Oil Crisis of 1973:
Its Impact on Barbados
The oil crisis of 1973 undoubtedly had a strong impact on many countries and a lot of significance for many people. Unfortunately, there has not been that much written about the impact that this crisis had specifically on Barbados. Overall, this paper will discuss the oil crisis of 1973 in general, and then will turn its attention to Barbados and what likely happened to that island based on the oil crisis. Any information about Barbados itself is unfortunately very scarce, but providing insight into how the oil crisis affected the world in general will also provide insight into how it affected Barbados.
For over 25 years there have been many different models that have been introduced to explain the behavior of OPEC (Adelman, 1982a). Most of the studies deal with the OPEC cartel as a profit maximizing cartel which looked for monopoly profits (Adelman, 1982b; Abdalla, 1979; Abraham, 2000; Adelman, 1985). It did this by influencing both production and prices. Others argue that the crude oil market throughout the world is very competitive and increases in oil prices can be explained by various other factors that have nothing to do with the OPEC cartel (Adelman, 1985). There have been statistical studies introduced which helped to examine these models but many of the studies have been exclusively confined to single equations which were introduced by Griffin in 1985 and followed by others in 1985 as well (Adelman, 1985).
In the summer of 1973 the marketing industry for petroleum was already seeing a few tremors of a large change that would soon be taking place (Reid, 2004). In the 1950s and 1960s the supply of oil had been so abundant that it was to the point of gluttony and the prices for this oil were extremely low (Reid, 2004). However, by the end of the 1950s America begin using so much oil that it was not producing all that it needed from its domestic sources (Reid, 2004). This was true of some other countries as well, as some of them did not have enough of their own resources to produce much of their own oil (Reid, 2004). By 1970 the amount of oil America created was only 20% of what it actually used (Reid, 2004). By the year 1973, imported oil was 3.4 million barrels every day or 35% of the supply that was needed (Reid, 2004). Approximately one million barrels every day of this oil came from Arab sources (Reid, 2004).
This shift was beginning to impact the availability of products (Reid, 2004). By June of that year the estimation was that a shortage in the gasoline supply, ranging from 300,000 to 400,000 barrels every day, already existed (Reid, 2004). Those that worked as refiner – suppliers began working with both branded dealers and jobbers on allocation and creating many price protections (Reid, 2004). On October 6th of 1973 the Yom Kippur war was started when Syria and Egypt got together and invaded Israel (Reid, 2004). The war only lasted 16 days but it was enough to seriously shake the world economy (Reid, 2004). Many oil companies were multinational and as problems arose they increasingly lost much of the control that they had over Arab production (Reid, 2004).
The nations that were oil-producing began to find more sophisticated ways to handle their negotiations and they also became much more enforceable (Reid, 2004). The organization of petroleum exporting countries, or OPEC, was formed back in 1960 (Reid, 2004). In 1973 it consisted of Ecuador, Gabon, Algeria, Iran, Iraq, Indonesia, Bolivia, Kuwait, Nigeria, Saudi Arabia, Qatar, United Arab Emirates, and Venezuela (Reid, 2004). During the Yom Kippur war the United States helped out Israel with massive supply systems and his helped turn many of the setbacks that Israel was experiencing into victories (Reid, 2004). OPEC is anchored by the Arab states, which were chiefly led by Saudi Arabia, and they developed a political gesture in retaliation (Reid, 2004).
In order to retaliate against the United States and the Netherlands, which also helped the Israelis, the members of OPEC decided to create an oil embargo on these specific countries (Reid, 2004). The following day, they increased the prices of all of the remaining oil exports by 70% (Reid, 2004). This raised the price of oil from $3.01 to $5.12 per barrel (Reid, 2004). Two days after that OPEC boosted its prices to $11.65 per barrel Even though Barbados was not directly involved in helping Israel, all nations around the world that needed oil had to deal with the increased prices (Reid, 2004). Many of these increases helped cover some of losses that had been faced with the embargo shortfall while also helping to punish Western nations, but the motivations for this type of price increase were much deeper than that.
Several of the OPEC members had already been pushing the strong need to increase the prices (Reid, 2004). This was particularly true of Iran although it was not actually involved in the political aspects of the issue (Reid, 2004). There was no leverage had by the oil consuming nations to counter what the rest were doing and therefore they simply had to pay if they wished to continue to receive oil (Reid, 2004). Many of the Arab supplies for the United States dried out but the need that the United States had was met by various other sources (Reid, 2004). However, the other sources could only do to much due to a reduction in overall supply that the world had (Reid, 2004). This helped impact further the prices internationally (Reid, 2004). The results of this were high interest rates, unemployment, recession, and rampant inflation (Reid, 2004). Barbados was swept up in this and saw these same types of problems during the Yom Kippur war and immediately after it (Reid, 2004).
At the dealer and jobber level the problems with supply began (Reid, 2004). Many of the stations that sold oil or gasoline were only open a few hours each day (Reid, 2004). Because of this many cars lined up to get their daily ration of gasoline and by the end of 1973 approximately 25,000 stations had completely closed (Reid, 2004). The price controls that had been put in place in the year before 1973 prevented dealers and jobbers from enjoying any kind of increase in profits (Reid, 2004). It also prevented them from taking the increased costs that they were dealing with and passing them on to others (Reid, 2004). By March 1974 the government decided to allow some of these retailers to pass along many of the higher production costs and because of this the prices of gasoline and oil actually went up 30% (Reid, 2004).
In a sudden move in that same month the shortage of oil supply came to an end and the long lines that people came to expect simply evaporated (Reid, 2004). It was very difficult to ignore many of the political aspects of not only the price increases but the embargo as well (Reid, 2004). However, the profit-taking issues that came with these problems could also not be overlooked (Reid, 2004). It was reported that in 1973 Exxon’s net profit was $2.44 billion (Reid, 2004). This was the highest amount that was ever made by any industrial company within the United States in a single year up to that point in history (Reid, 2004). Texaco reported that it its net earnings had reached $1.6 billion and there were many other companies throughout the United States and the world that reported that their business and profits increased by approximately 50% (Reid, 2004). Some of these increases actually exceeded 100% (Reid, 2004).
