Oil crises and oil embargoes

DEFINITION: Disruptions of oil supply patterns between the Middle East and the industrialized West

Oil crises and oil embargoes have typically occurred during times of political tension in the Persian Gulf region. Such episodes have strengthened support in Western nations for greater domestic energy production and for military policies enhancing oil security in the Persian Gulf.

The industrialized West depends on oil as a fuel and chemical feedstock. Given that the majority of the world’s long-term oil reserves are located in the Middle East, the West depends on a smooth flow of oil through world markets. On at least three occasions during the last few decades of the twentieth century, political events in the Middle East led to crises in the world oil markets. These crises illustrated the West’s vulnerability to oil supply interruptions and price increases.

World Oil Market Interruptions

In the early years of international oil markets, the United States was the leading producer, accounting for more than one-half of the world’s oil production until the 1950s. US oil production, however, peaked at 11.3 million barrels per day in 1970 and began to decline as lower-cost reserves in the Middle East were tapped. Leading oil-producing nations in the Middle East had met in 1960 to form the Organization of Petroleum Exporting Countries (OPEC), but the new organization was largely ignored by the world community. Because oil flowed without significant interruption, there was also little notice of the increasing dependence of the West on Middle Eastern oil into the early 1970s.

The security of oil supply became an immediate world issue on October 6, 1973, with an attack by Egyptian forces against Israeli positions along the Suez Canal. The United States supported Israel in the brief war that followed. In retaliation, King Faisal of Saudi Arabia ordered a 25 percent cut in Saudi oil output and a cutoff of shipments to the United States. The other Arab members of OPEC joined in the embargo and production cutbacks. World oil prices roughly quadrupled, from around three dollars per barrel to twelve dollars. In the United States, emergency conservation measures were implemented, and consumers waited in long lines for limited supplies of motor fuels. The embargo ended about six months later, on March 18, 1974.

The Western economies recovered, and oil prices were relatively stable from 1974 to 1978. Oil demand resumed its growth, and oil again flowed to the West. In 1979, however, the Iranian revolution removed much of Iran’s production from world markets at a time when there was little excess capacity. World oil prices again rose sharply, reaching a peak of nearly thirty-five dollars per barrel by 1981. During this incident, unlike 1973-1974, there was no attempt to declare an embargo. OPEC members merely raised prices and continued to ship oil.

The high prices in the aftermath of the Iranian revolution did not persist, as a worldwide surplus of oil drove prices lower during the 1980s. A third crisis, the Persian Gulf War of 1990-1991, elevated prices so temporarily that some analysts referred to the period as “an oil spike,” referring to the sharp upward, then downward, movement in oil prices. The upward movement was precipitated by Iraq’s invasion of Kuwait in August, 1990. World oil prices reached their highest level in more than eight years, briefly peaking near the forty-dollar-per-barrel mark. Saudi Arabia and other producers began to replace Kuwait’s lost output, and prices fell, with a dramatic drop after Operation Desert Storm defeated Iraqi forces in Kuwait in January, 1991. Even the burning of Kuwaiti oil wells by Iraqi forces was unable to keep world prices at their previous high levels.

In 2024, Ukraine imposed a partial ban on Russian oil passing through its territory. To hurt Russia financially two years after its invasion of Ukraine, Kyiv blocked the transit of pipeline crude oil sold by Lukoil, Moscow's largest private oil firm, to Central Europe. However, because of this, Hungary is facing a fuel shortage.

Oil Crisis Effects

The early stages of all three crises were characterized by panic buying, with producers and consumers scrambling to assure supplies. Later research showed that the crises affected price more than physical availability. Even during the most severe of the three episodes (1973-1974), the ordered cutbacks amounted to less than 10 percent of world oil supply. Further, after the embargo ended there was evidence that important quantities of supposedly embargoed oil had reached the United States and other Western nations.

During each of the three crises, Western economies entered recessions. Higher oil prices acted as a tax that transferred massive amounts of wealth from consuming nations to producing nations. Later declines in world oil prices had the opposite effect, stimulating the economies of the consuming nations.

