|The Arab Oil Embargo of 1973-74
With the recent turmoil in the Middle East, there has been increased talk of the possibility for an Arab oil embargo against the U.S. and other supporters of Israel. While for various reasons I don't currently believe this will come to pass, it is a good time to take another look at the embargo of 1973-74. Following is a piece I first did back on July, 2000 in this spot. I have added a few minor points, otherwise, it is as originally written.
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, 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. Then in 1960, many of the oil producing nations, from both the Middle East and elsewhere, formed a cartel to protect their interests.
[Currently, OPEC is comprised of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Large non-OPEC producers such as Mexico, Norway and Russia sometimes go along with the cartel position of the day.]
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, as 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, while 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 it was determined to increase its share of the profits.
President Nixon, as part of his ill-fated price control
program, had slapped controls on oil in March 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 surprise offensive. After early losses, Israeli counterattacks quickly pushed into Syrian territory in the north, as 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. But on October 17, 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 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 nationalism,
standing up to American oil companies that had once
held their countries 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 were later approved 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. See any parallels to today's fight over the Arctic National Wildlife Refuge?]
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. New York Harbor was really full of tankers loaded with oil, in no hurry to dock, according to the Oliver Stone types. Sorry, folks, it was just our own stupidity that allowed us to be so used and abused.
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 go from its 1/11/73 high of 1051 to 577 by 12/6/74, a whopping 45% decline over nearly two years.
As for the embargo, the Arabs lifted it against the U.S. on March 18, 1974. The Dow then stood at 874.
"The Century," Peter Jennings and Todd Brewster
"It Was a Very Good Year," Martin Fridson
"The Great Wave," David Hackett Fischer
"A History of the Arab Peoples," Albert Hourani
"One World Divisible," David Reynolds
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