American production decline

By 1969, American domestic output of oil could not keep pace with increasing demand. In 1925,
oil had accounted for one-fifth of American energy use; by the time World War II started one-
third of America's energy needs was met by oil. Oil started to replace coal as a preferred fuel
source. It was used to heat homes and generate electricity, and it was the only fuel that could be
used for air transport. In 1920, American oilfields accounted for nearly two-thirds of global oil
production. In 1945, US production had increased to just over two-thirds. The US had been able
to meet its own energy needs independently in the decade between 1945 and 1955, but was
importing 350 million barrels per year by the late 1950s, mostly from Venezuela and Canada. In
1973, US production had declined to 16.5% of global output.[4][5]

The costs of producing oil in the Middle East were low enough that companies could turn a
profit despite the US tariff on oil imports. This hurt domestic oil producers in places like Texas
and Oklahoma who had been selling oil at tariff-supported prices and now had to compete with
cheap oil from the Persian Gulf region. The first American firms to take advantage of low
production costs in the Middle East were Getty, Standard Oil of Indiana, Continental Oil and
Atlantic Richfield. In 1959, President Dwight D. Eisenhower said "As long as Middle Eastern oil
continues to be as cheap as it is, there is probably little we can do to reduce the dependence of
Western Europe on the Middle East." Eventually, at the behest of independent American
producers, Eisenhower imposed quotas on foreign oil that would stay in place between 1959 and
1973.[5][6] Critics called it the "drain America first" policy. Some scholars believe the policy
contributed to the decline of domestic US oil production in the early 1970s.[7] While US oil
production declined, domestic demand was increasing at the same time, leading to inflation and a
steadily rising consumer price index between 1964 and 1970.[8]

US surplus production capacity had declined from 4 million bpd to around 1 million bpd
between 1963 and 1970, increasing American dependence on foreign oil imports.[8] When
Richard Nixon took office in 1969, he assigned George Shultz to head a committee to review the
Eisenhower-era quota program. Shultz's committee recommended that the quotas be abolished
and replaced with tariffs but Nixon decided to keep the quotas due to vigorous political
opposition.[9] Nixon imposed a price ceiling on oil in 1971 as demand for oil was increasing and
production was declining, which increased dependence on foreign oil imports as consumption
was bolstered by low prices.[8] In 1973, Nixon announced the end of the quota system. Between
1970 and 1973 US imports of crude oil had nearly doubled, reaching 6.2 million barrels per day
in 1973. Until 1973, an abundance of oil supply had kept the market price of oil lower than the
posted price.[9]