Oil Embargo, 1973–1974
During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. Arab OPEC members also extended the embargo to other countries that supported Israel including the Netherlands, Portugal, and South Africa. The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production. Several years of negotiations between oil-producing nations and oil companies had already destabilized a decades-old pricing system, which exacerbated the embargo’s effects.
Cars wait in long lines during the gas shortage. (Library of Congress Prints and Photographs Division, U.S. News & World Report Magazine Photograph Collection, Warren K. Leffler)
The 1973 Oil Embargo acutely strained a U.S. economy that had grown increasingly dependent on foreign oil. The efforts of President Richard M. Nixon’s administration to end the embargo signaled a complex shift in the global financial balance of power to oil-producing states and triggered a slew of U.S. attempts to address the foreign policy challenges emanating from long-term dependence on foreign oil.
By 1973, OPEC had demanded that foreign oil corporations increase prices and cede greater shares of revenue to their local subsidiaries. In April, the Nixon administration announced a new energy strategy to boost domestic production to reduce U.S. vulnerability to oil imports and ease the strain of nationwide fuel shortages. That vulnerability would become overtly clear in the fall of that year.
The onset of the embargo contributed to an upward spiral in oil prices with global implications. The price of oil per barrel first doubled, then quadrupled, imposing skyrocketing costs on consumers and structural challenges to the stability of whole national economies. Since the embargo coincided with a devaluation of the dollar, a global recession seemed imminent. U.S. allies in Europe and Japan had stockpiled oil supplies, and thereby secured for themselves a short-term cushion, but the long-term possibility of high oil prices and recession precipitated a rift within the Atlantic Alliance. European nations and Japan found themselves in the uncomfortable position of needing U.S. assistance to secure energy sources, even as they sought to disassociate themselves from U.S. Middle East policy. The United States, which faced a growing dependence on oil consumption and dwindling domestic reserves, found itself more reliant on imported oil than ever before, having to negotiate an end to the embargo under harsh domestic economic circumstances that served to diminish its international leverage. To complicate matters, the embargo’s organizers linked its end to successful U.S. efforts to bring about peace between Israel and its Arab neighbors.
Partly in response to these developments, on November 7 the Nixon administration announced Project Independence to promote domestic energy independence. It also engaged in intensive diplomatic efforts among its allies, promoting a consumers’ union that would provide strategic depth and a consumers’ cartel to control oil pricing. Both of these efforts were only partially successful.
President Nixon and Secretary of State Henry Kissinger recognized the constraints inherent in peace talks to end the war that were coupled with negotiations with Arab OPEC members to end the embargo and increase production. But they also recognized the linkage between the issues in the minds of Arab leaders. The Nixon administration began parallel negotiations with key oil producers to end the embargo, and with Egypt, Syria, and Israel to arrange an Israeli pullout from the Sinai and the Golan Heights. Initial discussions between Kissinger and Arab leaders began in November 1973 and culminated with the First Egyptian-Israeli Disengagement Agreement on January 18, 1974. Though a finalized peace deal failed to materialize, the prospect of a negotiated end to hostilities between Israel and Syria proved sufficient to convince the relevant parties to lift the embargo in March 1974.
The embargo laid bare one of the foremost challenges confronting U.S. policy in the Middle East, that of balancing the contradictory demands of unflinching support for Israel and the preservation of close ties to the Arab oil-producing monarchies. The strains on U.S. bilateral relations with Saudi Arabia revealed the difficulty of reconciling those demands. The U.S. response to the events of 1973–1974 also clarified the need to reconcile U.S. support for Israel to counterbalance Soviet influence in the Arab world with both foreign and domestic economic policies.
The full impact of the embargo, including high inflation and stagnation in oil importers, resulted from a complex set of factors beyond the proximate actions taken by the Arab members of OPEC. The declining leverage of the U.S. and European oil corporations (the “Seven Sisters”) that had hitherto stabilized the global oil market, the erosion of excess capacity of East Texas oil fields, and the recent decision to allow the U.S. dollar to float freely in the international exchange all played a role in exacerbating the crisis. Once the broader impact of these factors set in throughout the United States, it triggered new measures beyond the April and November 1973 efforts that focused on energy conservation and development of domestic energy sources. These measures included the creation of the Strategic Petroleum Reserve, a national 55-mile-per-hour speed limit on U.S. highways, and later, President Gerald R. Ford’s administration’s imposition of fuel economy standards. It also prompted the creation of the International Energy Agency proposed by Kissinger.
The Arab Embargo 50 Years Ago Weaponized Oil to Inflict Economic Trauma — Sound Familiar?