The 1973-1974 embargo led to marked changes in energy policy in the United States. During the embargo, President Richard Nixon announced Project Independence, a program designed to enable the United States to achieve self-sufficiency in energy through crash programs along the lines of the Apollo moon missions and the Manhattan Project to develop the first nuclear weapons. Project Independence called for major development of nuclear and energy resources, placing a low priority on conservation and environmental concerns. Similar policies continued during the administration of President Gerald R. Ford but lost urgency as the embargo’s effects were overcome. The Iranian disruption of 1979-1980 occurred during the term of President Jimmy Carter, adding force to Carter’s characterization of energy problems as “the moral equivalent of war.” Carter called for conservation and new technology to engineer a transition that he characterized as having the same importance as the transition from wood to coal during the Industrial Revolution. By the time of Operation Desert Storm in 1991, policy concern had shifted to the ability of Western nations to use military force to keep oil flowing. Iraq’s initially successful invasion of Kuwait and the implied threat to Saudi Arabia quickly generated support for a military solution by a coalition of nations led by the United States.

Knowledge Gained from Oil Crises

Although the oil crises have been extensively studied, their message for the future and the policy lessons to be learned from them are uncertain. One viewpoint holds that, in some cases, oil crises constitute an early warning of resource depletion. The 1973-1974 price increases were initially seen as a signal confirming predictions that the prices of nonrenewable resources would increase as depletion approached. This “depletionist” viewpoint calls for government-enforced conservation of existing resources and development of new technologies to postpone or avoid the consequences of oil depletion.

A second interpretation of the oil crises is that instead of reflecting a fundamental problem of depletion, they reflect a problem with distribution; that is, oil resources occur in patterns that are different from their patterns of use. Since large amounts of oil resources are held in the politically unstable Middle East but used in the West, cutoffs and price increases are always possible. The policy problem is viewed as a politically inspired cutoff of oil shipments. There is no threat, in this view, of a calculated economic cutoff of oil because producers would find it more profitable to sell oil at a high price than to cut it off altogether. An embargo would make sense only to demonstrate control of a resource and the will to sustain price increases.

A third interpretation characterizes the oil crises as simple products of monopoly power or conspiracy. During the 1970s oil crises—with their long lines for gasoline—and the rapid 1990 price increases that followed Iraq’s invasion of Kuwait, such explanations were common. Early versions of this viewpoint denied resource scarcity as a problem and called for the breakup of oil companies to end the conspiracy. Later, as Middle Eastern oil-producing countries assumed control over operations from Western oil companies, the focus shifted to policy actions to combat the OPEC monopoly.

OPEC Power

The degree of perceived power held by the OPEC oil cartel has fluctuated considerably since its formation in 1960. OPEC nations held 90 percent of the world’s then-known oil reserves. Although this guaranteed the OPEC nations a key role in the future as reserves outside OPEC were depleted, the organization was weak during its first ten years. A hint of OPEC’s possible power came in 1970 when a bulldozer accident broke a pipeline carrying oil from the Persian Gulf to the Mediterranean Sea. In the aftermath of the accident, which caused tight oil supplies, Libya insisted on and received higher prices for its crude oil.

During the 1973-1974 embargo OPEC’s power was little questioned. The sharp upward movement of oil prices seemed to prove that OPEC had the ability to withhold enough oil to keep prices permanently higher. Further confirmation came with the 1979-1980 incident, when oil prices again doubled. Recessions following the oil crises made the West appear dependent on OPEC’s indulgence for its future prosperity.

The collapse of oil prices after the three crises led to a different interpretation. In this view, oil prices were kept artificially low before 1970 by the rapid pumping of oil from Middle Eastern reserves by Western-based companies. The companies were seeking profit with little regard for the long-term future of the resource, since they realized that power would soon shift away from them. After 1970, as the host nations began to realize their power, oil prices recovered from their artificially low levels. The extraordinary oil price increases of 1973-1974, in this view, were from artificially low levels to normal levels. At the time they occurred, they had been seen as increases from normal levels to artificially high levels. Some analysts came to believe that OPEC was simply announcing, rather than causing, higher oil prices.

Energy analysts have observed that oil crises and embargoes have had a common pattern. First, demand growth catches up with world capacity, leading to generally tight market conditions. Next, a precipitating event occurs in the Middle East, leading to quick price increases and disruptions of ordinary supply channels. If there is no permanent loss of supply, however, the disruption soon ends. At the time of the crisis, policy priority goes to energy security over environmental concerns. With the passage of time, however, energy security loses some of its prominence as a policy goal.

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