Before there was an OPEC (the Organization of Petroleum Exporting Countries), the great oil companies of the West ruled the roost. Oil is the lifeblood of the industrialized nations. It is used in planes, cars, tanks, skyscrapers, industrial plant, fertilizer, drugs and synthetics. Yet back before the days of OPEC the great oil companies often retained 65% or more of the revenue from a product that was produced on someone else's property. In 1960, many of the oil producing nations, from both the Middle East and elsewhere (like Indonesia and Venezuela) formed a cartel to protect their interests.

The goal of OPEC was to present a common front in negotiations with the giant oil companies, which themselves worked closely together. OPEC set the stage for a new process in which the producer nations would eventually take over the functions of the companies, at least in production, and retain much more of the revenues. But OPEC really had little impact from its founding in 1960 until 1973. Then all hell broke loose.

In 1973 the U.S. and the Western world were in the midst of an inflationary spiral. The world had become highly vulnerable to commodity cartels. Twenty years of prosperity and accelerating population growth had created heavy demand for raw materials. In the U.S., consumer prices were rising at an 8.5% clip. Inflation rates in other nations were often much higher. The demand for Middle Eastern oil had been increasing throughout the industrialized world and the needs of these countries grew far faster than production. OPEC was growing stronger and more determined to increase their share of the profits.

President Nixon, as part of his ill-fated price control program, had slapped controls on oil in March of 1973. The U.S., which had been self sufficient in energy as recently as 1950, was now importing some 35% of its energy needs. U.S. petroleum reserves were nearly gone. Governments, corporations and individuals were entirely unprepared for what would happen next.

On October 6, 1973, the Jewish holy day of Yom Kippur, Egyptian forces attacked Israel from across the Suez Canal while at the same time Syrian troops were flooding the Golan Heights in a total surprise offensive. After early losses, Israeli counterattacks quickly pushed into Syrian territory in the north while troops outflanked the Egyptian army in the south. Israel, with help from the U.S., succeeded in reversing the Arab gains and a cease fire was concluded in November.

On October 17, OPEC struck back against the West by imposing an oil embargo on the U.S. and increasing prices by 70% to America's Western European allies. Overnight, the price of a barrel of oil to these nations rose from $3 to $5.11. [In January, 1974, they raised it further to $11.65]. The U.S. and the Netherlands, in particular, were singled out for their support of Israel in the war.

When OPEC announced the sharp price rise, the shock waves were immediate. Industrial democracies, accustomed to uninterrupted sources of cheap, imported oil, were suddenly at the mercy of a "modern Arab," standing up to American oil companies that had once held their nations in a vise grip. Many of these "new" Arabs were Harvard educated and familiar with the ways of the West. And to many Americans it was impossible to understand how their standard of living was now being held hostage to obscure border clashes in strange parts of the world.

The embargo in the U.S. came at a time when 85% of American workers drove to their places of employment each day. Suddenly, President Nixon had to set the nation on a course of voluntary rationing. He called upon homeowners to turn down their thermostats and for companies to trim work hours. Gas stations were asked to hold their sales to a max of ten gallons per customer.

In the month of November, 1973, Nixon proposed an extension of Daylight Savings Time and a total ban on the sale of gasoline on Sunday's. [Both passed later by Congress]. But the biggest legislative initiative was the approval by Congress on November 13 of a trans-Alaskan oil pipeline, designed to supply 2,000,000 barrels of oil a day. [This was completed in 1977].

A severe recession hit much of the Western world, including the U.S. And as gasoline lines snaked their way around city blocks and tempers flared (the price at the pump had risen from 30 cents a gallon to about $1.20 at the height of the crisis), conspiracy theories abounded. The rumor with the widest circulation had the whole crisis as being contrived by the major oil importers who were supposedly secretly raking in the profits.

And how did Wall Street respond? Well, as you might imagine shares in oil stocks performed well as profits soared, but the rest of the market swooned 15% between 10/17/73 and the end of November [The Dow Jones fell from 962 to 822]. This ended up being the middle of the great Bear Market that would see the Dow Jones go from its 1/11/73 high of 1051 to 577 by 12/6/74, a whopping 45% over nearly two years.

As for the embargo, the Arabs lifted it against the U.S. on March 18, 1974 [The Dow stood at 874].

Next week, the story after the embargo was lifted. Did we learn anything?

Sources:
"The Century," by Peter Jennings and Todd Brewster;
"It Was a Very Good Year," by Martin Fridson;
"The Great Wave," by David Hackett Fischer;
"A History of the Arab Peoples" by Albert Hourani.

Brian Trumbore