The 1973-1974 energy crisis produced many lessons, but Joel Darmstadter cautions that the benefits of moving toward US energy independence should not be overdrawn.
Table 1. Oil Production, Consumption, and Price at the Time of the Oil Crisis
In recalling those oil producers "whose embargo once brought the industrial world to its knees" (Baltimore Sun), commemorative coverage of the worldwide price shock of 1973–1974 may sometimes veer toward the dramatic. Still, one would have to be a committed contrarian to downplay the seriousness of the shock. The virtually unprecedented and precipitous more-than-threefold increase in the real price of a barrel of oil not only produced significant near-term economic damage in the United States and elsewhere but also sharpened intense policy concerns about the implications for future vulnerability of energy-dependent societies.
Background on the Crisis
What key elements drove that upheaval of 40 years ago? No episode of turbulence in the Middle East exists in isolation from what has gone before and is likely to recur. That said, the oil shock's precipitating genesis was the outbreak on October 6, 1973, of the Yom Kippur War. This conflict, the fourth Arab–Israeli war in 25 years, began with a coordinated attack by Syria and Egypt in an effort to reclaim lands lost to Israel during the 1967 Six-Day War.
The October outbreak of hostilities was followed by two events—the first was political and, as it turned out, largely symbolic; the second was painfully economic. First, in October 1973, the Arab–Israeli conflict prompted a group of Arab oil producers to institute a selective embargo on oil exports. The second development was a collective decision by member countries of the Organization of the Petroleum Exporting Countries (OPEC) to raise the price of oil.
The embargo, by far the easier issue to consider, was conducted by a somewhat shifting group of Arab oil exporters that embraced a fairly ambiguous set of goals during its relatively brief six-month existence. (The embargo was formally terminated in March 1974.) In essence, it targeted the United States and the Netherlands with oil delivery shortfalls as a protest against the two nations' presumed support of Israel. Yet, to demonstrate the achievement of this objective—or that of any embargo—one would need to find statistical evidence of manipulated and extended export restrictions. No such evidence exists, notwithstanding an embargo announcement, pledging supportive output reductions.
Several major non-Arab oil producers (and OPEC members)—among them Venezuela and Iran—failed to join the embargo. In addition, all indications suggest that an effective rerouting of world oil flows spared the intended targets any major disruption in supply. These logistical responses, though no doubt entailing some added transportation costs, are separable from the genuine damage inflicted by the steep rise in oil prices. In short, it is hard not to view the embargo as a largely symbolic and limited expression of political sympathy by Arab oil producers.
If, judged by its futility, the embargo was mostly a token gesture, the dramatic rise in the price of oil was anything but. To probe how the world demand for and supply of oil came to intersect and settle at such a dramatically higher price, one needs to explore the degree to which shifting consumption, production, or both represented the principal driver of change. In fact, a good case can be made that both factors did play an important role.
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