The Bretton Woods conference held in 1944 in New Hampshire in the United States of America at the Mount Washington Hotel, situated in Bretton Woods. The conference also known as the United Nations Monetary and Financial Conference had 730 delegates each representing the allied nation. It aim was to put in regulatory measures to control the international monetary system. The conference aimed at putting the world currencies and monetary systems to order after the World War II. Many policies were passed at the conference, but they became effective in 1958 because the European currencies were not convertible at the time of the conference. The International Monetary Fund (IMF) was created at this conference to act as a permanent body internationally to help in regulating any international monetary changes. The International Bank for Reconstruction and Development (IBRD) was developed to help in speeding up the process of recovery from the post-World War II effects. It functions included inducing political stability and fostering peace among the member countries. The agreements of the conference were many, but some were never put into effect.
The main agreements included the establishment of the IMF, the IBR, pegging of foreign exchange market rates, which were fixed with the necessary provision for change included in a separate clause, and countries that were part of the conference had to make their currencies convertible to allow for exchange of currencies to occur. The other agreements of the conference included a power by the governments to revise the balance of payment terms to suit their needs and all the member countries of the Bretton conference had to contribute to the initial capital of setting up the IMF. The conference aimed at creating an open international market where the world’s economy would be under the control of the IMF. The other reason for the conference was to create a joint political-economic management order where the countries with industrial power would open up to international trade by reducing the barriers of trade and make the movement of capital across borders easier to allow free movement of goods and services (Mills, 2008).
The United States was the World’s largest Creditor and this placed them at a good position and made it powerful in international trade. The dollar also gave it a unique position allowing it to enjoy the terms of international trade. The IMF functioned as a regulatory body helping in monitoring the exchange rates and reconstructing developments destroyed during the World War II. The IMF also provided loans to countries with trade deficits to help them develop their economy. The US dollar was the currency to be used in the international trade as the member countries agreed to tie their own currencies to the dollar. The reason for this agreement was due to the argument by the US representatives who claimed that their currency was very dependable as compared to the other currencies. The dollar was seen as having more value when linked to gold where one US dollar was equal to 35 oz. of bullion. This saw the other countries giving in to sell and buy their currencies within a one percent range of the dollar. The agreements were different from the gold standard that was not flexible and not negotiable. The new system however, was different as the monetary terms and values could be negotiated to suit the needs of the member countries. The gold standard was no longer effective as countries had to peg the US dollar, this led to a free flat of the US dollar, and other currencies followed suit.
Pegging is measuring a country’s currency with the gold standard or to other currencies. The oil industry developed in the 1870 enjoyed stability and had no major blows during the world wars. The oil industry is highly dependent on prevailing economic situations and the shift in demand and supply can have adverse effects on the oil sector. The oil prices were stable and there was no impending oil crisis before the 1970s when the United States withdrew from the Bretton accord. The prices of oil were affected by the withdrawal of the United States because countries began printing more currencies in an effort to bring stability to the exchange rates. The value of currencies dropped as they focused on creating more currencies. The cartels supplying oil to the developed nations suffered fro the devaluation of the currencies and decided to drop their previous agreements to peg the oil prices with the US dollar and go back to peg the prices of a single barrel with the gold standards. The pegging of oil process was no longer using any form of currency to determine its process for fear of suffering from instability in case a country withdrew form an accord. OPEC tried to control oil prices since its withdrawal of the Bretton accord, but it faces many challenges due to lack of proper technology to regulate process. Since the pegging of oil with the gold, process has never enjoyed stability again as the keep rocketing back and forth (Mills, 2008).
