Oil

With the recent turmoil in the Middle East, there has been increased talk of the possibility for an Arab oil embargo against the U.S. and other supporters of Israel. While for various reasons I don't currently believe this will come to pass, it is a good time to take another look at the embargo of 1973-74. Following is a piece I first did back on July, 2000 in this spot. I have added a few minor points, otherwise, it is as originally written.

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Before there was an OPEC (the Organization of Petroleum Exporting Countries), the great oil companies of the West ruled the roost. Oil is the lifeblood of the industrialized nations. It is used in planes, cars, tanks, skyscrapers, fertilizer, drugs and synthetics. Yet back before the days of OPEC, the great oil companies often retained 65% or more of the revenue from a product that was produced on someone else's property. Then in 1960, many of the oil producing nations, from both the Middle East and elsewhere, formed a cartel to protect their interests.

[Currently, OPEC is comprised of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Large non-OPEC producers such as Mexico, Norway and Russia sometimes go along with the cartel position of the day.]

The goal of OPEC was to present a common front in negotiations with the giant oil companies, which themselves worked closely together. OPEC set the stage for a new process in which the producer nations would eventually take over the functions of the companies, at least in production, and retain much more of the revenues. But OPEC really had little impact from its founding in 1960 until 1973. Then all hell broke loose.

In 1973, the U.S. and the Western world were in the midst of an inflationary spiral. The world had become highly vulnerable to commodity cartels, as twenty years of prosperity and accelerating population growth had created heavy demand for raw materials. In the U.S., consumer prices were rising at an 8.5% clip, while inflation rates in other nations were often much higher. The demand for Middle Eastern oil had been increasing throughout the industrialized world and the needs of these countries grew far faster than production. OPEC was growing stronger and it was determined to increase its share of the profits.

President Nixon, as part of his ill-fated price control program, had slapped controls on oil in March 1973. The U.S., which had been self-sufficient in energy as recently as 1950, was now importing some 35% of its energy needs. U.S. petroleum reserves were nearly gone. Governments, corporations and individuals were entirely unprepared for what would happen next.

On October 6, 1973, the Jewish holy day of Yom Kippur, Egyptian forces attacked Israel from across the Suez Canal, while at the same time Syrian troops were flooding the Golan Heights in a surprise offensive. After early losses, Israeli counterattacks quickly pushed into Syrian territory in the north, as troops outflanked the Egyptian army in the south. Israel, with help from the U.S., succeeded in reversing the Arab gains and a cease-fire was concluded in November. But on October 17, OPEC struck back against the West by imposing an oil embargo on the U.S., while increasing prices by 70% to America's Western European allies. Overnight, the price of a barrel of oil to these nations rose from $3 to $5.11. [In January 1974, they raised it further to $11.65.] The U.S. and the Netherlands, in particular, were singled out for their support of Israel in the war.

When OPEC announced the sharp price rise, the shock waves were immediate. Industrial democracies, accustomed to