Fifty years ago, Saudi King Faisal and other Arab leaders launched an oil embargo in 1973 as a payback for Washington’s support for Israel in its war with Egypt and Syria. The embargo arose from a pact between Faisal and the leaders of Egypt and Syria, who planned surprise drives to retake their territory under Israeli occupation.
If the US intervened, Faisal and other Arab producers agreed to retaliate with the “oil weapon.” When Washington airlifted U.S. weapons that helped Israel thwart Arab gains, Faisal and OPEC’s Arab members retaliated, increasing oil prices, banning oil shipments to the United States, and cutting production by 5% per month. This led to a long period of upheaval in global oil markets and pain at the gasoline pump for Americans and consumers globally.
The embargo’s disruptive power was due to OPEC’s dominance of world oil supply and oil’s supremacy in the global energy mix. After the embargo, producer states took over, and control of global oil production passed from Western oil giants to newly formed national oil companies.
The 1973 Arab oil embargo led to a significant increase in oil revenues in Middle Eastern countries, such as Saudi Arabia, which boosted their geopolitical power. However, this led to price increases in the West, causing economic stagnation and high inflation. Misguided policies, such as gasoline price controls and rationing, exacerbated shortages and created long lines at service stations.The downsizing of gas-guzzling vehicles in America and the importation of fuel-efficient Japanese cars led to the imposed corporate average fuel economy (CAFE) standards. Western oil companies were forced to move to more challenging terrain, such as the offshore Gulf of Mexico and North Sea.
Fifty years later, crude oil use has grown dramatically, with global supply rising from less than 60 million barrels per day in 1973 to nearly 94 million barrels per day in 2022. Motor fuel prices continue to be a critical input to inflation, with the increase in gasoline prices costing the average American household roughly $1,000. However, OPEC’s importance and oil’s share of the global energy mix have declined, with its 13 members accounting for just 36% of global oil production today. The high oil prices caused by the 1973 embargo encouraged oil drillers to diversify and develop substitute fuels.
The 2022 Russian invasion of Ukraine and the Israel-Hamas war have resurged concerns about energy security, with Russia’s 2022 invasion reinforcing the risks of energy “weaponization.” Europe, particularly, has been affected by over-dependence on Russian natural gas and is shifting its energy sources. The transition to renewable energy sources like wind and solar insulates consumers from supply chain risks, while electric vehicles protect owners from swinging oil prices. However, shortages and price spikes mainly affect component manufacturers and investors. If supplies are bottlenecked long enough, the energy transition could be delayed.
Like the embargo 50 years ago, today’s crises have made the future of energy massively uncertain. Changes in the global energy mix, particularly the rapid growth of electric vehicles, could weaken the importance of oil and the cartel overseeing it. Former Saudi oil minister Ahmed Zaki Yamani once said, “The Stone Age did not end for lack of stone, and the oil age will end long before the world runs out of oil.”