³). In real prices, oil briefly fell back to
pre-1973 levels. Overall, the reduction in price was a windfall for the
oil-consuming nations: Japan, Europe and especially the Third World.
• When reduced demand and over-production produced a glut on the
world market in the mid-1980s, oil prices plummeted and the cartel
lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela,
whose economies had expanded frantically, were plunged into nearbankruptcy, and even Saudi Arabian economic power was significantly
weakened. The divisions within OPEC made subsequent concerted
action more difficult.
• In thirty-year-old British government documents
released in January 2004, it was revealed that the
United States considered invading Saudi Arabia
and Kuwait during the crisis and seizing the oil
fields in those countries. According to the BBC,
other possibilities, such as the replacement of Arab
rulers by "more amenable" leaders, or a show of
force by "gunboat diplomacy," were rejected as
unlikely