1973 oil crisis
In October 1973, the Organization of Arab Petroleum Exporting Countries announced that it was implementing a total oil embargo against countries that had supported Israel at any point during the 1973 Yom Kippur War, which began after Egypt and Syria launched a large-scale surprise attack in an ultimately unsuccessful attempt to recover the territories that they had lost to Israel during the 1967 Six-Day War.
In an effort that was led by Faisal of Saudi Arabia, the initial countries that OAPEC targeted were Canada, Japan, the Netherlands, the United Kingdom, and the United States. This list was later expanded to include Portugal, Rhodesia, and South Africa.
In March 1974, OAPEC lifted the embargo, but the price of oil had risen by nearly 300%: from US to nearly US globally. Prices in the United States were significantly higher than the global average. After it was implemented, the embargo caused an oil crisis, or "shock", with many short- and long-term effects on the global economy as well as on global politics. The 1973 embargo later came to be referred to as the "first oil shock" vis-à-vis the "second oil shock" that was the 1979 oil crisis, brought upon by the Iranian Revolution.
Background
Arab-Israeli conflict
Following the Israeli Declaration of Independence in 1948, there has been conflict between Arabs and Israelis in the Middle East, including several wars. The Suez Crisis, also known as the Second Arab–Israeli war, was sparked by Israel's southern port of Eilat being blocked by Egypt, which also nationalized the Suez Canal belonging to French and British investors. As a result of the war, the Suez Canal was closed for several months between 1956 and 1957.The Six-Day War of 1967 included an Israeli invasion of the Egyptian Sinai Peninsula, which resulted in Egypt closing the Suez Canal for eight years. Following the Yom Kippur War, the canal was cleared in 1974 and opened again in 1975. OAPEC countries cut production of oil and placed an embargo on oil exports to the United States after Richard Nixon requested $2.2 billion to support Israel's war effort. Nevertheless, the embargo lasted only until January 1974, though the price of oil remained high afterwards.
American oil production decline
By 1969, American domestic production of oil was peaking and could not keep pace with increasing demand from vehicles. The US was importing per year by the late 1950s, mostly from Venezuela and Canada. Because of transportation costs and tariffs, it never purchased much oil from the Middle East. In 1973, US production had declined to 16% of global output.Eisenhower imposed quotas on foreign oil that would stay in place between 1959 and 1973.
Critics called it the "drain America first" policy. Some scholars believe the policy contributed to the decline of domestic US oil production in the early 1970s.
The cheapness of oil compared with coal led to the decline of the coal industry. In 1951, 51% of the United States' energy came from coal, and by 1973, only 19% of American industry was coal-based. The decline in domestic oil production, combined with the country's increasing reliance on oil as a source of power, made the US economy vulnerable to a foreign oil embargo.
When Richard Nixon became US president in 1969, he assigned George Shultz to head a committee to review the Eisenhower-era quota program. Shultz's committee recommended that the quotas be abolished and replaced with tariffs but Nixon decided to keep the quotas due to vigorous political opposition.
Nixon imposed a price ceiling on oil in August 1971 as demand for oil was increasing and production was declining, which increased dependence on oil imports as consumption was bolstered by low prices.
In 1973, Nixon announced the end of the quota system. Between 1970 and 1973 US imports of crude oil had nearly doubled, reaching 6.2 million barrels per day in 1973. Until 1973, an abundance of oil supply had kept the market price of oil lower than the posted price.
In 1970, American oil production peaked and the United States began to import more and more oil as oil imports rose by 52% between 1969 and 1972. By 1972, 83% of the American oil imports came from the Middle East. Throughout the 1960s, the price for a barrel of oil remained at $1.80, meaning that with the effects of inflation considered the price of oil in real terms got progressively lower and lower throughout the decade with Americans paying less for oil in 1969 than they had in 1959. Even after a price for a barrel of oil rose to $2.00 in 1971, adjusted for inflation, people in the Western nations were paying less for oil in 1971 than they had in 1958. The extremely low price of oil served as the basis for the "long summer" of prosperity and mass affluence that began in 1945.
OPEC
The Organization of Petroleum Exporting Countries, was founded by five oil producing countries at a Baghdad conference on 14 September 1960. The five founding members of OPEC were Venezuela, Iraq, Saudi Arabia, Iran and Kuwait. OPEC was organized after the oil companies slashed the posted price of oil, but the posted price of oil remained consistently higher than the market price of oil between 1961 and 1972.In 1963, the Seven Sisters controlled 86% of the oil produced by OPEC countries, but by 1970 the rise of "independent oil companies" had decreased their share to 77%. The entry of three new oil producers—Algeria, Libya and Nigeria—meant that by 1970, 81 oil companies were doing business in the Middle East.
In the early 1960s Libya, Indonesia and Qatar joined OPEC. OPEC was generally regarded as ineffective until political turbulence in Libya and Iraq strengthened their position in 1970. Additionally, increasing Soviet influence provided oil producing countries with alternative means of transporting oil to markets.
Under the Tehran Price Agreement of 1971, signed on 14 February, the posted price of oil was increased and, due to a decline in the value of the US dollar relative to gold, certain anti-inflationary measures were enacted.