The Bretton system did not last for long after its implementation in 1958 because it was dismissed in 1971. In the late 1960s, there was an increase in deficit of the US dollar across the world. The rise in inflation at the time was worsened by the war in Vietnam and countries began losing faith in the ability of the United States to provide stability cutting down the budgets and maintaining the trade deficit. In 1970, the dollar was running at a 22% of gold coverage as compared to the 55%required to maintain the deficit. The demand for more dollar currencies in the war-fledged zones forced the US to print more dollars causing it to lose value over the gold convertibility. This is the famous Nixon Shock because Nixon ordered a pursuant and oversaw the closure of the gold window. This was an independent decision, as he never consulted with the other monetary states before making the decision. There were structural changes that caused the end of the Bretton system indirectly. The high interdependence on monetary management was one of the structural changes that contributed to the failure of the Bretton agreements. The aspect of convertibility meant that countries would have to be reliant on the terms and status of the international monetary system and its failure translated to high economic loses and affected the world trade negatively.
The banks were not left behind in the formation of syndicates, which helped them cushion them against the changes and inflation threats. The banks formed syndicates to help them transfer money from one country to the other in order to increase investments and lending rates. The reluctance to change the exchange rates led the destabilization of the Bretton system. The United State was fast losing it place in the world as its largest economic stakeholder as Japan and the E.E.C were becoming more economically powerful than the US. This weakened the strength of the dollar as the only currency that could serve the other currencies. The economic gap was reducing fast and destabilizing the influence of the dollar in the market. The dollar shortage was now a dollar glut as the country was no longer in a position to provide the gold outflows and maintained the pegging standard of $35/ounce (Campbell, 2005).
This marked the end of pegging the dollar for the countries in agreement with the dollar as the major pegging currency. This led to free floating of currencies in the markets as the major economic countries in the world let their currencies float freely in the market against the dollar. The effects of this step were felt by 1973 when the prices of major commodities began sky rocketing. The transition process has adverse effects on the oil sector as its process began to rise at a high rate and the stock prices plummeted. The banks failed to operate smoothly as inflation was on the rise and they could not maintain a balanced deficit. The economic effects of the failure of the international monetary system and the dollar led to a lot of economic constrains which took the world’s economic countries a long time to recover form. Some of the sectors that were affected were the oil industry, which is highly dependent on stable economic conditions to maintain a stable demand and supply curve. With the currencies floating freely in the market, it became difficult to maintain a stable economy and the oil process in return plummeted (Eichengreen, 2007).
The reserves of the United States were declining and the other economies were suffering because their currencies were convertible. The economy went through two series, the first one being the boom, which only lasted for a short while. This was the time when the economies recorded an increase in their income caused by a rise in the prices. The second phase was the bust, which led to recession because of the high prices (Edwards, 2010). The oil embargo in the United States came about in 1973 and it was prompted by an economic and political reasons. The OPEC used the dollar to peg prices for barrels of oil. The failure of the Bretton system had it toll in the oil industry. The value of the dollar they got form selling the oil in US currencies was reducing as the system ended. OPEC was no longer able to purchase much with the devaluing dollar and they opted to increase the prices of oil in an effort to increase their income. The prices of the oil reached the same level as that of the gold prices and the US dollar. The decline in the value of the dollar meant a rise in the oil prices as they kept on increasing the prices to keep their income at reasonable prices. The prices of gas also kept rising with the devaluation of the dollar and the old. The Americans, in an effort to resolve the problem, expanded money supply leading to further inflation.
The other cause of the oil embargo was the attack on Israel by Egypt and Syria. The United States supported Israel and to counter this, the Arab countries who were the major suppliers of oil to the United States cut down the supply of oil to the United States this resulted in a further increase in the prices of oil in the United States of America. The united states were not in a good position to promote production of local oil because of the ceiling imposed on local oil process. The other cause of the embargo was the stepping down of the Iranian president, which resulted in unstable prices in the country. This made the situation worse for the United States who was already suffering from unemployment and high inflation rate. President Carter put a stop to oil importation form Iran and then deregulated oil prices making the oil situation in America worse and leading to an increase in the oil and gas prices (Eichengreen, 2007).
The oil embargo led to unstable oil prices and the United States tried to counter the increasing oil prices by increasing the supply of the dollar. This further weakened the dollar and devalued it in the market. As a result, the oil producers and importers increased the oil process leading to further devaluation of the dollar. This resulted in high oil prices and increased inflation in the United States of America. This strained the economic power and the abilities of the states to manage the deficit in the dollar supply and the oil prices. This led to the failure of the Bretton system as Nixon tried to minimize the rates of inflation and unemployment by making more dollars without considering its value in the market (Edwards, 2010).
