Date: September 28th, 2012
Cate: Finance
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Flashback 1973: The OPEC shock from a 2012 perspective. $356/bbl oil by Xmas 2012.

Studying history is vital to keeping things in perspective. Big shocks etc. come around all the time and various capital flows, political responses and fiscal and monetary policy responses can’t be predicted but may be guessed at based on historical precedents. Fiscal and monetary policy from the 1950’s to 1980’s provides an interesting look at how things change while staying the same. The oil shock is highlighted below.

I just finished reading Paul Volcker and Toyoo Gyohten’s 1992 book, Changing Fortunes which gives first hand accounts of US and Japanese monetary policy with the regime ups and downs from the post World War II era to 1991.  The book is based on a series of lectures and reads like a long narrative.  The amazing thing one finds while reading it is how capricious seeming policy can be.

The appendix provides a chronology of events. The 1973 OPEC price shock can truly be called a Black Swan. The events unfold in 1973 in the following way: (from the book)

1973: Oct 6. Yom Kippur war

1973: Oct 16. OPEC raises the price of crude oil 70% from $3.01/bbl to $5.12/bbl. [my comment (The equivelant in late sept 2012 would be going from $92.06/bbl to $156.50/bbl.)]

1973: Oct 20. OPEC imposes an oil emabargo on the United States, and later the Netherlands. Oil companies shuffle shipments to ensure steady supplies.

1973: Nov. 12. Central bank governors, meeting in Basel, terminate the two-tier gold agreement.

1973: Dec. 23. The oil price is raised again, nearly quadrupling from its level of early October, to $11.65 a barrel. [my comment (The equivelant from late sep 2012 base would be a Dec. price of $356.07]

Now that is sticker shock. Amazingly US inflation using govt. CPI figures reported increases of only 8.86% in 1973, 12.09% in 1974 and 7.05% in 1975. GDP is reported to have only fallen 3.9% during the recession.

And for fun here is Nixon in 1971 spinning the dollars decline and blaming”international money speculators” instead of poor fiscal policy while jumping off the gold standard. Reading Volcker’s book is a great inside lesson about the machine.

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