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The Oil Crises Of The 1970s

May 2, 2016
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By Paul Homewood

 

who-owns-big-oil

 

 

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.

https://history.state.gov/milestones/1969-1976/oil-embargo

 

 Events were to repeat themselves in 1979, when the Iranian revolution sparked another cut in oil production.

 

Oil_Prices_Since_1861.svg

 Graph of oil prices from 1861–2015, showing a sharp increase in 1973 and again during the 1979 energy crisis. The orange line is adjusted for inflation.

https://en.wikipedia.org/wiki/1973_oil_crisis

 

 

 

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.

 

image

http://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html

 

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.

 

 

     

10 Comments leave one →
  1. Paul2 permalink
    May 2, 2016 6:18 pm

    Not oil but coal. Very small contribution to the national grid according to Gridwatch. Sad to see.

  2. Tom O permalink
    May 2, 2016 7:16 pm

    Seems to me that if governments truly were concerned with “carbon fuels,” instead of attacking the fuels, they would demand they be used more efficiently. That is, cars not get less than 50mpg or the equivalent in KM/L. They would insist that all new electrical appliances give as good a performance while using less electricity. They would push to have all heating systems to become more efficient. In that way they function responsibly with the good of the people as their purpose. Instead they look to find ways to waste more precious resources so that those that are well off remain so or become richer, while those that can’t make changes to lessen their expenses are driven deeper into debt or out on to the streets. Sad that government has no more conscience than the man who worships gold.

  3. Alan Kendall permalink
    May 2, 2016 7:49 pm

    All the focus is on fossil fuel’s use as an essential energy source. What also is of the greatest importance is the essentual role fossil fuels play as feedstocks for a multitude of essential commodities, mostly petrochemicals. Suppression of future exploration and curtailment of exploitation activities will eventually cause shortages. Deteriorating road surfaces (due to lack of asphalt) and short supplies of all types of plastic products, coupled with energy shortages, should ensure any political interference with the fossil fuel industries will be short lived. We can only hope.

  4. Bloke down the pub permalink
    May 2, 2016 8:25 pm

    One is entitled to ask why he is not doing just that.
    Probably because his wife won’t let him.

  5. John F. Hultquist permalink
    May 2, 2016 11:30 pm

    Via mutual funds, our retirement is much happier when large companies do well. I remind folks of this when they go into a green rant.

    There is not a lot to worry about, however. New cars and trucks that use oil based products are being sold in record numbers and last, on average, about 15 years. When new sales start to nosedive, you will still have time to look for the new investment — their replacement. It isn’t in sight yet.

  6. Ex-expat Colin permalink
    May 3, 2016 7:12 am

    Ah yes..1973 I was in RAF Germany and had to obtain a special letter to present to the police. That so I could use the roads to get to the RAF station I worked at 5Kms away. Folk walked the autobahns on Sundays. Sort of funny really?

  7. dave permalink
    May 3, 2016 8:12 am

    “…a National 55 mph speed limit…”

    I was touring America, at the time. In the mornings, the traffic rolled along sedately at 50 mph. After lunch it was doing 60 mph. In the evenings it was doing 70 mph. At night it was every man for himself at 80-90 mph on the back roads! It was all tokenism.

  8. Ben Vorlich permalink
    May 3, 2016 9:08 am

    I too had a 1973 ration book, I wish I’d kept it I’m sure I could sell it on eBay for a decent amount. Many people who had lived through the war were bettered prepared than I was with secret stocks in the barn.I wouldn’t have been surprised if they didn’t have an illicit still available somewhere so they could create a version of E10.

    Until I was in my 20s I lived in a house in central Scotland with no electricity, no mains gas, no mains water and a septic tank for waste disposal. My mother continued living there until the mid-1990s. As I couldn’t afford a car until the 1970s cycling 4 miles to catch a bus was the only means of getting about. Anyone who wants to protest about fracking should try it for a couple of years, they will soon become fans of fossil fuels and transistor radios.

  9. May 3, 2016 11:36 am

    I lived in the Washington, DC area during Jimmy Carter’s little gasoline clambake. What fun….. Interesting to see the investment breakdown. Due to my stock in Exxon-Mobil, I eat. For a number of years, a friend of mine from a singles church group from the 1970’s and a White House Marine, has been on the Board of Directors for Exxon-Mobil. It is a real pleasure to vote every year for Steve to continue on the Board. He is a true man of integrity.

  10. Peter Grossman permalink
    May 3, 2016 12:48 pm

    The above account of the 1970s oil crises and their impact on the US and the world is strangely deficient. As I detail in my 2013 book, U.S. Energy Policy and the Pursuit of Failure, the embargo (or really the output cut) did raise prices significantly. But the gas lines and shortages in the US were due to the fact that the price of oil and gasoline were subject to government imposed price controls, which required approval from the authorities for any price increase. These typically were made at the beginning of the month only so that increases in the cost of gasoline during the month could not immediately be passed on to consumers. Not surprisingly the longest lines were at the end of the month as producers/refiners/distributors/retailers held onto stocks waiting for the opportunity to raise prices. Of note, government controlled natural gas prices as well, which created shortages periodically throughout the 1970s.

    Moreover, the immediate response of the Nixon administration was to compound the problem by introducing quantity and allocation controls, which led to imbalances throughout the country.

    Both price controls and quantity controls were still in place in 1979 and again were the major reason for the gas lines. Since controls were removed (oil in 1981; gas piecemeal through the 1980s), there have been no gas lines despite wars and revolutions among oil producers.

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