The 2008 oil crisis is similar to the oil crisis experienced in the 1970s and its causes are majorly economic. The price of an oil barrel in the 1980s to early 2003s was at an average of $25. This price had remained stable throughout the years, but by September 2003, the oil price per barrel was $30 up from the stable $25. This was not the end of the increase in the oil prices as it was at a peak of $147 by 2008. The economic causes of the increase in the oil prices can be attributed to the fall in the price of the US dollar in the market. The global recession experienced in the early 2007 and went to 2008 and 2009 had an effect in the increasing oil prices and the 2008 oil crisis. The consumption of oil products in the United States decreased by 5.5% in the total consumption, which is the highest since the oil crisis of 1970s (Campbell, 2005). The weak economies experienced at the time also contributed to the decline in demand and consumption of oil.
The decline in demand of oil products in the United States was an isolated case as other developing countries have a high demand for oil products to be used in transportation. The increase in demand of oil between 2006 and 2030 is seen as the reason for the shortage of oil in many countries. The use of personal transport means has also increased the demand for oil in developing countries despite the increasing oil prices. The thriving economies in many countries in the world increase the demand for oil, which is the major source of energy. This is increasing especially with the third world countries becoming developed. Countries like China and India are fast becoming major oil consumers after the United States due to growth in their economies.
The other cause of the oil crisis is the removal of the oil subsidies by many countries, which helped shield their citizens from the plummeting oil prices. The subsidies prices were becoming a burden for man governments and the decision to withdraw subsidies led to an increase in the cost of energy production and purchase. China and India always keep their prices at a lower level compared to the world oil prices and this increases the level of consumption and demand for oil in their countries (Mills, 2008).
Price inflation is one of the causes of the increased oil prices seen in the world. The monetary policies in many countries in the world are loose and this leads to an increase in the oil prices and devaluation of currencies. The oil prices depend on the value of the dollar as seen by investors. Therefore, the prices will rise or fall depending on the way investors see the dollar. The investors are keen on keeping the value of the dollar at bar as they do not want to risk losing their investments in case the dollar loses its value. The devaluation of the dollar in 2008 caused by recession resulted in the rise in oil prices. The demand for and supply of oil to the consumers’ needs to be stable if the oil prices are to remain at a constant and reasonable prices. The consumers of the oil products need to purchase the oil at prices that do not seem too oppressive and the suppliers and producers need to get a good return for their investments without exploiting the consumers (Bina, 1985).
The rise of oil prices in 208 led to a strain in the global economy as the prices of many commodities increased due to the rise in the production and transport costs. Oil products play an important role in shaping the economy of a country and a shift in the oil prices can affect the country’s economy either positively or negatively. The impact of the oil prices and the 2008 oil crisis had a negative impact on the economic growth of many developing countries, which had to use more money to get sufficient oil supplies for their population. The consumers were the ones who catered for the increase in the oil prices as the increase in costs of production, transport and processing was passed on to them. Many countries are still trying to recover from the effects of the oil crisis and their economies are still on hold due to the strains caused by the increase in the oil prices all over the world. The exchange rates of the dollar increased and have not yet regained the rate it was before the oil crisis.
References
Bina, C. (1985). The economics of the oil crisis: theories of oil crisis, oil rent, and internationalization of capital in the oil industry. New York: St. Martin's Press.
Campbell, C. J. (2005). Oil crisis. Brentwood, Essex, England: Multi-Science Pub. Co..
Edwards, S. (2010). Left behind: Latin America and the false promise of populism. Chicago, Ill.: University of Chicago Press.
Eichengreen, B. J. (2007). Global imbalances and the lessons of Bretton Woods. Cambridge, Mass.: MIT Press.
Mills, R. M. (2008). The myth of the oil crisis: overcoming the challenges of depletion, geopolitics, and global warming. Westport, Conn.: Praeger.