In general, however, the public was not stupid and it soon begin to suspect that many of the multinational oil companies and the Arab leaders were simply looking for any excuse they could find to raise the prices (Reid, 2004). The outrage that was originally seen on the streets soon spread to Congress (Reid, 2004). Many of the oil companies rolled out media campaigns that were large and full-scale to help explain the profit issue (Reid, 2004). They said that what they were making were not really profits (Reid, 2004). The public, however, had a very hard time buying this type of message and much of the residue that was left over from that mistrust is still felt today (Reid, 2004). Through the information of members of OPEC it was stated that the goal of the embargo, aside from retaliating, was to force the United States to leverage Israel and get it to withdraw from some of its occupied territories (Reid, 2004).
Much of the result of this was that what these members had too quickly disappeared in the face of much of the practical business ideas and the fact that the oil demand that was previously enjoyed had plummeted drastically when prices begin to sharply increase (Reid, 2004). It can be argued to some extent that an adjustment upward in the prices of oil was required but the shocking amount of the price increases that the embargo had on so many people pushed many changes that were actually to the detriment of OPEC (Reid, 2004). This was good for those that felt OPEC was getting too strong because these changes would have been very difficult to make had the embargo and the oil prices not become such an issue (Reid, 2004).
Many countries begin to look for alternatives to the supplies that they were getting from Arab nations and in the years immediately following the embargo many efforts would be directed at the promotion of production and exploration in areas such as Alaska and the North Sea (Reid, 2004). The energy information administration indicated that the world oil production share that was generally provided by OPEC declined by approximately 25% between the years 1973 and 1985 (Reid, 2004). In the United States, the consumption of gasoline increased between 1970 and 1973 by 15.2 billion gallons (Reid, 2004). One estimate indicated that over 90% of Americans were taking vacations in their cars and averaging over 2100 miles per each vacation trip and using, therefore, 150 gallons of gasoline (Reid, 2004). The era involved Detroit iron and the muscle car but that very quickly changed (Reid, 2004). Horsepower used to be an important selling point but fuel efficiency rapidly replaced that and many of the fuel economy standards were regulated in addition to the demands placed by consumers (Reid, 2004).
The speed limit designated at 55 mph was also set throughout the country and this helped reduce the consumption further (Reid, 2004). Many power plants also switched from cheap oil to nuclear power, natural gas, or clean coal (Reid, 2004). There were many conservation efforts where energy was concerned ranging from campaigns which indicated to set the thermostat higher in summer and lower in winter to stronger campaigns which pushed for appliances that were much more energy-efficient (Reid, 2004). In 1979 there was another oil crunch that was considered very significant, and this was caused by the Iranian revolution (Reid, 2004). In 1991 the first Gulf War also had focused attention on reducing oil consumption (Reid, 2004). It seemed at times that the focus level had been wondering and weak but it is unlikely in the future that consumer markets will be seen where oil is used as a political weapon (Reid, 2004).
Even though the tensions were very high following the second Gulf War there was no serious expectation of another embargo as long as many of the political dynamics that are in place now remain relatively stable among those that belong to OPEC (Reid, 2004). The oil crisis that occurred 1973 showed the industrial world that it had a lot of dependence on countries that produce oil (Reid, 2004). However, it also indicated to those that produce oil that their comes a point where demand shifts and markets adjust when enough pressure is placed (Reid, 2004).
The embargo that OPEC declared on oil occurred on the 17th of October of 1973 (OPEC, 1991). This embargo was only to the countries that had offered support to Israel in the conflict that it had with Egypt (OPEC, 1991). The industrialized world had so much dependence on oil that the embargo created a lot of painful difficulties for many countries, including the United States (OPEC, 1991). Barbados was also affected very strongly (OPEC, 1991). Much of the oil that the industrialized world used was beneath the sand in the Arab countries (OPEC, 1991). Before the embargo occurred, much of the industrialized area in the West had taken plentiful and inexpensive petroleum largely for granted (OPEC, 1991). In the United States, oil consumption doubled between 1950 in 1974 (OPEC, 1991). The United States had approximately 6% of the population of the world but was actually consuming 33% of the energy that the world was providing (OPEC, 1991).
The embargo effects that were seen were immediate (OPEC, 1991). A gallon of gasoline rose in the United States from 38.5 cents in May of 1973 to 55.1 cents in June of 1974 (OPEC, 1991). This may seem very inexpensive when compared with today’s prices, but it was a very large jump to take in slightly over one year (OPEC, 1991). Originally, the United States was importing oil from various Arab countries at 1.2 million barrels per day (OPEC, 1991). The embargo caused this to drop to only 19,000 barrels per day (OPEC, 1991). From September to February of the 1973-1974 embargo, consumption went down 6.1% (OPEC, 1991). By the time 1974 had reached its summer months, this consumption was down 7% (OPEC, 1991).
With this the United States government knew that it had to respond to the embargo very quickly, and this was not only to protect its interest but to protect the interests of Barbados and other countries that were utilizing oil as well (OPEC, 1991). However, what the United States attempted to do to lessen the embargo was only effective on a small scale (OPEC, 1991). The 55-mile per hour speed limit that was imposed did help to reduce consumption, and it had another effect as well (OPEC, 1991). Between 1973 and 1974 fatalities from traffic incidents went down 23% (OPEC, 1991). Richard Nixon was the president at that time and he named a man called William Simon as the energy czar (OPEC, 1991). In 1977 a department of energy was created at the cabinet level in order to help with the problem (OPEC, 1991). There are still, however, long-term effects that are being felt from the embargo of 1973 (OPEC, 1991).
