Could it happen again?
In 1973, three crises came together to impel what became known as the Arab Oil Embargo. One crisis was political, centering on Richard Nixon, the president of the United States; one was geopolitical, focused on actions taken in the context of the Yom Kippur War; and the last had to do with the rising dominance of the oil producing countries over the previously all-powerful oil companies.
In the context of the current Israel-Hamas War, the World Bank recently warned that a major escalation of the war — one that spilled over into a broader Middle East conflict — “could send oil prices surging as much as 75 percent.”
Is this really something we need to worry about? Will the war actually intensify and expand? Can oil really be used as a weapon once again or are we past that now?
Recently Daniel Yergin, author of The Prize, gave a talk at Columbia University titled The 1973 Energy Crisis: The Oil Embargo and the New Age of Energy. You can access his presentation here.
Yergin provides a great deal of historical context in his presentation, so before we try to make any predictions about what might happen in the rest of 2023 and beyond, we should look at history too.If you’re interested in doing a deep dive into oil, you might want to check our post on After the Cold War: 18 Good Books About Oil. Click here to access.
A selective timeline follows drawn on information found in The Prize and in Yergin’s discussion at Columbia.
1913: Persia is the only significant Middle Eastern oil producer other than Russia, but even Persia’s output was insignificant. At this time, the United States produces 140 times more oil than did Persia.” (A Peace to End All Peace, David Fromkin, p.29.)
Post World War I: Oil is recognized as a strategic commodity.
World War II era: Six out of every seven barrels of oil come from the United States.
July 1956: Egyptian president Gamal Abdel Nasser nationalizes the Suez Canal. At the time, the waterway controls two-thirds of the oil used by Europe.
October 1956: A crisis breaks out when Israel pushes into Egypt.
June 1967: In reaction to the June 1967 Six Day war between Israel and its Arab neighbors, Saudi Arabia, Kuwait, Iraq, Libya, and Algeria tried to use oil as a weapon. They ban oil shipments to Israel’s supporters – the United States, United Kingdom, and West Germany. The flow of oil around the world is completely reorganized in response, with oil from non-Arab countries diverted to the embargoed countries in Europe. The oil weapon misfires because the United States has spare capacity.
1967-1973: Over this half decade the situation changes. Oil facilitates the ‘economic miracle’ in Europe and Japan. Worldwide, demand doubles.
1969-1970: Winter is the coldest in 30 years, and fuel shortages begin to crop up. Both oil and natural gas are in short supply.
1970: Supply problems are becoming chronic and the phrase “energy crisis” emerges as part of the American political vocabulary.
1970-1973: Prices for crude oil double.
1971: Production limits are removed in the US, allowing production at 100% capacity. This still doesn’t meet demand.
1973: On the supply side, the oil producing countries gain dominance over the oil companies. They are mobilizing to increase their share of revenues. At the same time, US consumption is rising.
1973: Oil has become the lifeblood of the world’s industrial economies. The United States is importing one-third of its requirement, and it’s also importing natural gas.
1973: America is dependent on Gulf oil.
April 1973: Foreign Affairs publishes an article by James Atkins, the director of a recent oil study for the White House. Titled “The Oil Crisis: This Time the Wolf Is Here,” the piece was widely read but controversial. Atkins’ views aren’t accepted.
May 1973: King Faisal of Saudi Arabia meets with Aramco executives, declaring that he is a ‘staunch friend’ of the United States. Nevertheless, he said:
It is absolutely mandatory that the United States do something to change the direction that events are taking in the Middle East today . . . he emphasizes that Zionism and along with it the Communists are on the verge of having American interests thrown out of the area . . .
A simple disavowal of ‘”Israeli policies and actions” would “go a long way toward overcoming the current anti-American feeling,” the Aramco president says in response, adding there was “extreme urgency” to the King’s remarks.”
Texaco, Chevron, and Mobil publicly call for a change in American Middle East policy.
June 1973: A new strand emerges in Japan’s foreign policy. It’s called “resource diplomacy,” and its aim is to reorient Japanese foreign policy in a way that guarantees access to oil.
August 1973: The trade journal Petroleum Intelligence Weekly reports on “near-panic” buying by US and European independent refiners. Result: oil prices sky-rocket. The twenty year surplus is over.
Egypt’s Sadat makes an unannounced trip to Riyadh to see King Faisal. He tells the king he is considering going to war against Egypt.
September 1973: Talk about the security of supply and an impending energy crisis is becoming widespread. The Middle East Economic Survey headlines: “The Oil Scene: Pressure All Around.”
Major oil companies and the Nixon Administration are worried that Libya might shut down all production by the majors.
Both government officials and businessmen acknowledge the rapid shift of power away from the oil companies toward the oil exporting countries.
Mid-September 1973: OPEC countries call for a new deal with oil companies.
Late September 1973: America’s National Security Council reports a sudden intensification of military signals that suggest war might be imminent in the Middle East. The warning is ignored.
October 5, 1973: The Soviets suddenly airlift dependents out of Syria and Egypt. The significance of the move is disregarded.
A CIA analysis for the White House that same day reports: “The military preparations that have occurred do not indicate that any party intends to initiate hostilities.”
The latest Israeli estimate for the White House (also delivered on October 5) notes: “We consider the opening of military operations against Israel by the two armies [of Egypt and Syria] as of low probability.”
The Watch Committee, representing the entire American intelligence community, reviews developments. “War, it says, is unlikely.”
October 6, 1973: The October War begins on Yom Kippur, the holiest of Jewish holidays, when Egypt and Syria launch surprise attacks.
As war rages, the oil exporters are demanding a 100% increase in the per barrel price of oil. Their demand is rejected.
Once war breaks out, America’s number one objective quickly becomes arranging a truce, to be followed by a diplomatic solution.
