Energy crisis of the 1970s

Identification Serious threat to the affordability and availability of oil and other energy sources

The oil crises of the 1970’s had a profound impact on American society, the country’s economic and environmental policies and politics, and the United States’ diplomatic relations with the world.

Henry Kissinger, the national security adviser to President Richard M. Nixon and President Gerald R. Ford, was often quoted as saying during his years of public service that the American people were just beginning to discover their vulnerability. He was speaking of the growing recognition during the late 1960’s and early 1970’s that a nuclear war with the Soviet Union would obliterate Western civilization, regardless of who struck first or what defense systems were employed. He could also have been speaking, however, of the country’s growing awareness, as a result of the Arab oil embargo of 1973 and the soaring price of oil in 1979, that the industrialized world ran on an energy source that it did not control. Subsequently, it was vulnerable to a disruption in its supply and increases in its price.

Background

Optimists saw the first oil crisis in 1973 as an aberration that did not require draconian policy responses. Pessimists viewed it as a culmination of forces at work for more than a quarter of a century, which could neither be ignored nor be reversed without great costs. In fact, the oil crisis of 1973 was a convergence of structural trends, which sooner or later would have resulted in a sharp increase in the cost of the developed world’s principal energy source and a series of idiosyncratic elements that affected its timing and severity.

The rebuilding of Europe and Japan and the satisfaction of pent-up consumer demands in postwar America set in motion a series of changes in energy use in the developed world: Overall energy use soared, oil—much of it imported—increasingly became the source of that additional energy, and the Middle East gradually became the primary source of imported oil. By 1973, Europe and Japan had moved far away from the domestic coal industries that had accounted for more than 70 percent of their total energy use prior to World War II and were dependent on imported oil, overwhelmingly from the Middle East, for 60 to 80 percent of their total energy supply. The United States, still one of the world’s largest oil producers, was itself importing at least 30 percent of its oil and nearly 15 percent of its total energy by the eve of the 1973 oil crisis.

In the meantime, a number of political coups in several once-pro-Western oil-producing states in the Middle East between 1958 and 1969 had installed less friendly, more pro-Arab governments in countries such as Iraq, Algeria, and Libya. This situation, coupled with the competition of a growing number of smaller oil companies such as Atlantic Richfield and Occidental, had, by 1973, weakened the hold of the Seven Sisters (seven oil companies, predominantly American, that had controlled the international oil industry for half a century). Thus, when the Yom Kippur War erupted between Israel and its neighboring states (principally Syria and Egypt) in October, 1973, and the United States rearmed Israel during the course of that war, the Organization of Petroleum Exporting Countries (OPEC) was able to respond by declaring an effective oil embargo on the United States. It also threatened to reduce oil exports to other Western-aligned importing states if they did not condemn Israel for continuing to occupy the Arab lands that it seized in the Arab-Israeli war of June, 1967.

The result of OPEC’s action was pandemonium. Oil-importing states rushed into the futures market to bid against one another for the oil that was essential to their economic survival. By the time the panic subsided, the price of oil had been driven from under three dollars per barrel to more than twenty, the member states of OPEC had replaced the Western petroleum companies as the owners of their oil fields, and OPEC had established a cartel-like control over decisions affecting the amount of oil being produced for export and the cost of that oil.

The 1979 Oil Crisis

OPEC’s initial pricing decisions were of a restrained nature, and by the mid-1970’s, the official price of oil had dropped to fourteen or fifteen dollars per barrel, Western economies had largely adjusted to the higher price levels and the inflationary pressures that they had generated, and importing states were less alarmed and easing away from the costly adjustment policies such as the use of synthetic fuels and mandated conservation, which they had considered in the immediate aftermath of the oil crisis of 1973. Then, in nine months during 1979, complacency vanished in the face of new crises in the oil-exporting Middle East and their catastrophic consequences for oil-importing countries.

The events began in January with the overthrow of Mohammad Reza Shah Pahlavi of Iran and the subsequent turmoil into which it threw that country. As production declined in the Iranian oil fields, the price of oil began to rise on the world’s market. Then, in September, Iraq’s leader, Saddam Hussein, sought to exploit the chaos in Iran and the sharp decrease in its military capability and initiated a war with Iran that did not end until ten years later.

In the short term, the combined disruption of Iraqi and Iranian oil exports—which, when combined, represented approximately a third of OPEC’s exports at the time—led to an official increase in the price of OPEC oil to more than thirty-two dollars per barrel and sales in the future-delivery market in the forty-dollars-per-barrel range. As a result of net price increases of nearly twenty dollars per barrel for imported oil (versus the real price increase of only nine dollars per barrel when the price of oil suddenly quadrupled in 1973), inflation soared in the United States and throughout the oil-importing world. In response, the United States and other Western governments enacted harsh counterinflationary policies, including higher taxes and higher interest rates, which in turn drove up unemployment figures. The United States experienced double-digit inflation and unemployment rates and developed an appreciation for the effects that sudden disruptions in oil supply can have on life far from the Middle East.

Impact

Although the economic consequences of the 1970’s oil crises were both immediate and substantial, the political effects of these events were at least as significant and proved to be longer lasting. The politically motivated 1973 OPEC embargo on oil shipments to countries supporting Israel in the Arab-Israeli conflict drove a wedge between the United States and most of its North Atlantic Treaty Organization (NATO) allies. The Nixon government sought to separate the oil issue (the availability of oil) from the Palestinian issue (Israel’s continued control over the overwhelmingly Palestinian-populated Gaza strip and West Bank—areas intended to be a Palestinian state when the United Nations partitioned Palestine and created Israel in 1948). Arab governments, however, demanded that oil-importing states endorse United Nations Resolution 242, which called for Israel to restore those lands to the Palestinian people as a prerequisite to avoiding the Arab oil embargo. Most countries quickly complied, as did Japan in the Pacific.

Meanwhile, the United States was forced into the position of becoming an ongoing broker in the Middle East drama, as it did during the Camp David Accords, seeking to resolve the territorial issues between Israel and its neighboring states and the issue of statehood for the Palestinian people. Above all, the energy issue became a major part of the United States’ public and policy agendas, affecting not only domestic policy making but also foreign policy, as the situations in the Persian Gulf proved in the following decades.

Bibliography

Davis, David Howard. Energy Politics. New York: St. Martin’s Press, 1992. A excellent account of the impact of energy crises of the 1970’s on the long-standing issue of U.S. energy politics.

Rustow, Dankwart A. Oil and Turmoil: America Faces OPEC and the Middle East. New York: W. W. Norton, 1982. An excellent examination of the impact of world events on American foreign policy in the years immediately following the second oil crisis.

Solberg, Carl. Oil Power: The Rise and Imminent Fall of an American Empire. New York: Mason, Charter, 1976. A solid examination of the relationship between civilization and energy sources and the implications of energy dependency for the American way of life.

Ting, Michael. Oil Crises and Climate Challenges: Thirty Years of Energy Use in IEA Countries. Paris: IEA, 2004. An outstanding discussion of the efforts to adjust to energy dependency by the United States as well as other countries of the developed, oil-importing world.

Vernon, Raymond, et al. The Oil Crisis in Perspective. Special Issue of Daedalus: The Journal of the American Academy of Arts and Sciences 104, no. 4 (Fall, 1975). One of the best analyses on the causes and effects of the 1973 oil crisis.

Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. An important discussion on the background to, and impact of, the oil crises of the 1970’s on the United States’ domestic and foreign policy.