Arab Oil Producers Curtail Oil Shipments to Industrial States

Date October 17, 1973-March 18, 1974

In response to the decision of the United States to support Israel during the October, 1973, Yom Kippur War, Arab oil ministers agreed to reduce oil shipments to nonfriendly oil importers. The ensuing oil crisis and its aftermath had far-reaching effects at home and abroad.

Also known as Arab oil embargo; energy crisis of 1973

Locale Kuwait City, Kuwait

Key Figures

• Faisal (c. 1905-1975), king of Saudi Arabia, r. 1964-1975
• Henry Kissinger (b. 1923), national security adviser and chief foreign policy negotiator in the Nixon administration
• Anwar el-Sadat (1918-1981), president of Egypt, 1970-1981

Summary of Event

The decision by Arab oil-exporting states to withhold oil from states supporting Israel during the October, 1973, Yom Kippur War was a watershed in the history of modern Western civilization. It revealed the fragile roots of the Western lifestyle, which had come to rest on an energy source Western countries did not control and for which there was no ready substitute. It also drove a wedge between members of the Western alliance based on their differing degrees of vulnerability to the disruption of their energy supplies. Western countries bid against one another for oil on the spot market, driving up the price of oil and providing the Organization of Petroleum Exporting Countries (OPEC) with the moment it needed to wrest control over the price and production of petroleum from the cartel of private oil companies that had controlled the international oil market for much of the twentieth century.

The developments leading to this event are easily summarized. The degree to which the moment could have been avoided and the seriousness of the embargo itself, however, became subjects of hot debate for years following the embargo.

By 1973, the major oil corporations that had collectively managed the world petroleum industry for nearly half a century were beginning to lose their grip on the market. New oil companies had gone multinational and had invested heavily in states that had only recently begun producing oil on a large scale. Because a state was often the only foreign source of supply for a company, the governments of new oil-producing states such as Libya were able to extract greater revenue from the development of their oil fields than the larger corporations (Exxon, Mobil, Chevron, Texaco, Gulf, British Petroleum, and Royal Dutch/Shell), with multiple sources, were conceding to their host governments. To satisfy the latter, the larger firms were forced to increase the posted price of oil. Under the 50/50 profit-sharing system then being employed, higher prices allowed the companies to give their hosts revenues per barrel that matched the revenues that governments such as that of Libya were receiving from the smaller, more vulnerable oil companies such as Occidental. These concessions, in turn, became the basis for new rounds of negotiations between Libya and Occidental. Libya would press its advantage, and the new concessions wrung out of Occidental would then generate another round of negotiations between the major oil companies and OPEC’s more established members. Further price increases and tensions in the oil market followed.

Only thinly masked by this process was the fact that the major oil companies had already lost their former power to dictate the market price to producing states. Furthermore, many of the older oil-producing states were no longer satisfied with the 50/50 agreement and demanded the right to buy into the majors’ operations within their borders. Matters reached a head at the September, 1973, OPEC meeting in Vienna, Austria, when several delegates noted the windfall profits the oil companies were reaping, under the 50/50 agreement, from increases in the market price of oil. They called for a new system for determining the revenue of the oil-producing states. Discussion was scheduled to continue at a follow-up meeting in October.

Meanwhile, within the Middle East tensions had again been rising between Israel and its neighboring Arab states. The Saudis regularly sent—often through the multinational oil firms—warnings to Henry Kissinger, President Richard M. Nixon’s national security adviser, and others in Washington that in the event of another Arab-Israeli war, assistance by the United States to Israel would almost certainly trigger retaliation in the global petroleum market. That market was already short of supply because of the demand for oil resulting from exceptionally high growth rates in Western economies during the 1968-1973 period.

Far from adjusting to this new reality, the Nixon administration had contributed to an even greater tightening of the market in the early 1970’s. The administration had dropped a quota system that had limited American oil imports to 12 percent of the oil consumed in the United States. In slightly more than a year, American demand for imported oil shot above six million barrels per day, nearly twice the level of 1971. The federal government, nurtured on decades of abundant, cheap oil and preoccupied with the then-breaking Watergate scandal, ignored the warnings of Arab states even as tensions continued to build between Israel and Egypt, Jordan, and Syria, all of which had lost land to Israel in the June, 1967, war. King Faisal of Saudi Arabia had a special stake in the resolution of these territorial disputes. The June war had left Israel in control of Jerusalem. As the official protector of Islam’s holy places (Mecca, Medina, and Jerusalem), Saudi Arabia was expected to do everything in its power to reopen Arab access to Jerusalem.

