Question

what caused the oil price shock in early 1970's? What is the petrodollar problem

Answer 1

Price shock in early 1970’s was due to several factors. So let’s see these reasons;

1. This shock mainly started due to problems of middle east countries.

2. Middle east countries restricted level of oil production during these period due to differences between western countries and middle east countries.

3. Most of industrial countries faced problem of shortage of oil hence price shock started during this period. This is because of low supply of oil in the market. Prices start increasing rapidly.

4. Two main wars also lead such price problems. These wars were Yom Kippur War and the Iranian Revolution. Due to these wars oil exports were interrupted hence as a result prices of the oil reached at high level.

5. Due to higher prices of the oil, cost of transport has increased rapidly thus as a result prices of most of the goods & services have increased so this led to price shocked for the countries etc.

Petrodollar Problem;

Petrodollar problem arise due to high accumulation of dollars in the oil exporting countries. As we know that whenever prices of oil increase then oil exporters receives more amount in dollars thus this led to higher accumulation of dollars in their reserve. But these oil exporting countries were not able to spend these accumulated dollars because these oil exporting countries have low populations and did not have proper industrilization so these countries have no base to spend these accumulated dollars.

So this problem is known as petrodollar problem.