Oil companies still have a lot of public suspicion because it was believed that they were profiting from the embargo or even working in a collaborative effort with OPEC (OPEC, 1991). This opinion still continues even today (OPEC, 1991). Of the 15 top companies in the Fortune 500 in 1974, seven of them were oil companies (OPEC, 1991). These company’s assets totaled over $100 billion (OPEC, 1991). The changes that the United States and other countries made toward the efficiency of automobiles and the alternate sources for energy ultimately ended as oil prices begin to fall and the memories of long lines for gasoline ultimately faded (OPEC, 1991).
Overall, very little actually changed (OPEC, 1991). Many countries continued to utilize energy in amounts that were well out of proportion to the number of people that they contained and automakers continued to fight any type of legislation that would require them to increase the efficient running of their vehicles (OPEC, 1991). The United States still sees any type of threat to the supply of oil as being a threat to national security and also understands the problems and difficulties that other countries may face if another oil crisis were to occur.
Whether or not the world is vulnerable to another crisis in oil is debatable (Miller, 1998). In 1998, on the 25th anniversary of the embargo that was placed on oil, there are still disturbing trends in this area that concern many people (Miller, 1998). The energy environment is seen to be different but there are still worries and problems (Miller, 1998). To many managers today, the 1973 oil embargo was an event that was considered to be very distant (Miller, 1998). It was something that many of them had only read about and either had not lived through or were too young to remember (Miller, 1998). This could be likened to the stock market crash that took place in 1929, the steel industry seizure that took place in 1951, or the standard oil company breakup that took place in 1911 (Miller, 1998).
To managers that had been on their jobs a long time and had experienced the 1973 oil crisis and embargo, however, much of the memories that they have seemed very real and very recent (Miller, 1998). Many times during the 1973-1974 oil embargo many countries were unable to purchase gasoline on specific days (Miller, 1998). Often the lines that they had to wait in went for blocks and then some of these individuals paid so much for gasoline that it would work out to approximately 4 dollars per gallon if today’s dollars were looked back (Miller, 1998). Many companies had to limit the production that they provided or they even had to shut down at certain times because they were unable to get enough fuel (Miller, 1998).
The federal government had hastily created a price control and allocation system to provide these individuals with fuel but it did not always work well (Miller, 1998). When it failed they lagged behind and the lack of fuel caused so many problems that shutdowns were inevitable (Miller, 1998). OPEC is not as powerful today as it was then but because it was so powerful at that particular time it was able to control much of the oil supply (Miller, 1998). The embargo itself lasted a mere 5 months (Miller, 1998). Despite the fact that it was short-lived energy shortages that were triggered by it throughout the world lasted approximately eight years (Miller, 1998). In addition to these lasting changes, there were permanent changes that were made within the oil market and a global recession that also took place (Miller, 1998).
Throughout the 1970s and then the 1980’s the price as fuel and the supply of it was a very critical concern to most businesses (Miller, 1998). It was considered to be just as important as interest rates, market demand, or corporate planning (Miller, 1998). In 1997, then President Jimmy Carter found himself on national television and declared what he considered to be the moral equivalent of war on how much dependency many nations had on imported oil (Miller, 1998). Even though this was more than three years after the embargo, it was still a very serious concern to the United States and to other industrialized countries.
The points that he raised were very important (Miller, 1998). It was deemed significant by the CIA as well and these individuals warned that a major shortage in oil would be seen by the mid-1980s and would cause an economic crisis throughout the world (Miller, 1998). Some forecasts that were similar to this came from the Massachusetts Institute of Technology, the club of Rome, and the organization of economic cooperation and development, just to name a few (Miller, 1998). In today’s world, the predictions that were made that seemed so gloomy at the time seem unfounded and silly (Miller, 1998). The environment that energy is involved in today has changed a great deal (Miller, 1998).
In 1998, oil was $14 per barrel (Miller, 1998). Its peak in 1981 was $32 per barrel (Miller, 1998). In the present day, however, oil is much higher than that and it is still the primary energy source for the world (Miller, 1998). There are record levels of production of oil and natural gas, and gasoline in the United States does not cost as much as it did during the embargo if inflationary factors are taken into account (Miller, 1998). Managers in today’s industries take cheap and convenient energy very much for granted, which is a very sharp contrast to individuals in the late 1980s (Miller, 1998). However, whether this ample and cheap energy should actually be taken for granted is still a concern (Miller, 1998).
Whether the world is becoming vulnerable to another crisis in oil is also a concern (Miller, 1998). Looking at the 25th anniversary of the embargo in 1998 prompted individuals to ask many of these kinds of questions (Miller, 1998). There were two statistics that were looked at that time that gave strong reasons for this concern (Miller, 1998). The first was that the demand for oil throughout the world continues to grow stronger (Miller, 1998). In 1997 it set a record of approximately 3.5 billion tons of oil equivalent (Miller, 1998). This was 35% of the total energy consumption (Miller, 1998). As more developing nations began to industrialize, the demand for oil appears as though it will continue to rise more sharply (Miller, 1998). The second statistic of concern is that over two-thirds of the supply of oil throughout the world still come from the Middle East (Miller, 1998). This is considered to be a political tinderbox that could cause cutoffs of oil supplies at any given moment (Miller, 1998).
Now that the events of September 11th, 2001 have taken place and the war in Iraq, although declared officially over, is really still ongoing, this concern is even stronger. It does not seem likely, according to many analysts, that a cutoff would be in the same form of an embargo as was seen in 1973 (Miller, 1998). It is seen to be more likely as the result of political instability or some type of military action (Miller, 1998). In 1998 the main concern over military action was the 1991 Persian Gulf War, now, however, the war with Iraq and ever-increasing difficulties with many nations including Iran and others appear to be the most likely reason for another oil embargo (Miller, 1998). Even though Barbados and many other countries are concerned about it, it does appear that the United States has the most risk (Miller, 1998).
