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Wall Street History
https://www.gofundme.com/s3h2w8
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04/05/2002
The Arab Oil Embargo of 1973-74
With the recent turmoil in the Middle East, there has been
increased talk of the possibility for an Arab oil embargo against
the U.S. and other supporters of Israel. While for various
reasons I don’t currently believe this will come to pass, it is a
good time to take another look at the embargo of 1973-74.
Following is a piece I first did back on 10/8/99 in this space.
I have added a few minor points, otherwise, it is as originally
written.
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Before there was an OPEC (the Organization of Petroleum
Exporting Countries), the great oil companies of the West ruled
the roost. Oil is the lifeblood of the industrialized nations. It is
used in planes, cars, tanks, skyscrapers, fertilizer, drugs and
synthetics. Yet back before the days of OPEC, the great oil
companies often retained 65% or more of the revenue from a
product that was produced on someone else’s property. Then in
1960, many of the oil producing nations, from both the Middle
East and elsewhere, formed a cartel to protect their interests.
[Currently, OPEC is comprised of Algeria, Indonesia, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab
Emirates, and Venezuela. Large non-OPEC producers such as
Mexico, Norway and Russia sometimes go along with the cartel
position of the day.]
The goal of OPEC was to present a common front in negotiations
with the giant oil companies, which themselves worked closely
together. OPEC set the stage for a new process in which the
producer nations would eventually take over the functions of the
companies, at least in production, and retain much more of the
revenues. But OPEC really had little impact from its founding in
1960 until 1973. Then all hell broke loose.
In 1973, the U.S. and the Western world were in the midst of an
inflationary spiral. The world had become highly vulnerable to
commodity cartels, as twenty years of prosperity and accelerating
population growth had created heavy demand for raw materials.
In the U.S., consumer prices were rising at an 8.5% clip, while
inflation rates in other nations were often much higher. The
demand for Middle Eastern oil had been increasing throughout
the industrialized world and the needs of these countries grew far
faster than production. OPEC was growing stronger and it was
determined to increase its share of the profits.
President Nixon, as part of his ill-fated price control program,
had slapped controls on oil in March 1973. The U.S., which had
been self-sufficient in energy as recently as 1950, was now
importing some 35% of its energy needs. U.S. petroleum
reserves were nearly gone. Governments, corporations and
individuals were entirely unprepared for what would happen
next.
On October 6, 1973, the Jewish holy day of Yom Kippur,
Egyptian forces attacked Israel from across the Suez Canal,
while at the same time Syrian troops were flooding the Golan
Heights in a surprise offensive. After early losses, Israeli
counterattacks quickly pushed into Syrian territory in the north,
as troops outflanked the Egyptian army in the south. Israel, with
help from the U.S., succeeded in reversing the Arab gains and a
cease-fire was concluded in November. But on October 17,
OPEC struck back against the West by imposing an oil embargo
on the U.S., while increasing prices by 70% to America’s
Western European allies. Overnight, the price of a barrel of oil
to these nations rose from $3 to $5.11. [In January 1974, they
raised it further to $11.65.] The U.S. and the Netherlands, in
particular, were singled out for their support of Israel in the war.
When OPEC announced the sharp price rise, the shock waves
were immediate. Industrial democracies, accustomed to
uninterrupted sources of cheap, imported oil, were suddenly at
the mercy of a modern Arab nationalism, standing up to
American oil companies that had once held their countries in a
vise grip. Many of these “new” Arabs were Harvard educated
and familiar with the ways of the West, and to many Americans
it was impossible to understand how their standard of living was
now being held hostage to obscure border clashes in strange parts
of the world.
The embargo in the U.S. came at a time when 85% of American
workers drove to their places of employment each day.
Suddenly, President Nixon had to set the nation on a course of
voluntary rationing. He called upon homeowners to turn down
their thermostats and for companies to trim work hours. Gas
stations were asked to hold their sales to a max of ten gallons per
customer.
In the month of November 1973, Nixon proposed an extension of
Daylight Savings Time and a total ban on the sale of gasoline on
Sundays. [Both were later approved by Congress.] But the
biggest legislative initiative was the approval by Congress on
November 13 of a Trans-Alaskan oil pipeline, designed to supply
2,000,000 barrels of oil a day. [This was completed in 1977.
See any parallels to today’s fight over the Arctic National
Wildlife Refuge?]
A severe recession hit much of the Western world, including the
U.S., and as gasoline lines snaked their way around city blocks
and tempers flared (the price at the pump had risen from 30 cents
a gallon to about $1.20 at the height of the crisis), conspiracy
theories abounded. The rumor with the widest circulation had
the whole crisis as being contrived by the major oil importers
who were supposedly secretly raking in the profits. New York
Harbor was really full of tankers loaded with oil, in no hurry to
dock, according to the Oliver Stone types. Sorry, folks, it was
just our own stupidity that allowed us to be so used and abused.
How did Wall Street respond? Well, as you might imagine
shares in oil stocks performed well as profits soared, but the rest
of the market swooned 15% between 10/17/73 and the end of
November. [The Dow Jones fell from 962 to 822.] This ended
up being the middle of the great bear market that would see the
Dow go from its 1/11/73 high of 1051 to 577 by 12/6/74, a
whopping 45% decline over nearly two years.
As for the embargo, the Arabs lifted it against the U.S. on March
18, 1974. The Dow then stood at 874.
Sources:
“The Century,” Peter Jennings and Todd Brewster
“It Was a Very Good Year,” Martin Fridson
“The Great Wave,” David Hackett Fischer
“A History of the Arab Peoples,” Albert Hourani
“One World Divisible,” David Reynolds
Brian Trumbore
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