October 9, 1973: The US realizes that Israeli forces are in deep trouble, desperately short of supplies.
Vice-President Spiro Agnew – charged with tax evasion – resigns. He complains that the Internal Revenue Service is trying to find out “how much he pays for his neckties.”
October 10, 1973: The Soviet Union begins a massive resupply of supplies, first to Syria, then to Egypt.
The Soviets also put their airborne troops on alert and encourage other Arab states to join in the battle.
October 11, 1973: The US decides that it must resupply Israel.
October 12, 1973: Four Aramco companies (Exon, Mobil, Texaco, and Standard of California) send a letter to President Nixon saying that the 100% increase in the posted price of oil that OPEC is demanding is unacceptable. But ‘some kind of price increase is warranted’ since there is essentially no spare capacity in the “Free World.”
That same day Nixon receives a message from Golda Meir, Israel’s Premier, warning that her nation’s survival is now precarious.
Nixon introduces Gerald Ford as his choice to replace Spiro Agnew as vice-president.
October 13, 1973: The US agrees to use Air Force planes to airlift supplies to Israel. Caveat: the flights must land and depart Israel under cover of darkness.
October 14, 1973: Because of unfavorable weather conditions, the planes land in Israel in broad daylight. undermining the US position as honest broker. The Arab countries now perceive the United States to be an active ally of Israel.
October 15, 1973: Israel launches the first oin a series of successful counter offensives against the Egyptians.
October 16, 1973: Oil countries, meeting in Kuwait City, announce their decision to raise the posted price of oil by 70%.
King Faisal of Saudi Arabia sends a letter to Nixon warning that if American support for Israel continues, Saudi-American relations would become only lukewarm.”
October 16-17, 1973: In meetings, an Iraqi delegate calls on the Arab world to focus on the US. He wants “to nationalize all American business in the Arab world, to withdraw all Arab funds from American banks, and to institute a total oil embargo against the United States and other countries friendly to Israel.” His proposal is dismissed, and the Iraqi delegation walks out.
The Arab ministers agree to an embargo, cutting production 5% from the September level, and agreeing to keep cutting by 5% monthly until their objectives are met. Some countries decide to cut by 10%. Previous levels will be maintained to ‘friendly’ states.
Per the Middle East Economic Survey: “Suffice it to say, however, that the new Arab-Israeli war probably stiffened the resolve of the Arab price negotiators.”
October 17, 1973: President Nixon states: “No one is more keenly aware of the stakes . . .”
October 18, 1973: In a cabinet meeting, referring to the earlier airlifts of supplies to Israel, Nixon notes: “we had to do something to keep the Soviets from tilting the military balance against Israel.”
October 19, 1973: Nixon proposes a $2.2 billion military aid package for Israel.
Libya announces it is embargoing all oil shipments to the US.
October 20, 1973: Kissinger leaves for Moscow to try to devise a cease-fire formula.
Saudi Arabia now cuts off all oil shipments to the US.
Despite previous warning signs, the embargo comes as a complete surprise to oil company executives.
In what becomes known as the Saturday Night Massacre, Nixon fires the special prosecutor (Archibald Cox) who has been appointed to investigate the Watergate scandal, and who has subpoenaed the President’s secret tapes.
Nixon becomes consumed by his personal crisis; control over American policy is now in the hands of Henry Kissinger (both Secretary of State and National Security Adviser) who is still in Moscow where he is completing a cease-fire plan with the Russians. The plan’s implementation, however, remains problematic.
Late October: Soviet leader Leonid Brezhnev demands that a joint American-Soviet force move in to separate the warring sides. Soviet airborne troops are on alert, and Soviet ships in the Mediterranean seem to be belligerent. Moreover, neutron emissions from (possible) nuclear weapons are detected on a Soviet freighter in the Mediterranean. You can read more about the standoff here.
While Nixon remains indisposed, US national security officials led by Kissinger meet and raise the status of American forces to DefCon 3.
October 25, 1973: American military forces are on nuclear alert around the world.
October 26, 1973: The fighting in the Middle East comes to a halt and the cease-fire goes into effect. The superpowers pull back from their alerts.
The Arabs continue to use the oil weapon. The oil embargo remains in effect.
Today’s World: Can The Oil Weapon Be Used Again
Are there parallels to Yergin’s 3 crises in today’s world? On the surface it might seem that there are.
The political situation in the United States seems unstable, marked by polarization and dissent. Congress seems unable or unwilling to address issues of importance, and President Biden (while certainly functional) suffers from very low approval ratings. While war rages in the Middle East, the American public bickers with low confidence in the nation’s leaders and in government institutions.
To add to these complications, world oil demand today – November 2023 – is twice what it was in 1973.
Nevertheless, unlike in 1973, the United States is currently the world’s largest producer of oil. And our energy sources are now much more diversified. The US has a Strategic Petroleum Reserve whose sheer size (authorized storage capacity of 714 million barrels) makes it a significant deterrent to oil import cutoffs and a key tool in foreign policy. Also, Saudi Arabia, the “central bank of oil,” holds spare capacity, although consumer access would come at great expense.
The World Bank’s new study suggests that
. . .such a crisis could overlap with energy market disruptions already caused by Russia’s war in Ukraine, exacerbating the economic consequences. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades . . .
Yergin’s take? In our current decade, critical minerals are much more important than oil.
So what do you think? Your thoughts are welcome in the comments.
PS: If you’re interested in oil you’ll want to read today’s New York Times article titled Why Are Oil Prices Falling While War Rages in the Middle East.
Featured Photo by Lisa Reynolds Wolfe of Ed Ruscha’s Standard Oil painting at MOMA
The Prize by Daniel Yergin