Much of this has to do with the fact that the United States consumes so much energy, and some of it also has to do with the fact that the United States is the one involved with most of the war and other difficulties the Iraq and Iran are facing now (Miller, 1998). In the mid-1970s OPEC increased its prices so strongly that the oil consumption throughout the United States and around the world dropped (Miller, 1998). Now that the embargo has been largely rectified the need and consumption for oil has been steadily rising since then (Miller, 1998). In 1997, spurred by many more sales of sport utility vehicles and other vehicles that used larger amounts of gasoline, oil to the United States increased to 18.6 million barrels every day (Miller, 1998).
Crude oil production within the United States continues to go down, and in 1997 was only 22 barrels per day (Miller, 1998). In the pre-embargo levels of 1972, crude oil production was 14 billion barrels per day (Miller, 1998). In order to make up the difference the United States and many other countries depend largely on imports (Miller, 1998). In the U.S., 48% of the supply for the nation comes from imports (Miller, 1998). Before the embargo that number was only 34% (Miller, 1998).
One of the main concerns for the United States and other nations is the overthrow of the Saudi Arabian royal family (Miller, 1998). Saudi Arabia is the world’s largest producer of energy and if this family were overthrown there would be much chaos in the nation (Miller, 1998). The United States would not have much power to intervene in this kind of problem and many people see the United States and other countries that import a great deal of oil as being dependent not only on the longevity of a few individuals in that country but the Middle Eastern kingdom as well (Miller, 1998). This causes some people to despair very strongly of the problems that may take place but there are many analysts that are much more upbeat about the issue (Miller, 1998).
Another analyst for international energy practices insist that there is not much reason to be concerned (Miller, 1998). Many of the political issues that alternately lead to the 1973 embargo are not present any longer and everything about the energy environment is so much different now that it was in 1973 that little concern is seen (Miller, 1998). It is for this reason that many analysts do not feel that another oil embargo is imminent and that integration on a more global level is seen today as opposed to the nationalism that was running rampant in 1973 (Miller, 1998). There are many oil-producing countries that used to have only nationalized oil industries and have now privatized them (Miller, 1998). Many countries are also pushing for more independence and interdependence is seen more fully on a global scale (Miller, 1998).
Global news networks have come on the scene and most economies are seeing that there is a greater private investment in them (Miller, 1998). The inflation that was seen worldwide early in the 1970s is also no longer a large issue (Miller, 1998). Continuing flare ups in the Middle East are somewhat of a concern but it is believed that the world in general is much more equipped today to deal with oil supply threats that might result from these conflicts (Miller, 1998). In other words, the world has found a way to be able to adjust and adapt (Miller, 1998). Much of this is helped by pointing out not only the 1973 embargo but the Iran revolution in 1979 and the Persian Gulf War that took place in 1991 (Miller, 1998). Even though the United States and other countries are very heavily dependent on imported oil, it is not believed that this should be a major concern (Miller, 1998).
This is especially true for the United States which not only has a six-month supply of oil stashed away in petroleum reserves but also that only 20% of the imported oil in the United States now comes from the Middle East (Miller, 1998). Most of the rest of it comes from Mexico, Canada, and Venezuela (Miller, 1998). Petroleum technology is also evolving very rapidly and this is helping to increase the optimism on the issue (Miller, 1998). Protection and exploration techniques as well as computer abilities are helping the oil industry to find greater yields of oil and extract them much more efficiently (Miller, 1998). Only 50 years ago companies that needed oil believed they were fortunate if they were able to find a crude oil field in which they could recover 30% of the oil (Miller, 1998). In the North Sea today, however, is possible for these companies to recover 60 or even 70% of the oil that they find (Miller, 1998).
Technology is helping to increase the oil production throughout the world and also helps to bring this optimism (Miller, 1998). There are many areas that are considered to have a high potential for expanded or even new oil development and these include Alaska, China, the Canadian Arctic, West Africa, Latin America, and Russia (Miller, 1998). Technology also helps to create other energy sources that are renewable and since oil is no longer as cheap as it used to be these renewable energy sources are becoming more competitive (Miller, 1998). The wind power industry has been growing at a rate of approximately 14% per year and the solar power industry at 16% per year (Miller, 1998). The tax incentives for these types of technologies have been stepped up as well, and this continues especially in Japan and in Western Europe (Miller, 1998).
Oil is still going to be most important for quite some time but it does not appear that there is any chance of running out of oil (Miller, 1998). The most worrisome issue regarding oil appears to be pollution and other environmental problems that involve the inefficiency of many of the sport utility vehicles and larger vehicles that are being driven in many countries today (Miller, 1998). The main constraint on the oil supply today does not have anything to do with embargos, as they are not largely practical for the oil market today (Miller, 1998). Instead, many of the countries that export oil are restricting the exports that they have because consuming countries have placed sanctions upon them (Miller, 1998). Many energy organizations have utilized the 25th anniversary of the oil embargo to promote many of their causes such as solar energy and wind power.
Conventional wisdom indicates that the need for oil that humanity has will not always be able to be met and that the gap will emerge between the supply of the oil and the demand for it (Adelman, 2004). There is a concern that the gap will broaden because many nations are growing and increasing the needs that they have for energy (Adelman, 2004). The United States and many other countries are deemed to be at the mercy of exporters in the Middle East that are able to use the oil to help cripple the economy in that country and others (Adelman, 2004). Unless oil production is increased domestically in many countries or consumption is radically cut, another oil crisis could be seen (Adelman, 2004). However, conventional wisdom also believes that it knows many things that are simply not true (Adelman, 2004).
An oil gap or crisis has never actually been the case according to some and the reserves of oil are actually not being reduced (Adelman, 2004). It is also believed that the Middle East does not have any type of oil weapon and has never actually had one (Adelman, 2004). How fast the oil output of other countries, such as Russia, actually grows is not of any real interest (Adelman, 2004). When OPEC cooperated so strongly in the 1970s it was seen to be an important monopoly but also a rather clumsy one (Adelman, 2004). Many of the largest exporters acted together in order to help limit the supply and therefore raise the price of oil (Adelman, 2004). However, the oil prices went so high that they actually worked to defeat much of the purpose that these countries had (Adelman, 2004).
