1973 oil crisis

In October 1973, the Organization of Arab Petroleum Exporting Countries announced that it was implementing a total oil embargo against countries that had supported Israel. This happened during the 1973 Yom Kippur War, which began when Egypt and Syria launched a surprise attack to recover land they had lost to Israel in the 1967 Six-Day War.

The embargo was led by Faisal of Saudi Arabia and first targeted Canada, Japan, the Netherlands, the United Kingdom, and the United States. Later, Portugal, Rhodesia, and South Africa were also included.

By March 1974, the embargo was lifted, but the price of oil had risen by nearly 300%, from US$3 per barrel to nearly US$12 per barrel globally. This sudden increase caused an oil crisis, also called an “oil shock,” which had many important effects on the world’s economy and politics. This event is known as the first oil shock, and a second one happened in 1979 after the Iranian Revolution.

Background

Arab-Israeli conflict

After Israel declared independence in 1948, there was conflict between Arabs and Israelis in the Middle East, including several wars. The Suez Crisis, also called the Second Arab-Israeli war, began when Egypt blocked the southern port of Eilat and nationalized the Suez Canal. This led to the Suez Canal closing for several months between 1956 and 1957.

The Six-Day War of 1967 saw Israel invade the Egyptian Sinai Peninsula, resulting in Egypt closing the Suez Canal for eight years. After the Yom Kippur War, the canal was cleared in 1974 and opened again in 1975. OAPEC countries cut oil production and placed an embargo on oil exports to the United States after Richard Nixon asked for money to support Israel. The embargo ended in January 1974, but oil prices stayed high.

American oil production decline

By 1969, the United States could not produce enough oil to meet the needs of cars and other vehicles. The US imported oil, mostly from Venezuela and Canada. In 1973, US oil production was only 16% of the world's output. The US had rules, called quotas, that limited how much foreign oil could be imported. These rules stayed in place from 1959 to 1973.

As oil became cheaper than coal, the use of coal went down. In 1951, 51% of the United States' energy came from coal, but by 1973, only 19% of American industry used coal. The US became more dependent on oil, making the economy vulnerable to an oil embargo from other countries.

OPEC

The Organization of Petroleum Exporting Countries (OPEC) was created by five oil-producing countries in Baghdad on September 14, 1960. The founding members were Venezuela, Iraq, Saudi Arabia, Iran and Kuwait. OPEC formed because oil companies had lowered the price of oil.

New members joined OPEC in the 1960s, including Libya, Indonesia and Qatar. In 1970, political changes in Libya and Iraq made OPEC stronger. By 1970, three new oil producers—Algeria, Libya and Nigeria—joined, so 81 oil companies were doing business in the Middle East.

In 1971, OPEC agreed to increase the price of oil. Later that year, President Nixon closed the link between the US dollar and gold, which hurt oil-producing countries because their income went down. OPEC wanted to price oil in gold instead of dollars.

Countdown to the October War

Some Arab oil countries had tried to use oil to influence politics before, like during the Suez Crisis in 1956 and the war between Egypt and Israel in 1967, but those efforts did not work well. Saudi Arabia usually did not want to mix oil and politics, but other countries like Algeria, Iraq, and Libya supported using oil as a tool.

In 1970, Egypt's leader, Nasser, died and was succeeded by Anwar Sadat, who wanted to work more closely with Saudi Arabia. Sadat and Saudi Arabia's King Faisal of Saudi Arabia formed an alliance. Sadat also wanted better relations with the United States and to move away from the Soviet Union.

In 1972, Sadat surprised everyone by expelling Soviet military personnel from Egypt, hoping the United States would pressure Israel to return land to Egypt. When this did not happen, Sadat moved closer to the Soviet Union again and prepared for war against Israel in 1973. Saudi Arabia promised to embargo oil to the West if war came. In April 1973, Saudi Oil Minister Ahmed Zaki Yamani warned the United States about this, but his warnings were not taken seriously.

The war and the "oil weapon"

On October 6, 1973, Egypt and Syria attacked areas in the Middle East that had been taken by Israel during a war in 1967. This fighting began what is known as the Yom Kippur War. King Faisal of Saudi Arabia supported Egypt and offered money to help with their war efforts. He also said he might use oil as a way to show his support.

The United States, led by President Richard Nixon, sent many weapons to Israel to help them during the fighting. This made some Arab leaders very angry, especially King Faisal. They felt that the United States was too strongly supporting Israel.

At a meeting of oil-producing countries, the price of oil was raised. Some leaders wanted to stop all oil sales to countries supporting Israel, but others, like Saudi Arabia, thought just raising the price would be better.

Later, Saudi Arabia and other Arab oil countries decided to stop selling oil to certain nations that supported Israel during the war. This included the United States, the United Kingdom, Japan, the Netherlands, and others. This action caused oil prices to jump sharply and created problems for many countries that needed oil. The embargo lasted until March 1974.

The embargo had big effects on the world. Oil prices went up a lot, and many countries had to find new ways to save energy or look for other sources of power. Even though the main goal of the embargo was not fully achieved, it showed how important oil was in global politics.

Chronology

Further information: 1970–1979 world oil market chronology

In early 1973, problems with money and markets began to cause trouble. Later that year, leaders from Arab countries planned to use oil as a tool in their fight against Israel. On October 6, Egypt and Syria attacked Israel, starting a war. This led to big changes in how oil was sold around the world.

Arab countries that produced oil decided to stop selling oil to some nations that supported Israel. This included places like the United States, the United Kingdom, and Japan. The lack of oil caused big problems, with prices going up and people having to use less oil. Over time, the rules about oil changed, and by early 1974, the embargo against the United States was ended.

Effects

Further information: Nixon shock and 1973–1975 recession

The embargo had immediate effects. Oil prices rose sharply, quadrupling from about $3 to nearly $12 per barrel by 1974. This caused many changes in how people and countries used energy.

The United States, which got about 25% of its oil from Arab countries, saw prices rise and this led to higher prices worldwide. Even countries not targeted by the embargo, like Iran and Venezuela, asked for more money for their oil, causing inflation around the world.

The embargo ended in March 1974 after talks, but its effects lasted through the 1970s. The world's economy slowed down, and there was less prosperity than before. People in the West faced harder times, with less fuel and higher costs for many things. This shock also changed the car industry, as people began to prefer smaller, more fuel-efficient cars.

Consequences

The oil crisis changed how countries got their energy. OPEC, the group of oil-producing countries, lost much of its power. By 1981, other countries produced more oil than OPEC members. Saudi Arabia produced more oil to lower prices, which hurt other oil-producing countries that needed higher prices to make money. Oil prices, which had been very high, dropped a lot during the 1980s.

Countries started looking for new places to find oil, such as Alaska, the North Sea, the Caspian Sea, and the Caucasus. They also began using other types of energy, like nuclear power and natural gas, which reduced the need for oil. This change hurt many oil-exporting countries, especially those that had not prepared for lower prices. Some countries faced serious economic problems as a result.

Graphs and charts

There are some useful graphs that show what happened with oil prices and exports around 1973. One graph shows oil prices from 1861 to 2015, with a big jump in 1973 and again during the 1979 energy crisis. The orange line on this graph shows prices adjusted for inflation.

Other graphs display changes in oil export revenues since 1972, U.S. oil production and imports, and the price of oil during the embargo. The last graph uses the nominal, not real price of oil, which makes prices look higher than they actually were at the time.