A severe drain on US gold reserves lead to higher inflation and lack of confidence in the strength of the dollar, President Nixon issued Executive Order 11615 on August 15, 1971, which closed the gold window. This action made the dollar inconvertible to gold directly, except on the open market, and was soon dubbed the Nixon Shock, leading eventually to the collapse of the Bretton Woods system in 1976. Because oil was priced in dollars, oil producers' real income decreased when the dollar started to float free of the old link to gold. In September 1971, OPEC issued a joint communiqué stating that from then on, they would price oil in terms of a fixed amount of gold.
After 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947 to 1967, the dollar price of oil had risen by less than two percent per year. Until the oil shock, the price had also remained fairly stable versus other currencies and commodities. OPEC ministers had not developed institutional mechanisms to update prices in sync with changing market conditions, so their real incomes lagged. The substantial price increases of 1973–1974 largely returned their prices and corresponding incomes to former levels in terms of commodities such as gold.
Countdown to the October War
Arab oil producing countries had attempted to use oil as leverage to influence political events on two prior occasions—the first was the Suez Crisis in 1956 when the United Kingdom, France and Israel invaded Egypt. During the conflict the Syrians sabotaged both the Trans-Arabian Pipeline and the Iraq–Baniyas pipeline, which disrupted the supply of oil to Western Europe. The second instance was when war broke out between Egypt and Israel in 1967, but despite continued Egyptian and Syrian enmity against Israel, the embargo lasted only a few months. Most scholars agree that the 1967 embargo was ineffective.Although some members of the Organization of Arab Petroleum Exporting Countries supported the use of oil as a weapon to influence the political outcome of the Arab–Israeli conflict, Saudi Arabia had traditionally been the strongest supporter of separating oil from politics. The Saudis were wary of the tactic due to the availability of oil from non-Arab oil producing countries, and in the decades leading up to the crisis, the region's conservative monarchies had grown dependent on Western support to ensure their continued survival as Nasserism gained traction. On the other hand, Algeria, Iraq and Libya had strongly supported the use of oil as a weapon in the conflict. Arab newspapers like the Egyptian Al-Ahram, Lebanese An-Nahar and Iraqi Al-Thawra had historically been supportive of the use of oil as a weapon.
In 1970, President Nasser of Egypt died and was succeeded by Anwar Sadat, a man who believed in the diplomacy of surprise, in engaging in sudden moves to upset the diplomatic equilibrium. Sadat liked to say that his favourite game was backgammon, a game where skill and persistence was rewarded, but was best won by sudden gambles, making an analogy between how he played backgammon and conducted his diplomacy. Under Nasser, Egypt and Saudi Arabia had engaged what was known as the Arab Cold War, but Sadat got along very well with King Faisal of Saudi Arabia, forming an alliance between the most populous Arab state and the wealthiest Arab state. Unlike the secularist Nasser, Sadat was a pious Muslim and he had a strong personal rapport with King Faisal, who was an equally pious Muslim. The man largely in charge of American foreign policy, the National Security Adviser, Henry Kissinger, later admitted that he was so engrossed with the Paris peace talks to end the Vietnam war that he and others in Washington missed the significance of the Egyptian-Saudi alliance. At the same time that Sadat moved closer to Saudi Arabia, he also wanted a rapprochement with the United States and to move Egypt away from its alliance with the Soviet Union. In 1971, the US had information that the Arab states were willing to implement another embargo. In July 1972, Sadat expelled all 16,000 of the Soviet military personnel in Egypt in a signal that he wanted better relations with the United States. Kissinger was taken completely by surprise by Sadat's move, saying: "Why has he done me this favor? Why didn't he demand all sorts of concessions first?"
Sadat expected as a reward that the United States would respond by pressuring Israel to return the Sinai to Egypt, but after his anti-Soviet move prompted no response from the United States, by November 1972 Sadat moved again closer to the Soviet Union, buying a massive amount of Soviet arms for a war he planned to launch against Israel in 1973. For Sadat, cost was no object as the money to buy Soviet arms came from Saudi Arabia. At the same time, Faisal promised Sadat that if it should come to war, Saudi Arabia would embargo oil to the West. In April 1973, the Saudi Oil Minister Ahmed Zaki Yamani visited Washington to meet Kissinger and told him that King Faisal was becoming more and more unhappy with the United States, saying he wanted America to pressure Israel to return all the lands captured in the Six Day War of 1967.
In a later interview, Yamani accused Kissinger of not taking his warning seriously, saying all he did was to ask him not to speak anymore of this threat. Angry at Kissinger, Yamani, in an interview with the Washington Post on April 19, 1973, warned that King Faisal was considering an oil embargo. At the time, the general feeling in Washington was the Saudis were bluffing and nothing would come of their threat to impose an oil embargo. The fact that Faisal's ineffectual half brother King Saud had imposed a crippling oil embargo on Britain and France during the Suez War of 1956 was not considered an important precedent. The CEOs of four of the United States' oil companies, after speaking with Faisal, arrived in Washington in May 1973 with the warning that Faisal was considerably tougher, more intelligent and more ruthless than his half-brother Saud whom he had deposed in 1964, and that his threats were serious. Kissinger declined to meet the four CEOs.
In an assessment done by Kissinger and his staff about the Middle East in the summer of 1973, the repeated statements by Sadat about waging jihad against Israel were dismissed as empty talk while the warnings from King Faisal were likewise regarded as inconsequential. In September 1973, Nixon fired Rogers as Secretary of State and replaced him with Kissinger. Kissinger was later to state he had not been given enough time to know the Middle East as he settled into the State Department's office at Foggy Bottom as Egypt and Syria attacked Israel on 6 October 1973.