They establish output levels basically by trial and error and these levels are very unstable (Adelman, 2004). OPEC has been able to damage the economy of the world but it appears that they have done it simply because they cannot help but do this and not out of any type of malice (Adelman, 2004). The power that OPEC has is actually decreasing but it does not seem that it will really end any time soon (Adelman, 2004). In 1979, and once again in 2003, the nations that consume so much of the oil made public an unconditional surrender to the cartel (Adelman, 2004). Not everyone believes that these countries really know what they were doing (Adelman, 2004). It is important to look at some of the myths that have occurred in order to clearly see what type of harm OPEC has done and how it can continue to do this (Adelman, 2004).
Once this has been done, it can be seen that many of the problems that are based in the world oil market are actually the result of this cartel as well as the failure of many importing countries to take the opportunities that the they need to help to weaken it (Adelman, 2004). The first myth is that oil is running out (Adelman, 2004). As has been mentioned, this is not the case (Adelman, 2004). There is plenty of oil throughout the world that can be utilized for an infinite number of years to come (Adelman, 2004). Despite the fact that there are many facts that would indicate this to be the case, the predictions regarding the fact that oil will eventually run out still keep coming (Adelman, 2004).
In 1973, starting with Richard Nixon, it appears that all presidents throughout history have been promising that America will reduce how much oil it uses and invest in new sources of energy (Adelman, 2004). This is true not only of the United States but of Barbados and other countries as well (Adelman, 2004). In Barbados this idea of new energy sources can be seen by the windmills that they purchased (Adelman, 2004). Even though not everyone in that country believed that the windmills were a good idea, they were designed to help that country survive and find ways to support itself so that it no longer had to rely so strongly on the oil of other countries (Adelman, 2004). Many people wonder when the oil will actually run out (Adelman, 2004). Individuals that study the issue insist that oil will never run out (Adelman, 2004). The main concern for these individuals that insist that the oil will not run out tends to be the prices that oil seems to be bringing now (Adelman, 2004).
Sometimes, oil does run out in specific places or specific areas (Adelman, 2004). However, this is not a global vision as some are trying to make it out to be (Adelman, 2004). It other words, even if oil runs out in a specific place, this does not mean that there would not be enough oil throughout the world to support the countries that need it (Adelman, 2004). For example, in the year 1950 there was no oil production offshore (Adelman, 2004). It was seen as being highly unconventional (Adelman, 2004). Only 25 years later there were offshore wells that were being drilled in 1000 feet of water (Adelman, 2004). Twenty-five years after that, wells were being drilled in water that was over 10,000 feet deep (Adelman, 2004). Technology had advanced to the point that allowed them to drill without having the costly structure made from steel that had earlier stopped deepwater drilling and was too expensive (Adelman, 2004). A third of the oil production in the United States today comes from offshore wells (Adelman, 2004).
It appears that the knowledge and techniques for drilling these wells have advanced to the point where it has been predicted that ultimately 50% of the United States’ production of oil will come from offshore wells (Adelman, 2004). Having a single world market is another issue that has long been discussed (Adelman, 2004). Much of this comes from the concern that the United States and other countries have a precarious energy supply because Middle Eastern nations that do not like many other countries are the only places that oil can be purchased from (Adelman, 2004). Oil moves generally by sea and it is possible to divert a ship from one destination to another with relative ease (Adelman, 2004). Much of the additional oil can also be diverted from being shipped over land to being shipped over the sea (Adelman, 2004). In other words, it is relatively easy to reroute oil shipments from nations that are seen to have sufficient supply to nations that are having a serious shortage (Adelman, 2004).
It may be an exaggeration, but only a minor one, to say that every oil barrel in the world competes with every other oil barrel (Adelman, 2004). If one barrel or shipment is blocked from going to a specific place, another shipment is able to replace it (Adelman, 2004). It has long been assumed that nations in the Middle East wield what many call an oil weapon that they can utilize in order to punish a country that they do not like (Adelman, 2004). Really, this is not relevant (Adelman, 2004). A seller in the world oil market is not able to strictly isolate a customer and a buyer is not able to isolate any supplier (Adelman, 2004). People that still believe this oil weapon theory, however, still point to the oil embargo that was brought against the United States in 1973 by OPEC (Adelman, 2004).
Henry Kissinger, who was Secretary of State at that time, went to the Middle East quite a few times to help negotiate an end to this embargo (Adelman, 2004). Over 10 years later, however, he explained that the real significance of the embargo was not economic but psychological (Adelman, 2004). Many of the long lines outside of gas stations in the United States and other countries actually resulted from allocations and price controls on a domestic level, not from the embargo (Adelman, 2004). It other words countries like the United States that were so upset by the embargo and felt that the Arab nations were hurting them actually did this to themselves (Adelman, 2004).
Many of the problems that have taken place in the world oil market are actually only imaginary ones and this leaves analysts and others to wonder what the actual problem is in the world oil market (Adelman, 2004). What many deemed the oil crisis began in 1971 and carried through to 1973 because a dozen of the producer nations decided to cut their output, which would raise the price of oil (Adelman, 2004). Even today, they continue that cooperation (Adelman, 2004). The cost of expanding the output of oil, which is mostly the return that they receive on the investment that they need, is actually a very small fraction of what price they charged for the oil that they find and sell (Adelman, 2004). Realistically, oil should have a relatively stable price (Adelman, 2004).
In order to see this it is important to compare many of its basic conditions with that of natural gas (Adelman, 2004). Those that use oil are much more diversified and numerous (Adelman, 2004). The storage costs are lower and the fluctuations that are seasonal are much milder (Adelman, 2004). In a 25-year period after the second world war the real price of oil, adjusted for inflation, actually fluctuated very little (Adelman, 2004). There was some short run volatility, which is generally seen in many industries, and the oil prices did go up and down a bit (Adelman, 2004). This there were Middle East crises in 1956 and 1967, oil prices did jump, but quickly they fell back into line (Adelman, 2004). There are individuals that would say this price stability came from the fact that most of the oil that was being sold throughout the world was controlled very strongly by a few large companies (Adelman, 2004).
