The Arab Oil Embargo: What Happened and Could it Happen Again?

Posted by admin on August 5, 2009 at 10:44 pm

Drivers line up to buy gasoline during the embargo. (image: terraverde.wordpress.com)

by Greg Burt

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It’s been thirty-five years since the gas lines, the 3-hour wait, the five-dollar per vehicle ration. If you were driving a real guzzler in those days, five bucks worth might have gotten you only as far as the next station on the Thruway. It was all long ago, but lately, some people are wondering if an Arab Oil Embargo could happen again. As recently as 2006, then-president Bush warned that if we pulled out of Iraq, that country and others in the region might “use energy as economic blackmail” and “pull millions of barrels of oil off the market, driving prices up to $300 or $400 a barrel.”  Clearly, the implication was that the Arabs are ready, willing and able to do it all over again.

But are they?  There are those who doubt it. In one recent book, Gusher of Lies, Robert Bryce points out that, politically at least, the original embargo was largely a failure and that the oil producing nations — both OPEC members and others — have no good reason to repeat the acts of 1973/74 and couldn’t afford to do it again, even if they wanted to. Let’s look at what happened way back then.

Political tensions in the Middle East, exacerbated by military and economic support from the US and other western nations for Israel, have often been cited as causes for the embargo and the ensuing energy crisis. But the underlying economic forces had been building for some time before that. These included the reordering of world currency and the rise of OPEC.  The Organization of the Petroleum Exporting Countries (OPEC) was created in 1960 as a Third World bulwark against the controlling forces of the major national oil companies—primarily U.S., British and Dutch – operating in the Middle East and elsewhere, who were retaining 65% or more of the revenues. At first OPEC confined its activities to gaining a larger share of those revenues and greater control over the levels of production. But it also gained strength over the next decade and by the early 1970s the western oil conglomerates were facing a unified bloc of  13 producers which included eight middle eastern countries as well as Ecuador, Indonesia, Nigeria, Angola and Venezuela.

In the 1970s, oil was still selling for about three dollars a barrel, having risen less than two percent per year in the previous three decades. During that time the value of the US dollar had been based on gold. Other western currencies were based on the dollar.  But in 1971 the United States went off the Gold Standard, eventually resulting in a sharply devalued dollar. Because oil was priced in dollars, oil producers began receiving less value for the same price. Something had to give. But it took a crisis to set off the eventual chain reaction.

On October 6, 1973, the Jewish holy day of Yom Kippur, Egyptian forces attacked Israel from across the Suez Canal, while Syrian troops flooded the Golan Heights. Thus began the so-called “Yom Kippur War.”  Israel was supported in this war by the US and several other western nations, the Netherlands in particular.  On October 17, the Arab member nations of OPEC struck back against the West by imposing an oil embargo on the U.S., while increasing prices by 70% to America’s Western European allies. Overnight, the price of a barrel of oil rose from $3 to $5.11. The embargo was soon extended to include the Netherlands, which had allowed American planes to use Dutch airfields for supply runs to the Israelis.

The UK and France continued to receive almost uninterrupted supplies, having refused to allow America to use their airfields or give arms or supplies to either side. Other countries faced partial cutbacks. OPEC simultaneously announced an immediate five percent production cut and promised ongoing five percent cuts until their economic and political demands were met.  In anticipation of lower levels of supply, worldwide market forces drove the price of oil up even further until it hit nearly $12 a barrel early the following year.

In 1973, foreign oil accounted for just 35 percent of total U.S usage and not all of that came from OPEC member countries. Even so, it added up to 1.2 million barrels a day. With the onset of the embargo, that number went down to a paltry 19,000 barrels, most of that coming from non-Arab members of OPEC including Iran.  Daily consumption dropped 7 percent by the summer of 1974 and the US suffered its first fuel shortage since World War II.  The retail price of a gallon of gasoline rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974, and New York Stock Exchange shares lost $97 billion in value in six weeks.

Gas station sign limiting purchases during the embargo. (image: 0-60mag.com)

The oil crisis came at a time when 85% of American workers drove to work each day. Gas lines snaked around the block. Commuters and suburban moms invented carpooling. Homeowners were urged to turn down their thermostats and companies to trim work hours. In December of 1973 the national Christmas tree went unlit. The world financial system, already under pressure, was set on a path of recessions and high inflation as oil prices continued to rise.

The embargo was lifted in March 1974 after negotiations at the Washington Conference, but the effects lingered throughout the 1970s. The price of energy continued to increase amid the weakening competitive position of the dollar in world markets and inflation soared.

Over the long term, the oil embargo had some good effects. It changed attitudes in the West towards increased exploration, energy conservation, and more restrictive monetary policy to better fight inflation. A national speed limit of 55 miles per hour was imposed to help reduce gas consumption, with a side-benefit of fewer highway fatalities, and year-round Daylight Saving Time was implemented. In 1977, the Department of Energy was created, leading to the creation of the United States’ Strategic Petroleum Reserve and the National Energy Act of 1978. The crisis also gave birth to energy awareness, with a call for individuals and businesses to conserve energy with the memorable campaign by the Advertising Council using the tag line “Don’t Be Fuelish.”. There was greater interest in renewable energy, especially wood fuel and more energetic research in solar power and wind power. It also led to greater pressure to exploit North American oil sources, and increased the West’s dependence on coal and nuclear power.

For the Arab nations, the results of the embargo and production cuts were a mixed bag. Although they never won their political demands from Israel, they grew enormously wealthy from the higher price of oil. That wealth, to some extent, though, has been their undoing.  The Institute for the Analysis of Global Security says “OPEC countries based their economies on oil products, failing to use their wealth to diversify their economies, build a strong industrial base, and improve the standard of living of their populations. In Iran, the infusion of petrodollars brought the Shah to indulge in a fantasy of imperial grandeur and lose touch with his people until he was overthrown by the mullahs. In Iraq, oil money allowed Saddam Hussein to build the world’s fifth largest military which he kept hurling against his neighbors every few years. In Saudi Arabia the oil boom fueled corruption, productivity loss and social discontent. The kingdom per capita GDP dropped in just two decades from $28,000 twenty years ago to below $7,000 today.”

Elsewhere, higher oil prices were having another unforeseen effect. According to Palestinefacts.org, “At the same time, however, the much higher prices for crude oil stimulated development activity in every country that had any potential for oil fields. It took years, but ultimately old fields were expanded and new fields were discovered, wells were drilled and pipe lines built to ports. The global supply of crude oil was dramatically increased, brought forth by the higher prices, as any first year economics student could have predicted. This resulted in a still-growing glut and the Middle East, while still quite important, is no longer the dominant world supplier of oil. The collapse of the oil cartel in the 1980s, the transformation in the global energy markets, and the political disunity in the Arab world have made the notion of the “Arab oil weapon” a distant memory.”

But, is it? Jay Hakes, author of the book, A Declaration of Energy Independence, writes in an article entitled “Thirty Five Years After the Arab Oil Embargo,” “OPEC limitations on production created a persistent ‘sellers’ market’ in oil until its members overplayed their hand late in 1980.  They ratcheted up prices yet again in the face of rising production in Alaska, Mexico, and the North Sea and falling consumption in the U.S., Europe, and Japan. For a long period (roughly from 1982 to 1998), a buyers’ market prevailed in international petroleum, and OPEC’s control almost disappeared.