October 11, 2023 | Jim Krane, Mark Finley
Photo by Owen Franken / Corbis via Getty Imagestoggle sidebar
Table of Contents
- Oil’s Global Regime Change
- How the Oil Price Spike Played Out in the West
- 50 Years Later, New Pressures
Author(s)
Jim Krane
Wallace S. Wilson Fellow for Energy Studies | Co-Director, Middle East Energy Roundtable
Mark Finley
Fellow in Energy and Global Oil
Tags
Fifty years ago, a secret deal among Arab governments triggered one of the most traumatic economic crises to afflict the United States and other big oil importers.
Saudi King Faisal and other Arab leaders launched an oil embargo on Oct. 17, 1973, as payback for Washington siding with Israel in its war with neighboring Egypt and Syria.
The oil market hostilities arose from a pact between Faisal and the leaders of Egypt and Syria, whose armies planned surprise drives to retake their territory under Israeli occupation. If the United States intervened to assist Israel, Faisal and other Arab producers agreed to retaliate with the “oil weapon.”
When Washington airlifted in U.S. weapons that helped Israel thwart Arab gains, Faisal and OPEC’s Arab members retaliated. They increased oil prices, banned oil shipments to the United States and cut production by 5% per month.
The ensuing economic and political carnage is legendary. The embargo catalyzed a long period of upheaval in global oil markets and pain at the gasoline pump for Americans and consumers globally. Oil prices quadrupled nearly overnight and remained high for over a decade. Producing countries leveraged the opportunity to reclaim sovereignty over their oil reserves. By 1980, many had completed the process of kicking Western oil companies out of their territories.
Oil’s Global Regime Change
The embargo’s disruptive power was due to two key factors: OPEC’s dominance of world oil supply, and oil’s supremacy in the global energy mix.
Prior to the embargo, oil fueled almost half of total energy consumption in the United States (47.5%) and worldwide (49%). While OPEC countries produced more than half (53%) of global oil, the concessions were operated by Western oil majors.
After the embargo, producer states took over. Control of global oil production passed from Western oil giants like Shell and Exxon to newly formed national oil companies.
Saudi oil minister Ahmed Zaki Yamani, second from left at the table, negotiated a deal that shifted control of Arabian American Oil Company from Exxon, Chevron, Mobil and Texaco to Saudi Arabia. Saudi Aramco is now the world’s largest oil producing company. AFP via Getty Images
As a result, a torrent of cash from oil sales poured into Middle Eastern countries where rudimentary services like electricity were still being built out. Oil revenues in Saudi Arabia jumped fortyfold between 1965 and 1975, from US$655 million to $26.7 billion. These countries also amassed new geopolitical power.
How the Oil Price Spike Played Out in the West
In the West, price increases wreaked havoc on economies and transport systems that were far less efficient than today. Inflation soon boiled over into “stagflation,” a combination of economic stagnation and high inflation. Misguided policies, including gasoline price controls and rationing, exacerbated shortages, creating long lines at service stations and emboldening gasoline thieves.
America saw a pell-mell downsizing of gas-guzzling vehicles and a simultaneous ramping up of imports of fuel-efficient Japanese cars. Drivers obsessed over miles per gallon, and the U.S. government imposed corporate average fuel economy, or CAFE, standards, aimed at saving fuel by requiring automakers to sell more fuel-efficient cars.
Western oil companies, kicked out of the Middle East and other oil regions, pivoted to more difficult terrain: the offshore Gulf of Mexico and North Sea, and the Arctic regions of northern Alaska.
The oil crisis rattled the U.S. One result was a shift toward more fuel-efficient vehicles. Archive Photos/Getty Images
As scholars of energy policy, we have long studied the embargo’s spillover effects on the global economy and political systems. These outcomes are a central theme in Jim Krane’s 2019 book “Energy Kingdoms.” On the embargo’s 50th anniversary, Oct. 17, 2023, King Faisal’s son, the former Saudi Ambassador to Washington Prince Turki Al Faisal, is joining us for a conference at Rice University’s Baker Institute to discuss the still-valid lessons of the Arab oil embargo.
50 Years Later, New Pressures
Fifty years on, markets have changed. But oil continues to be the world’s dominant energy source.
On one hand, crude oil use has grown dramatically. Global supply has risen from less than 60 million barrels per day in 1973 to nearly 94 million barrels per day in 2022. Motor fuel prices are still a critical input to inflation; we calculate that the increase in gasoline prices in 2022 cost the average American householdroughly $1,000.