However, the real price of oil actually fell by approximately two-thirds from 1945 to 1970 (Adelman, 2004). If these big companies actually did have control, the control that they had was very limited (Adelman, 2004). Unfortunately, in the decade between 1970 and 1980, the real price of oil rose by approximately 1300% (Adelman, 2004). From 1982 to 1986, the price dropped again by approximately two-thirds (Adelman, 2004). In between 1986 and 1997, the price of oil remained relatively steady, leveled off even further between 1997 and 1998, and then actually tripled after February of 1999 (Adelman, 2004). The question becomes why such huge ups and downs in the price of oil have been seen in recent years and why these changes did not quickly reverse as they did in older times (Adelman, 2004).
Some of this may be due to speculation (Adelman, 2004). In other words the price of any good or service is often affected by the guesses that are made by speculators (Adelman, 2004). Professionals that are in the business are looking to make money based on the price changes (Adelman, 2004). Every refiner, transfer, producer, consider consumer, or other individual that either sells or buys today in hope or fear regarding a different price the next day is speculating (Adelman, 2004). Even though the competitive prices affect the oil cartel prices, speculation affects them more strongly (Adelman, 2004).
The price of oil, therefore, fluctuates more than once because individuals bet on the price and they must calculate not just the demand and supply but the quota decisions made by OPEC and how strongly the members will stick to the promises that they have made (Adelman, 2004). The result of this is that the oil market throughout the world is more volatile and unpredictable than it used to be (Adelman, 2004). When the prices spiked so strongly in 1973 the supply change was very trivial but the affects on price were so massive that it was almost amazing (Adelman, 2004). The crisis, therefore, came not from the embargo that was placed on oil but on the panic of the buyers that were afraid they would not be able to get enough of it (Adelman, 2004).
The oil industry has likely learned some lessons from what took place in 1973 (Subroto, 1994). Some that review these kinds of issues indicate that it is very difficult to decide whether surviving the years between 1973 and 1993 were oil was concerned should be celebrated or whether the two decades that passed should actually be mourned because many of the problems before 1973 seemed so much more simple than they did in 1993 (Subroto, 1994). Even though only one oil crisis was seen to take place in those 20 years there were many shocks in the price of different and varying sizes (Subroto, 1994). It is ironic to note that, in 1993, the price of oil in real terms was actually little different from what it was in 1973 before the oil crisis took place (Subroto, 1994).
Much of the world will continue to rely on OPEC well into the future and there are countries that are still very concerned about this (Subroto, 1994). There are others that believe that OPEC members gained very strongly from the oil crisis in 1973 but in the long-term they actually did not (Subroto, 1994). Short-term gains are not what should be utilized to dictate policy and now that the embargo years are a fading memory for most people there is little chance that any more of these short-term price gains will be a concern (Subroto, 1994). Working together as a world to create open-minded and honest relationships were oil is concerned is what is really necessary (Subroto, 1994).
Not everyone sees cooperation as being the key to the future of oil but is important to look at some of the patterns in the oil market (Subroto, 1994). In 1973, OPEC members were nationalizing many of their oil industries very actively and this was an effort to receive a better return from the fact that their natural resources were being progressively depleted (Subroto, 1994). Since the embargo, many countries that previously did this have been more able to recognize many of the benefits that can be seen of utilizing the capital, technology, and skills of third parties (Subroto, 1994). Because of this trends toward partnering for development and exploration of oil throughout many member countries in OPEC is strengthening (Subroto, 1994).
These partnerships, however, must be based on a mutual interest to avoid some mistakes that were committed in the past (Subroto, 1994). Also recognized is the increasing need to relax many of the barriers of legislation and regulations that were so diverse and have sought to protect many of the national oil industries of the past (Subroto, 1994). Even though these were deemed important at the time, their net effect actually promoted many oil industries outside of OPEC to continue development (Subroto, 1994). Putting the 20 years from 1973 to 1993 in this perspective is somewhat difficult but there were positive aspects that should also be considered (Subroto, 1994).
Some benefits have been gained and lessons that are deemed very viable have been learned (Subroto, 1994). Particularly, this is seen to be true of OPEC because it has become a very important player in the oil market throughout the world (Subroto, 1994). OPEC has grown very strongly since 1973 and it has also benefited from both the bad and good experiences that it had (Subroto, 1994). In the 1960s, OPEC was simply trying to find its way in the market because there were declining prices and much surplus export capacity (Subroto, 1994). Because of this OPEC countries became more involved in creating fiscal policies that dealt with the production and price of oil, as well as determining what would help to create more development throughout their member countries (Subroto, 1994).
Control of much of the oil pricing finally passed to OPEC in the early 1970s (Subroto, 1994). In 1971, the Tehran agreement created a price-fixing accord for 5 years that was signed by 23 international oil companies and six Gulf members of OPEC (Subroto, 1994). In October of 1973 when the embargo occurred the deal collapsed (Subroto, 1994). OPEC tried many times but ultimately failed to renegotiate the terms that they had with multinational companies and this indicated the last time that any of these companies were directly involved in price negotiations with the countries that were involved with OPEC (Subroto, 1994). Another take on the embargo that occurred in 1973 indicates that it was not actually result of OPEC decisions that were made as an organization but involved a regional crisis that was much wider than this (Subroto, 1994).
It was ultimately true that the members of OPEC were looking for a better deal from multinational oil companies that had very lucrative contracts to market and extract much of the oil in OPEC member countries (Subroto, 1994). The Middle Eastern members of OPEC therefore raised the oil prices that they had by 70% but it was still only $5.12 per barrel (Subroto, 1994). When oil reached $10 per barrel in 1974 as a result of a tight tanker market and panic buying, this problem persisted even after the OPEC embargo was truly lifted (Subroto, 1994). When the war between Iraq and Iran occurred early in the 1980s the price of oil went to $38 per barrel (Subroto, 1994).