It was against this economic and political backdrop that the Egyptians and Syrians launched a surprise attack as Israel celebrated Yom Kippur on October 6, 1973. In the initial days of the war, their armies enjoyed considerable success in entering lands Israel had occupied since 1967. Israel had to deplete its supply of war materials to halt the Arab advance. For the first time during an Arab-Israeli war, Israel had to request military assistance from the United States. On October 14, as the scheduled OPEC session drew near, highly visible American Air Force transports carrying military equipment touched down in Israel.

On October 16, the delegates of the five Arab states along the Persian Gulf, along with a delegate from Iran, met in Kuwait City, Kuwait, to discuss the evolving situation. As OPEC moved to increase the posted price of oil without further consultation with the oil industry, the Arab delegates opted on October 17 to impose a 5 percent cut in oil deliveries on states friendly to Israel. An additional 5 percent cut per month would occur until the oil-importing states officially endorsed United Nations Resolution 242, which called on Israel to relinquish the land it had seized in the 1967 war. The announcement of these cuts spurred a round of fear-laden buying and resultant price increases on the spot market. On October 20, 1973, fear turned to panic as Saudi Arabia responded to President Nixon’s announcement of a $22 billion military assistance package for Israel by cutting off all oil shipments to the United States, Holland, and other pro-Israel states. The following day, Aramco (Arabian-American Oil Company) executives were summoned to King Faisal’s royal palace to help plan the details of implementing the embargo.

Significance

The Arab oil embargo had profound political and economic ramifications. Both the developed, oil-importing world and the developing world felt its direct and indirect consequences, as did the multinational oil companies. A major disruption in the flow of oil was not among these consequences.

The Western oil companies had little choice but to accept the Arab prohibition against shipping Arab oil to blacklisted states. At the same time, however, they controlled a global petroleum distribution network that was not limited to moving only Arab oil. The embargo involved only the Arab oil-exporting countries, not the full membership of OPEC. Following a rule of “equal misery,” the major oil companies rerouted Arab oil initially destined for embargoed states to nonembargoed areas and filled the needs of the embargoed countries by rerouting shipments of oil from non-Arab OPEC suppliers to the blacklisted countries and those targeted for substantial reductions in their oil deliveries. Accomplishing the task required an enormous effort, in part because the type of oil needed (heavy, light, crude, refined) varied from oil-importing state to oil-importing state. Nevertheless, as a result of industry action, all consumers received approximately the same percentage of their scheduled deliveries and no consumer experienced more than a 20 percent shortfall in its contracted delivery amount during the embargo period. The Arab states did not control enough of the production or distribution networks to make more of an impact.

The perceived danger of an oil supply disruption nevertheless remained high throughout the oil-importing world. Western countries regularly competed against one another for oil supplies on the spot (noncontracted) oil market, on occasion purchasing more oil than they had the capacity to use immediately or store. By the time the embargo ended in March, 1974, and the crisis had passed, OPEC had been able to use this demand for oil to establish a market price of OPEC oil at nearly $12 a barrel, four times the precrisis price. It took the oil-importing countries nearly three years of general inflation, corrective interest rates, and resultant increases in unemployment rolls to adjust their economies to these costs.

The political fallout from the embargo was also substantial. The political demands made on importing states by the Arab world forced Japan and several U.S. allies in the North Atlantic Treaty Organization (NATO) to break with the United States in their response to Arab demands to avoid being placed on the embargo list or having their oil shipments curtailed. In the oil-importing countries, energy became a major political issue. Oil companies were often scapegoated for permitting the energy crisis to occur. In the oil-producing states, the events of October, 1973, accelerated an ongoing redefinition of the multinational oil companies’ role in the oil-producing world. The principal oil companies not only lost control to the emergent OPEC cartel of the pricing and production of oil but also were generally downgraded to being the contracted producer of oil for the oil-exporting states. In many instances, these states used their new wealth and power to buy out the oil companies’ operations inside their borders.

