WATCHING WASHINGTON REMEMBERING THE 1973 EMBARGO

With Patrick Crow Oct. 17 is an anniversary the oil industry might rather forget. On that date in 1973 Arab oil producers, in support of allies fighting Israel in the Yom Kippur War, began an oil embargo against the U.S. and Netherlands. The embargo later was extended to several other countries. The cutoff sent world oil prices and inflation soaring. It soon became ineffective and was lifted, but oil prices remained three or four times their previous levels.

Oct. 11, 1993

3 min read

Oct. 17 is an anniversary the oil industry might rather forget.

On that date in 1973 Arab oil producers, in support of allies fighting Israel in the Yom Kippur War, began an oil embargo against the U.S. and Netherlands. The embargo later was extended to several other countries.

The cutoff sent world oil prices and inflation soaring. It soon became ineffective and was lifted, but oil prices remained three or four times their previous levels.

IMPORT DEPENDENCE

The U.S. was 36% dependent on imported oil in 1973. It is now 49% dependent. But no one is particularly concerned because prices are relatively low and oil supplies are ample.

Former Energy Sec. James Schlesinger recently said, "The issue of oil dependence is less relevant today than it was in the 1970s. The decline of the Soviet Union and the Persian Gulf war have reduced our fears that some nation might to control supplies of oil from the Persian Gulf."

He and others observed that since 1973, world reserves are higher and less concentrated in the Middle East, consumers are more flexible, the International Energy Agency is available to help with shortages, and the U.S. has stored 585.2 million bbl in its Strategic Petroleum Reserve.

Moreover, many producing countries now own refineries and marketing chains in other nations, linking them to consumers.

Oil analyst Phil Verleger has written a book, "Adjusting to Volatile Energy Prices," that will be published next month regarding the oil producer-consumer relationship.

Verleger said the embargo was a classic economic situation in which producers of a commodity build market power, exercise it, and then lose it due to conservation and competition.

Verleger advocates free trade in energy, with no barriers to companies' investments in producing countries.

"I have no trouble with the U.S. being 100% dependent on imported oil," he said. "Consumers are invariably better off with free trade and much worse off with barriers to trade."

Daniel Yergin and Joseph Stanislaw of Cambridge Energy Research Associates wrote about the Arab embargo in the current issue of Foreign Affairs. Yergin said the embargo taught importers about the need for secure supplies, oil exporters that they could not take customers for granted, and both about their interdependence.

EMBARGO'S LESSON

John Lichtblau, Petroleum Industry Research Foundation president, said, "I don't see any chances for another embargo under any realistic assumptions. History doesn't usually repeat itself in the same ways."

He said the embargo forced an overdue supply/demand adjustment in world oil prices. "For that reason, when the embargo was over and the oil flowed freely, the price never went back to where it was before."

Lichtblau said importing countries, particularly the U.S., learned a lesson from 1973. They since have used oil embargoes as a political weapon against Iran, Libya, and Iraq.