Petroleum

Weaponizing Oil: How the Arab Oil Embargo Changed the World

The Arab Oil Embargo

The 1973 Arab Oil Embargo was one of the most impactful events in the history of global oil consumption. This strategic event that took place in the Middle East resulted in the first real oil shock that was ever experienced in the world. Even the sheer mention of the Arab Oil Embargo will certainly reverberate with those who experienced the impacts of this tumultuous event. In 1973, oil was used as a political weapon. The weaponization of oil was launched in an effort to punish the United States. Some historians describe the events that took place as representative of the most momentous challenge experienced by the developed world since the outbreak of the Second World War. The impacts were most devastating in the United States, where the nation was ultimately inflicted with the most devastating recession since the Great Depression.

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Economic Collapse

In October 1973, oil-producing Arab countries initiated a temporary cessation of oil shipments from the Middle East to the United States. The Arab oil-producing nations cut off all oil exports to the U.S. in retaliation of the American military support for Israel during the 1973 war with Syria and Egypt. As a result of this strategic move, oil prices quadrupled, the stock market collapsed, and the Arab world nearly brought the U.S. to an economic halt.

The Arab Oil Embargo initiated a 46 percent bear market loss for the Dow Jones Industrial Average, increased unemployment by 73.5 percent, raised inflation to nearly 11 percent, rearranged the global monetary system, and caused a 2.6 percent drop in total economic activity (Freeman, 2015). The economic turmoil and overall geopolitical uncertainty created a tremendous period of instability in the United States. Soaring fuel prices coupled with long lines at gas stations ultimately led the U.S. to make a series of changes to its overall foreign policy objectives. Following the Arab Oil Embargo, extensive efforts were made to make the U.S. less dependent on the Middle Eastern Oil. While the efforts yielded varying levels of success, the Arab Oil Embargo ended up shaping U.S. foreign policy around interventions in the Middle East.

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Peak American Oil Production

Prior to the events that led to the beginning of the Arab Oil Embargo, the U.S. reached a period of peak oil production that wasn’t crossed again until the 2000s. In 1970, U.S. oil production reached 11.3 million barrels per day (Kunstler, 2005). At the same time, the total aggregate demand for oil in the U.S. surpassed the country’s ability to produce enough oil. Therefore, the U.S. became increasingly dependent on foreign oil and gas imports to continuously propel economic growth. After years of denial regarding the notion that U.S. oil production would not be able to meet the overall demand for oil, the 1973 Arab Oil Embargo ended up being a very unsettling wake-up call for the American economy.

Throughout the early 1970s, the global demand for oil began to surge. In 1960, oil demand hovered around 19 million barrels per day. However, by 1972, the demand had skyrocketed up to 44 million barrels per day (Kunstler, 2005). In the U.S. alone, the total net importation of oil rose from 2.2 million barrels in 1970 to six million barrels of oil by 1973 (Kunstler, 2005). Without a surplus of oil production, the U.S. began to import about a third of its oil, primarily from the Middle East. As the U.S. lost the ability to produce excess capacity, the nation also lost the ability to influence the price of globally traded oil. With excess capacity, the American oil producers were able to open the valves of oil production to flood the market in order to reduce prices.

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Surplus Oil Capacity

During the 1970s, Saudi Arabia was generating a tremendous amount of surplus oil capacity, giving the country the unique ability to influence oil prices. While the U.S. reached a period of peak oil production in the 1970s, Saudi Arabia began to enter its most robust phase of oil production. With much more proven reserves of oil than the U.S. and a production and discovery period that began well after oil and gas were first discovered and produced in the U.S., Saudi Arabia had started to enter its golden age of oil production. While the first oil and gas wells in Saudi Arabia were discovered and were negotiated upon during the 1930s, the rise of the Second World War put a halt to much of the oil and gas production in the Middle East. However, after the end of World War II, a consortium of oil producers made up of Exxon, Standard Oil of California, Texaco, and Mobil moved in to form a joint venture on oil production in Saudi Arabia.

Immediately following the Second World War, developed nations around the world experienced a period of post-war oil glut. As economies shifted away from the energy-intensive production of war machines and bombs that were required during World War II, countries began to accumulate increasing stockpiles of oil. Following this brief period of economic restructuring, Europe began to recover from the war, while the U.S. proceeded to make massive investments in infrastructure, moving forward with a system of nationwide automobility and mass consumption. The post-war economic boom required a significant amount of energy, which meant that the post-war stockpiles of oil were short lasting.

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The Yom Kippur War

As the global economy started to recover after the war, the geopolitics of the Middle East became increasingly convoluted. Influence from the Soviet Union began to put pressure on Syria and Egypt to enter into another war with Israel. To weaken the U.S., the Soviet Union had hoped that a war between Israel and the Arab nations would strain the relationship between the U.S. and the Arab world. As a staunch ally with Israel, a war between Israel and the Arab world would mean that the U.S. would be hard-pressed to choose between aligning with its long-time ally or the Middle Eastern nations that supply the U.S. with oil.