On the other hand, OPEC’s importance – and oil’s share of the global energy mix – has declined. OPEC’s 13 members account for just 36% of global oil production today. The high oil prices caused by the 1973 embargo created incentives for oil drillers to diversify toward new sources of oil and develop substitute fuels to replace oil.
Within 15 years of the embargo, production outside OPEC increased by a massive 14 million barrels per day. Oil from Alaska and the Gulf of Mexico helped stabilize U.S. production. Later, the shale revolution turned the United States into the world’s largest producer and a net exporter of oil, capping a 50-year quest.
The world has also become much more efficient, reducing the amount of oil needed to maintain the same activity. Global per-capita oil use per dollar of gross domestic product has fallen by a massive 60% since 1973, our calculations show.
But, as in 1973, energy security concerns are back at the top of national agendas.
Russia’s 2022 invasion of Ukraine reprised the risks of energy “weaponization.” Europe, in particular, has been hurt by overdependence on Russian natural gas and has raced to shift its energy sources. The Israel-Hamas war that began on Oct. 8, 2023, has not yet ignited retaliatory responses from Arab governments, and the initial impact on oil has been minimal, but geopolitical effects from such a large event could still roil markets.
Energy security itself is also being altered. The transition to renewable energy sources like wind and solar insulates consumers from most supply chain risks. Electric vehicles likewise protect owners from swinging oil prices. So, while crucial materials can still be manipulated by governments, shortages and price spikes mainly affect component manufacturers and their investors. If supplies are bottlenecked long enough, the energy transition could be delayed.
The U.S. still imports more than 8 million barrels of petroleum per day, but since 2020, it has exported more than it has imported. More than one-third of U.S. crude oil exports go through the Houston Ship Channel. Carol M. Highsmith/U.S. State Department Bureau of Global Public Affairs, CC BY-NC
The U.S. still imports more than 8 million barrels of petroleum per day, but since 2020, it has exported more than it has imported. More than one-third of U.S. crude oil exports go through the Houston Ship Channel.
Like the embargo 50 years ago, today’s crises have rendered the future of energy massively uncertain. Changes in the global energy mix, especially the rapid growth of electric vehicles, could weaken the importance of oil and the cartel that oversees it.
As former Saudi oil minister Ahmed Zaki Yamani was reported to have said a quarter-century ago: “The Stone Age did not end for lack of stone, and the oil age will end long before the world runs out of oil.”
This post originally appeared in The Conversation on Oct. 11, 2023.
1973 oil crisis
From Wikipedia, the free encyclopedia
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In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) announced that it was implementing a total oil embargo against countries that had supported Israel at any point during the 1973 Yom Kippur War, which began after Egypt and Syria launched a large-scale surprise attack in an ultimately unsuccessful attempt to recover the territories that they had lost to Israel during the 1967 Six-Day War. In an effort that was led by Faisal of Saudi Arabia,[1] the initial countries that OAPEC targeted were Canada, Japan, the Netherlands, the United Kingdom, and the United States. This list was later expanded to include Portugal, Rhodesia, and South Africa. In March 1974, OAPEC lifted the embargo,[2] but the price of oil had risen by nearly 300%: from US$3 per barrel ($19/m3) to nearly US$12 per barrel ($75/m3) globally. Prices in the United States were significantly higher than the global average. After it was implemented, the embargo caused an oil crisis, or “shock”, with many short- and long-term effects on the global economy as well as on global politics.[3] The 1973 embargo later came to be referred to as the “first oil shock” vis-à-vis the “second oil shock” that was the 1979 oil crisis, brought upon by the Iranian Revolution.
Background
Arab-Israeli conflict
Ever since Israel declared independence in 1948 there was conflict between Arabs and Israelis in the Middle East, including several wars. The Suez Crisis, also known as the Second Arab–Israeli war, was sparked by Israel’s southern port of Eilat being blocked by Egypt, which also nationalized the Suez Canal belonging to French and British investors. As a result of the war, the Suez Canal was closed for several months between 1956 and 1957.[4]
The Six-Day War of 1967 included an Israeli invasion of the Egyptian Sinai Peninsula, which resulted in Egypt closing the Suez Canal for eight years.[5] Following the Yom Kippur War, the canal was cleared in 1974 and opened again in 1975.[6][7] OAPEC countries cut production of oil and placed an embargo on oil exports to the United States after Richard Nixon requested $2.2 billion to support Israel’s war effort. Nevertheless, the embargo lasted only until January 1974, though the price of oil remained high afterwards.[8]
source and more: https://en.wikipedia.org/wiki/1973_oil_crisis
Categories: Arab World, Israel, Middle East, Oil crisis, Saudi Arabia