Although it seems strange, research indicates that many of the members of OPEC actually did not want to see that strong of an increase in price (Subroto, 1994). These countries were not prepared for this to happen and were also not able to stop it (Subroto, 1994). Though the price fluctuated so wildly and rose so sharply it was based on many factors that were not all related to the marketplace (Subroto, 1994). This helped to highlight the fact that oil had become so important to consumer societies in the West that political and strategic considerations had involved into a problem that was disproportionately large within the international oil market (Subroto, 1994). This happened at the expense of more fundamental and important economic roles (Subroto, 1994).
The result of this was a market that was unusually sensitive and prone to overreaction and panic on many levels (Subroto, 1994). Ideally, economic growth throughout the world should improve strongly and in a way that is sustainable over the next 20 years (Subroto, 1994). When oil producers are able to work together more closely, and consumers and producers are also able to do this, the misunderstandings that many of these individuals have are minimized and regional and national policies will help to reflect a division of economic and environmental independence throughout the world that is much wider than it is today (Subroto, 1994).
When competitors and consumers are able to receive a properly priced and stable oil supply and producers receive a fair income from this, not only will these producers be able to help develop their own economies but they will also be able to plan and carefully measure the expansion of the oil supply in order to help match the growing demands (Subroto, 1994). Some people think that this is a fantasy that is not able to be realized but many people share the ideals of a world oil market that is respectable and comfortable (Subroto, 1994). Countries throughout the world are able to make this particular vision a reality if they so choose but they must go off of what they have learned particularly between 1973 and 1993 (Subroto, 1994).
Many challenges are still faced by those that produce the oil and by those that consume it, but countries that are willing to work together and do what they can to help each other without deliberately attempting to only benefit themselves will be much more likely to succeed in the long-term. The United States is not the only country that uses a lot of oil but since they are such a leading power it seems only prudent that they work toward making oil a more stable commodity.
While it is true that most of this paper has focused on the crisis in itself and not dealt strongly with Barbados, this is largely due to the fact that little published information on Barbados is available. What follows, however, is some of what happened in Barbados and what that particular country has been trying to do in order to survive the crisis that took place and rebuild the country so that another oil crisis will not take place or harm it so strongly if it does take place.
All official government functions for the Independence Anniversary celebrations have been canceled. Public transport has been virtually crippled. Promoters of show for this anniversary weekend have either been asked to call off their entertainment or stage them during daylight hours as the country celebrates the seventh nation food in the grips of an acute energy crisis. Trade Minister Branford Taitt announced that Venezuela had decided to slash oil exports to this country by twelve percent until the end of this year. He appealed to nationals to understand the seriousness of the situation and help in conserving energy fuel, electricity, and water.
At this time of year, the Minister cautioned in a nationwide television appeal, many of us sing of a white Christmas. Schools throughout the island were closed and the public transport operated on hourly schedules in an effort by both the public and private sectors to conserve limited supplies of fuel. One hour power shut downs were also enforced Wednesday and Thursday nights in what is believed to be less voluntary action.
Senator Taitt threatened last week, if efforts to conserve energy were not satisfactory. The Minister stressed that the prediction of a Black Christmas was not an exaggeration. If the situation continued unchecked, we may find ourselves unable to reap next year’s crop, as prospects are as bad as that. Meanwhile, as the gasoline rush continues, sources revealed that several cruise liners have canceled stops to Barbados, suggesting the fuel crisis would inevitably cause the country to lose thousands of dollars in tourist revenue this winter. There have also been predictions of serious food shortages should the petrol crisis continue. Petrol stations will not be opened on Sundays, Christmas Day, Easter Day, Good Friday, May Day, and Independence Day.
Barbadians round off their seventh year of Independence in the grips of an energy crisis following a severe period of drought, food shortages, rising prices, and declining morale. As a result, we are going to be short of edible oil. The island’s allocation of edible oil has been slashed by seventy-five percent as a result of a decision reached at the recently concluded oils and fats conference held in Guyana, at which Barbados was represented. Instead of a monthly supply of 1,200 barrels of edible oil, Barbados will now receive only 300 barrels a month for the next six months.
This is expected to cause a serious shortage for the community. The reason for the cutback in the allocation to Barbados is that as a partner in the Caribbean Community, the CARIFTA produced commodity must be shared by the four signatories to the agreement — Jamaica, Trinidad and Tobago, and Guyana. The only country now supplying commercial quantities of edible oil is St. Lucia.
Rising food prices in the world will affect Barbadians significantly, if they do not return to the land. The island will soon be burning cane residues bagasse to produce electricity and the Barbados Light and Power Company was now in the process of converting some of its power generators to use locally and produce natural gas as a replacement for imported oil. The Barbados Government had begun examining forms of new and renewable sources of energy, including solar, wind, wave, and biomass, with a view toward future use if it was technically and economically feasible. In addition, government had sought to promote the competitiveness of solar water heaters by placing thirty percent consumption tax on imported gas and electric water heaters and had more recently allowed solar water heater installation costs to be fully tax deductible.
The oil crisis really started in 1973. It was a very critical situation in Barbados. There were very long lines at the petrol stations. In October of 1973, there was the Yom Kippur War. Yom Kippur is the holiest time in the Jewish calendar and during this time the Jewish people do not engage in activities except to go to the synagogue and pray. The Jews were not even prepared for the war as they were caught unaware by the Arabs. America got involved and saved Israel. Therefore, the Arabs in anger placed an embargo on the sale of oil to the United States and that increased shortages. In Barbados in 1974 the rate of inflation quadrupled. The rate of inflation was 40% in 1974 as a result of the increase in the price of the petroleum, which was disastrous for the economy.
