In 1960 oil-exporting countries formed a cartel called OPEC (the Organization of the Petroleum Exporting Countries) in order to coordinate production and raise prices. In 1973 OPEC countries agreed to an embargo, withholding oil sales to the United States and western Europe in response to U.S. support for Israel in the Yom Kippur War. As a result of the embargo, the price of oil increased almost overnight from $3 to $12 per barrel, quadrupling energy costs.

OPEC’s ability to disrupt the world economy, and the U.S. government’s powerlessness to reverse the disruption, suggested a new world order. Brazil’s military leaders, for example, distanced themselves from their traditional alliance with the United States and built relations with OPEC countries.

Oil prices remained high and peaked again in the second oil shock of 1979 as a result of the Iranian revolution, which ousted the secular government and brought religious leaders to power. In the United States soaring energy costs sapped economic growth and also triggered inflation, making prices rise at a time when earning power was diminished, a combination dubbed stagflation. Europe and Japan, heavily dependent on oil imports, resorted to bicycle and mass transit use to reduce their energy needs, as well as intense development of nuclear power generation.

In the decade after the first oil shock, OPEC countries such as Saudi Arabia deposited their huge profits in large international banks. This money, which began as oil profits and circulated the world as bank loans, was known as petrodollars. In this economic cycle, the higher prices that consumers around the world paid for fuel generated profits for oil exporters that they invested in large banks. In turn, these banks loaned this capital out to foreign governments. Many industrializing countries faced both high energy costs and heavy debts amassed through petrodollar loans.

In the United States, as stagflation and the 1979 second oil shock drove rising inflation, the Federal Reserve Bank raised interest rates. Increased interest rates in the United States made it more expensive to borrow money, which slowed economic activity and led to an economic recession. The United States was not the only country to experience this recession: countries that exported goods to the United States faced reduced demand for their goods, and countries that borrowed from U.S. banks found that the interest on their debts increased as well. In industrializing nations the rapid increase in interest on their heavy debts became a crippling burden, triggering a global crisis. Debtor nations became dependent on U.S. assistance to restructure unsustainable loans; the U.S. government was able to impose neoliberal free-market reforms for the first time.

Beginning in the 1980s neoliberal policies increasingly shaped the world economy. Neoliberalism promoted free-market policies and the free circulation of capital across national borders. Debtor countries needed to continue to borrow in order to pay the interest on the debts they held, and their ability to secure loans now depended on their adherence to a set of liberal principles known as the Washington Consensus: policies that restricted public spending, lowered import barriers, privatized state enterprises, and deregulated markets.

The forces unleashed by the Yom Kippur War and the OPEC oil embargo of 1973 at first tipped the scale in favor of less industrialized nations, but by the 1980s the scale had swung back as debt and liberalization shifted power back to the most economically powerful countries, in particular the United States. The experiences of Mexico and Nigeria reflect the effects of the boom-and-bust cycle ignited by the oil embargo.