oss state lines.
1c. Demand for oil grew during the early 1970s as world economies continued to expand. Oil remained a bargain energy source even at slightly higher prices than the 1960s saw. Supply failed to grow at the same pace as demand, with the result that actual prices rose above posted prices. In OPEC countries, there were ceilings on production and increasing risks to the point that investment in new oil areas declined.
In 1973, OPEC members met with oil companies to negotiate tax reference prices by more than two dollars a barrel. During a recess in those meetings, Arab OPEC members decided that no further negotiation was necessary and instituted the requisite price increase. Combined with the Arab Embargo that resulted from the political situation in 1973, the price hike caused fear among some oil companies. Panic buying ensued, with the result that prices were driven up even further in many situations.
In 1979, Saudi authorities imposed a production limit in the middle of the month, with the result that production for the remainder of the month was severely curtailed. The result was an increase in the price of crude oil on the spot market. Prices continued to climb as the Saudis continued to cut their production levels, and had doubled by the time that the Saudis increased their production levels to the pre-ceiling level. However, while the Saudis adjusted their production levels eventually, they also raised the official price of their oil.
In the short-term, the effect of the Saudis' action was to increase the price of crude oil. That was because demand could not adjust as quickly as supply was altered, with the result that oil consumers were willing to pay more for the product. Over the short-term, revenue was increased.
By keeping the official Saudi price high, even after production was increased, the Saudis hoped to capitalize on short-term demand. However, other OPEC countries did not follow t...