The impact of the oil crisis on Barbados was because Barbados imports more than what it consumes, and it caused problems over the question of foreign exchange. It took higher importation costs to pay for the importation of oil. The Barbados government then allowed the Barbados Light and Power Co. Ltd. To bring in the fuel adjustment charge because the fuel that the Barbados Light and Power uses at first was not part of their energy bill. That is, they never passed it on to the consumer. Barbados imported inflation, because Barbados imports most of what it consumes. Since the price increase, Barbados had to pay greater money for bringing in products.
During the oil crisis Barbados’ balance of payment was in serious trouble. This helped lead to the overthrow of former Prime Minister Errol Barrow in 1976 because he did not have an answer to the crisis. The Errol Barrow government did not establish a coherent policy on how to deal with the crisis. The successive government then took a defensive strategy of buying an oil field in Barbados which increased Barbados’ production of oil. This led to reduced importation of oil. At one point, Barbados was producing 55% of the oil that it needed. During the oil crisis, the then Minister of Energy, Mr. Clyde Griffith, spoke to the press every day to keep them abreast of what was happening. Barbados had bought the oil field from Mobil. Mobil had bought the oil wells in Barbados from a company called General Crude. The development of oil wells in Barbados was very difficult because of Barbados’ limestone formation.
Therefore, the Barbados government had to get a lot of technical assistance from Canada. For example, assistance at the time came from a company called Petro Canada. The Barbados government sent people to Canada to be trained. The Barbados government also had to spend a lot of money to bring in drilling equipment. The Canadian government leant the Barbados government money to do this. They also provided training to Barbadians. When the oil field was bought from Mobil, it was renamed by Mr. Clyde Griffith as the Barbados National
Oil Company. Engineers were brought in from Trinidad. A lot of money was invested in drilling because Barbados’ recovery cost was very high. Barbados as a result of the oil crisis was then forced to import a cocktail from Venezuela. Therefore, a lot of Barbados’ petroleum-based products came out of Venezuela. These petroleum products were called cocktails.
The oil crisis was a very critical period in the history of Barbados. The impact also forced the Barbados government to look at alternative sources of energy. Barbados had studies done on ways to generate fuel from garbage. The Canadians had financed this study to convert refuse into electrical power and to look at a way to reduce the use of fuel oil. The Barbados government gave people who installed solar water heaters a thousand dollar tax incentive. This was done to move people away from using electrical driven hot water and use solar hot water. The Canadian government wanted to give the Barbados government concessions to build municipal solid waste plants but no one followed up on it. One plant would have cost about six million dollars.
These were all moves away from petroleum. During this time the United Nations wanted developing countries to start looking at introducing alternate energy sources for example, the sun and the wind. The Barbados government did not decide to look at the development of windmills to generate electricity again. The Barbados government purchased a windmill from a company in 1985 which is in Lamburts in St. Lucy, and which, according to Mr. Clyde Griffith, should never be in Barbados. The windmill was purchased from a company called Howden in Scotland. The British government advised former Minister, Clyde Griffith, that the Barbados government should not buy the windmill.
The British Aerospace in London had done extensive research of windmills. A grant was given to the Barbados government in 1980 of 1.8 million dollars to look at a study on whether or not Barbados could use wind energy. The study proved that Barbados could use wind energy for generating power. British Aerospace had agreed to putting up a windmill plant in Barbados, to assemble windmills and train Barbadians to maintain the windmills. However, this did not materialize. Whatever inputs that Barbados used that were petroleum driven, for example water and electricity, the fuel adjustment charge rose and this was passed on to consumers. The Barbados government was able to save 40 million dollars in three years by increasing oil production and lowering their import bill. Minister Clyde Griffith came to parliament with a policy that stated that Barbados need to try to cushion the impact of the international decision process.
The Barbadian Government introduced an energy awareness week to make the citizens excited about saving energy. The oil crisis caused a drain on the government’s revenue and foreign reserves. The members of Oil Producing Exporting Countries (OPEC) decided that they would take part in an embargo. They were Saudi Arabia, Iraq, Iran, and Kuwait. This embargo, as has been seen throughout the paper, was a very serious issue, but not as serious as everyone thought it was. This panic to buy oil and gasoline and to come up with alternative forms of energy was the real problem that was faced by many countries.
Even though much of the information presented here dealt with the United States, Barbados actually suffered more due to the fact that it was not as large and powerful as the United States and many other countries. Barbados does not have oil reserves that it can draw on and therefore it must always rely on others. This is generally not a problem but can become very upsetting when problems like the oil crisis hit, because the oil that is needed for Barbados must come from countries that often must get their oil from the Middle East. Even though there has not been that much written about how the 1973 oil crisis affected Barbados, there should be more information on this topic.
The bottom line is that the 1973 oil crisis affected everyone and smaller nations or countries should not be overlooked simply because they were not as significant as the larger ones. Everyone struggled during that time, either from things that were real or imagined and because of this many new ideas were created. Today, however, there is still a huge reliance on oil as a source of fuel, which could lead to problems in the future.
Abdalla, Hussein (1979). The Market Structure for International Oil with Special Reference to OPEC. New York: Arno Press.
Abraham, Kurt (2000). If OPEC members are cheating, why have oil prices been rising? World Oil 221 (4) April.
Adelman, M.A. (1982a). OPEC as a Cartel. In J. Griffin and D. Teece et al., eds., OPEC Behavior and World Oil Prices. London: Allen and Unwin.
Adelman, M.A. (1982b). Coping with Supply Insecurity. The Energy Journal 3(2): 1-17.
Adelman, M.A. (1985). An Unstable World Oil Market. The Energy Journal 6(1): 17-22.
Adelman, M.A. (2004). The real oil problem: behind the myths of an oil crisis and an oil weapon is a very real danger posed by a clumsy and shortsighted cartel. Regulation Miller, W.H. (1998). Another oil crisis? Industry Week.
OPEC oil crisis. (1991). The Reader’s Companion to American History.
Reid, K. (2004). 1973 oil crisis: the embargo shows both OPEC power and weakness. National Petroleum News.
Subroto. Dr. (1994). 1973-1993:P what are the lessons the oil industry has learnt? Economic Review.
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