The Oil Crises Of The 1970s
By Paul Homewood
Oil companies and other fossil fuel producers have been coming under increasing attack recently, whether subpoenas from New York Attorney General Eric Schneiderman, or stranded asset threats from Mark Carney.
They all have the same purpose, to discourage companies from investing further in developing oil resources and wind down existing ones.
All of this raises the question, just what effect would such actions have on the world economy?
To give us a clue, we only have to look back at the oil crises of the 1970s.
The Office of the Historian at the US Dept of State has this account:
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.
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.
Events were to repeat themselves in 1979, when the Iranian revolution sparked another cut in oil production.
It is often said that when America sneezes, the rest of the world catches a cold. I well recall the issuing of petrol ration books in Britain during November 1973, although they were never used. I also remember the stagflation of the 1970s, partly due to the oil crisis and the resulting currency havoc.
But the most remarkable thing is just how small an effect the whole affair had on global oil production.
Between 1972 and 1974, output actually increased, albeit at a slower rate than before. It only dipped in 1975, likely due to the economic crisis and not the embargo.
Production did fall by 4% between 1979 and 1980, mainly due to Iranian output halving. But again, the falls in the years that followed were a consequence of economic recession, as Iranian output started to increase again by 1982.
What this shows is how finely balanced oil markets are, something we have seen again the last couple of years. Cut output by just a percent or so, and prices go through the roof. This is because oil demand, at least in the short and medium term, is pretty inelastic – you still have to fill the car up to go to work, regardless of the price. (Worth noting that despite price increases, oil consumption in the US was higher in 1974 than two years earlier).
Just imagine then the chaos which would ensue now if, say, Exxon, decided to make big cutbacks? Or if the oil majors took Mark Carney’s advice and abandoned all future exploration and development?
The 1970s would probably look like a tea party in comparison.
Like many of us, I remember the 1970s only too well. In many ways it was a fantastic decade. But economically we had to put up with mass unemployment, sky high inflation and the winter of discontent.
We never seemed more than a few weeks away from the next sterling crisis, and, of course, we had to go cap in hand to the IMF in 1976.
People lost their jobs and saw the value of their savings eaten away.
Maybe this was not all directly due to the oil crisis, and there were certainly other underlying problems, but there is little doubt that the rocketing of oil prices, along with the global economic disruption caused, had a dominant effect, not just in the UK but around the world.
Which all brings us back to Mark Carney. According to the Bank of England, their mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.
His attacks on the fossil fuel industry are not consistent with this objective, quite the contrary. It is all very well him talking about Paris and climate objectives, but, if he wants to do his job properly, he should be shouting from the rooftops that the world as a whole, and the UK in particular, cannot afford the economic carnage that would inevitably follow from a shrinking of the oil industry.
He should, in reality, be warning the government of the huge risks they are taking with the economy. If necessary he should resign, if that is the only way to get his message across.
One is entitled to ask why he is not doing just that.