Oil Embargo in 1973 by OAPEC Thesis

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1973 Oil Embargo and International Trade Issues

What happened in 1973 to cause OPEC (Organization of Petroleum Exporting Countries) to cut off the flow of oil to the U.S. And other Western nations? And what was the impact of that embargo? The sale of oil to international consumers is actually an act of trade by OPEC -- what happened to Saudi Arabia's trade surplus following the 1973 embargo? This paper will examine those issues and provide background and analysis into the embargo and the response to it by the United States.

While there has been considerable focus on the embargo in 1973, the embargo of 1967 has nearly been forgotten in the fuss over the current oil tensions between the U.S. And Middle Eastern oil sources. A brief look at the 1967 crisis is worthwhile before more fully exploring the 1973, because in many ways the embargo of 1967 set the political and economic table for the 1973 embargo.

1967 Oil Embargo

The Six-Day War between Israel and Arab countries (Egypt, Syria, and Jordan) (June 6, 1967) was only one-day-old when several Middle Eastern countries got together and decided to limit their oil shipments to the U.S. And the UK. The reason was in response to the U.S. support for Israel (military hardware, technology and ammunition) in that war. And according to the communique issued by the countries participating, Arab oil shipments were to be denied to any nation involved "…directly or indirectly in armed aggression against Arab states" (http://history.state.gov.). In addition, the communique sternly promised to target assets of "companies and its nationals" inside Arab countries.

A telegram from U.S. Embassy in Baghdad to the State Department in Washington, send by Ambassador Duncan on June 6, 1967, pointed to specific methods of reprisal instituted by those Arab countries participating in the embargo including a warning to "all foreign petroleum companies operating in Arab countries of consequences of supplying oil to Israel" (http://history.state.gov). The leaders of eight Arab nations did indeed get together in September 1967 and released the "Khartoum Resolution": while the eight nations did lift the embargo but came to the "…conclusion that the oil pumping can itself be used as a positive weapon" (www.mfa.gov).

1973 Oil Embargo

While the 1967 "embargo" really didn't reduce the flow of oil to the U.S., the 1973 embargo certainly did reduce oil supplies to the U.S. -- and there are ample resources that provide the details of these tensions. The U.S. Department of State reports that the 1973 Embargo was a direct response to the U.S. decision to supply Israel during the war. The embargo lasted from October 1973 to March 1974 and "…posed a major threat to the U.S. economy" (www.state.gov). The embargo not only "banned petroleum exports to the targeted nations" but it also "introduced cuts in oil production" which raised prices globally, the State Department explained.

The price of oil "doubled, then quadrupled, leading to increased costs for consumers world-wide and to the potential for budgetary collapse in less stable economies" (www.state.gov). What's more, the embargo coincided with the devaluation of the U.S. dollar and so a global recession was a possibility, albeit such an event did not materialize. The U.S. (Nixon Administration) sent Henry Kissinger (Secretary of State) to the Middle East to negotiate a settlement with OPEC; and although the U.S. was negotiating from a weaker international position, Kissinger coaxed the Israelis into withdrawing their troops from parts of the Sinai and the embargo was lifted in March 1974.

"Like a stroke of lightning, the event laid bare the vulnerability of the major industrialized countries," William P. Bundy writes in the journal Foreign Affairs. Things were so bad in the U.S. that some argued that the "West should have taken military steps aimed at the Persian Gulf, and there were indeed brief official threats in this direction" by Kissinger and Defense Secretary James Schlesinger (Bundy, 1977, p. 3). The outcome of the embargo -- as of 1977 when Bundy's article was published -- was disappointing; America failed to "mount an effective energy policy" which reflected, "more than anything, popular refusal to accept (or inability to grasp) the implications of growing dependence on OPEC (Bundy p. 4).

Robert Mabro, Honorary President of the Oxford Institute for Energy Studies, writes that there were concerns right after World War I that "the world was running out of oil" but not many key leaders did anything about it (Mabro 2008, p. 1). But the embargo of 1973 created "a seemingly permanent fear about supply security" (Mabro 1). Consumers of course would like oil products like gasoline to be available "at the lowest possible price, continually over time and close to their preferred buying point," Mabro writes; and producers would like to have plentiful supplies and sell those supplies at prices that maximize profits (Mabro 2).

That having been said, Mabro adds that "import dependence is neither a sufficient nor a necessary condition for security of supply concerns," and "international trade would suffer a deadly blow" if imports of oil were absolutely shut down at a given point in time (Mabro 3). "Oil nationalism" is usually stirred in oil-producing countries because oil happens to be the "main economic resources of the country" and the idea of putting any of those resources in the hands of foreigners is repugnant to that oil country (Mabro 4). It should also be mentioned that prior to the 1973 the U.S. policy apparently rested on "…the miscalculation that Arab exporters couldn't pressure the U.S. By reducing production, because they couldn't afford the loss of revenue" (Hakes, 2008). Jay Hakes, former Administrator of the U.S. Energy Information Administration, writes that Nixon even commented, "Oil without a market does not do a country much good" (Hakes, 2008). Nixon, and preceding U.S. leaders, seemed to misjudge the seriousness of the Arab states in punishing Western nations for their support of Israel.

1979 Oil Embargo

Six years after the 1973 embargo, OPEC again disrupted oil supplies, causing a cutoff of between 3 and 3.5 million barrels a day (Mabro 6). It also caused a "very significant impact on oil prices that proved unsustainable," Mabro continues. "Panic among oil-importing countries" (including Japan and Europe) was caused by the actions of oil giants British Petroleum and Exxon. These two oil companies involved "force majeure" clauses to their customers. Force majeure in this case meant that Exxon, for example, would not be liable for damages when it cannot supply the contractually agreed upon amount of oil due to conditions beyond its control (i.e., an oil embargo) (Mabro 6).

It is also pertinent to report that the 1979 disruption of oil imports happened in the wake of the Iranian revolution (the coming of the Ayatollah Khomeini and the departure of the Shah of Iran); the incoming cleric, Ayatollah, did not have oil expertise and production fell off drastically in Iran, raising prices world wide.

U.S. Trade Deficit -- Oil Imports -- International Trade Relationships

Among resources discussing the international trade implications of the oil embargo of 1973 is the Ecologic Investor (www.ecologicinvestor.com). At the time of the embargo in 1973, the U.S. Energy Information Administration reported that the U.S. was consuming 17,308 barrels of petroleum per day, which added up to 34% of all U.S. oil use at that time. Of those barrels, 13.6% were from "Persian Gulf countries" and 47.8% were from OPEC, Ecologic Investor continues.

By 2008, the U.S. oil use had jumped by 15% to some 19,886 barrels a day. About 56.6% of oil used in the U.S. In 2008 came from imports; 18.8% of those imports come from Persian Gulf nations and 46.6% of imports come from OPEC nations (Algeria, Angola, Ecuador, IR Iran, Iraq, Kuwait, Nigeria, SP Libyan AJ, Qatar, Venezuela, UAE and Saudi Arabia). The U.S. imports in… [END OF PREVIEW]