producing states, the net effect probably was to accelerate the depletion of domestic petroleum reserves. New discoveries became more difficult to realize; they were overtaken by growing consumption in the early 1960s, so proved reserves peaked in 1968 and then declined. The only recent American discovery of international significance (in northern Alaska) remained unavailable for several years because of opposition to the building of a pipeline. At the same time, environmental concerns about the use of high-sulfur coal for electricity generation further stimulated the demand for imported oil. Other such concerns, expressed through increasingly active and effective citizens’ groups, led to abandonments and postponements of hydroelectric power, nuclear power, and offshore oil projects.

These developments made the United States a major factor in the global supply-demand balance. Until the mid-1960s U.S. oil imports were relatively small and were satisfied mostly by nearby areas—Canada and Venezuela. As American demand grew, more had to come from the Persian Gulf area, which was already supplying most of the increasing demand in Western Europe and Japan.

We have already seen that production in the Middle East had expanded rapidly during the 1960s. Large new discoveries and intensified competition among the oil companies had caused crude oil prices to soften in this period. This helped to open up markets for the new output, but it also threatened the level of royalties paid by the oil companies to the countries where reserves were located. To counter this threat, the royalty owners organized themselves in the Organization of Petroleum Exporting Countries (OPEC) and were moderately successful. (One must remember that most of the OPEC countries own little but desert, aside from oil, and it is on the wealth represented by the oil that they must build industrial economies able to survive when the oil runs out.) As demand began to outstrip supply and U.S. oil production approached capacity, OPEC saw its opportunity. Its first achievement along these new lines came in early 1971, when the oil companies agreed to a sizeable increase in royalty rates.

Despite this price increase, oil consumption continued to grow, stimulated by the worldwide inflationary boom that started around 1972. The imbalance came to a head in the fall of 1973, when the fourth Arab-Israeli war was accompanied by an embargo imposed by the Arab oil exporters against certain Western countries, including the United States. How much quantitative effect this embargo had is still unclear, but the psychological effect was unmistakable, reinforced as it was by widespread concern over exhaustion of natural resources. Small quantities of non-Arab oil changed hands at prices as high as $17 per barrel, about seven times the price prevailing before the embargo. Encouraged by this demonstration of the oil importers’ vulnerability, OPEC declared a

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