In 1973, the Yom Kippur war was initiated when Egyptian and Syrian forces initiated a surprise attack against Israel on the Jewish holiday of Yom Kippur. After fighting erupted across the Golan Heights and the Suez Canal, Israeli forces were able to push back the Egyptian and Syrian forces once they received a shipment of weapons and other military supplies from American forces. Meanwhile, the Soviet Union continued to resupply the Arab forces. As it became clearer that the Soviet Union was a primary supporter of the war, U.S. President Richard Nixon publicly vowed to not let an American ally be defeated by the Soviets. As the U.S. became increasingly involved in the conflict, the Arab forces decided to implement a strategic economic attack against the Americans. The Organization of the Petroleum Exporting Countries (OPEC) moved to weaponize oil by implementing an oil embargo against the Americans and their Western allies, which included Canada, the Netherlands, and the United Kingdom.

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A Challenging Time

Egyptian President Anwar Sadat was the first to implore the Middle Eastern oil producers to weaponize oil to retaliate against the Americans. While OPEC initially responded by raising the price of oil by 100 percent, a complete embargo wasn’t implemented until President Nixon announced that the U.S. would be supplying Israel with a robust military aid package. Following this announcement, OPEC completely cut off shipments of oil to the United States and increased prices by 70 percent for much of Europe (Kunstler, 2005).

Even though a United Nations ceasefire officially ended the war on October 22, 1973, the oil embargo remained in place against the United States. The embargo wouldn’t be officially called off until March 1974. According to Wall Street Journal oil analyst Daniel Yergin, “”The oil crisis set off an upheaval in global politics and the world economy. It also challenged America’s position in the world, polarized its politics at home, and shook the country’s confidence” (Myre, 2013). While the U.S. once had enough spare oil capacity to withstand oil price increases, the Arab Oil Embargo stunted the American economy. Between 1973 and 1975, U.S. gross domestic product (GDP) plunged by six percent, while unemployment jumped to above nine percent (Hayward, 2015). Gasoline shortages caused consumers to be stranded in extremely long gas lines for fuel that climbed in price by upwards of 40 percent in a matter of days.

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A Suffering Global Economy

During the height of the crisis, gasoline rationing measures were common. On alternating days, only vehicles with odd or even numbered license plates could make fuel purchases. The fear and overall hysteria about oil supplies led to the establishment of the U.S. Department of Energy. The Nixon administration was the first to truly refence the concept of the need for American energy independence. The Arab Oil Embargo initiated a wave of concerns about having an economy that was so dependent on a single resource.

Without ample supplies of oil, absolutely everything in the industrialized world suffered. Even the price of food and manufactured goods shot up substantially because oil was needed to transport goods to markets. The U.S. auto industry also suffered because American cars were known to be primarily gas-guzzling behemoths. Consumers started to favor the European and Japanese vehicles because they were smaller and offered much better fuel efficiency. The oil crisis rendered American cars useless in comparison.

While the global economy suffered during the Arab Oil Embargo, oil producers experienced a tremendous period of wealth. Crude oil earnings from exporting nations rose from $23 billion in 1972 to over $140 billion by 1977 (Hayward, 2015). During this period of time, the OPEC member nations were generating more money than that they could ever spend, which ultimately led to the rise of ultra-luxurious developments in Dubai, Qatar, and Saudi Arabia.

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Lasting Economic Changes

The termination of the Arab Oil Embargo in March 1974 led to lasting changes in the United States. Since then, presidential administrations have been obsessed with securing Middle Eastern oil assets for American interests. One of the biggest American military bases in the world now lies in the heart of the Middle East at Al Udeid Air Base in Qatar. While no American military action was used against OPEC to end the Arab Oil Embargo, the Nixon administration is said to have seriously considered using America’s military power to secure oil fields in Abu Dhabi, Saudi Arabia, and Kuwait. Although, since this period of time, the U.S. has consistently been involved in Middle Eastern conflicts to ensure that future global oil supply shocks are prevented.

Following the calamitous period initiated by the Arab Oil Embargo, U.S. President Jimmy Carter attempted to move America away from oil dependency. The Carter administration moved towards a comprehensive national energy policy that stressed the importance of developing alternatives to fossil fuels. Carter even installed solar panels on the roof of the White House in an attempt to show the world that he was serious about renewable energy. Although, when President Ronald Reagan took office, the solar panels were immediately removed from the White House, while a number of renewable energy initiatives were also scraped. The Reagan administration dismissed the idea of moving away from fossil fuels and instead further reinforced America’s dependency on oil. However, since the ending of the Arab Oil Embargo, increases in alternative energy research have started to become widespread all around the world, with many countries vowing to eventually move away from oil completely.  

Sources

Ahrari, M. (2015). “OPEC: The Falling Oil Giant.” The University Press of Kentucky.

Freeman, K. (2015). “Oil, Economic Warfare, and America’s Future.” The Counter Terrorist.

Hayward, L. (2015). “The Oil Weapon: 42 Years After the OPEC Oil Embargo.” The Fuse.

Kunstler, J. (2005). “The Long Emergency”. New York: Grove Press.

Myre, G. (2013). “The 1973 Arab Oil Embargo: The Old Rules No Longer Apply.” National Public Radio.

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