The big losers in the postembargo world, however, were the states in the developing world that did not produce oil. Economic development is an energy-intensive process, whether pursued through mechanization of agriculture or through industrial diversification. Even before 1973, with oil priced at $2.50 a barrel, energy costs posed an obstacle to development in many countries. After October, 1973, much of the Third World was essentially priced out of development and for nearly a generation locked into a situation of continued poverty. The price of oil nearly reached $40 a barrel before it plunged below $10 and finally stabilized at about $20 a barrel during the late 1980’s and early 1990’s. Ironically, few Third World countries condemned the OPEC states for exploiting their leverage against the richer Northern Hemisphere countries and for escalating the price of oil. Most of those countries dreamed of some day finding themselves in a cartel of coffee, tin, or phosphate producers that could make similar changes to the world markets. This dreamed-of opportunity appears to have been wasted. None of the larger, suddenly richer OPEC states noticeably distinguished itself by using its newfound wealth to significantly improve its own underdeveloped status during the decade of high oil prices that followed the Arab oil embargo of 1973.

Bibliography

Bromley, Simon. American Hegemony and World Oil. University Park: Pennsylvania State University Press, 1991. A good study of the effect of the energy crisis on U.S. influence in international relations since 1973, cast in a broad discussion of the significance of energy in global economic and political affairs since 1945.

Daedalus (Fall, 1975). This special issue, devoted to the oil crisis, is the single best source of information on the multiple dimensions of the first oil crisis and its effects on the states, multinational oil companies, and international organizations caught up in it.

Energy Information Administration. Twenty-Fifth Anniversary of the 1973 Oil Embargo: Energy Trends Since the First Major U.S. Energy Crisis. Washington, D.C.: Author, 1998. Describes the energy crisis and its aftermath. Includes bibliographic references.

Farmanfarmaian, Manucher, and Roxane Farmanfarmaian. Blood and Oil: Inside the Shah’s Iran. New York: Random House, 1997. In this insightful memoir, the exiled Iranian prince, former director of the National Iranian Oil Company, and former ambassador to Venezuela relates his experiences of the tumultuous 1970’s.

Kapstein, Ethan B. The Insecure Alliance: Energy Crises and Western Politics Since 1944. New York: Oxford University Press, 1990. An outstanding study of Western efforts to respond to seven energy crises in the twentieth century.

Licklider, Roy E. Political Power and the Arab Oil Weapon: The Experience of Five Industrial Nations. Berkeley: University of California Press, 1988. A well-developed examination of the Arab oil embargo of 1973 and its success in advancing the interests of Arab oil-exporting states.

Lieber, Robert. Oil and the Middle East War: Europe in the Energy Crisis. Cambridge, Mass.: Center for International Affairs, Harvard University, 1976. A short, outstanding analysis of the failure of the European Community to respond to the oil crisis as a community and of the counterproductive effects of its members’ individual responses to the crisis.

Sowayegh, Abdulaziz al-. Arab Petropolitics. New York: St. Martin’s Press, 1984. An excellent work on the politicization of Arab oil, the use of oil as a weapon to influence negotiations concerning Palestine, and the general success of the policy to 1973. The author concludes that the embargo marked the culmination, not the beginning, of the Arab world’s efforts to use oil for political gains.

Tetreault, Mary Ann. The Organization of Arab Petroleum Exporting Countries: History, Policies, and Prospects. Westport, Conn.: Greenwood Press, 1981. A readily accessible, comprehensive study of the Organization of Arab Petroleum Exporting Countries (OAPEC). Covers its structure, its policies, and its relationship with OPEC.

Venn, Fiona. Oil Diplomacy in the Twentieth Century. New York: St. Martin’s Press, 1986. A compact, readable, scholarly work on the influence of oil on international relations. As Venn notes, no other resource has come close to having an equivalent influence on international politics or finance.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. A massive study of the development of the international oil industry, with as much attention devoted to the personalities and politics involved as to the historical events that marked the evolution of the petroleum industry.