Economy
On this day in 1973: oil price hike sparks crisis in the west
On October 16 1973, the Organisation of Petroleum Exporting Countries (OPEC) decided to raise the price of oil by 70% to $5.11 per barrel and declared an oil embargo on the US.
The oil crisis had its roots in the Yom Kippur War between Israel and several Arab countries. The oil embargo was triggered by the decision of the US to supply arms to Israel, as Egypt and Syria were trying to get back Arab territories of the Golan Heights, West Bank and Sinai occupied in 1967.
As a response to the military aid given to Israel, Arab countries decided to hit the US with an oil embargo, which lasted until March 1974, when US negotiations convinced Israel to withdraw troops from Sinai. OPEC countries then decided to end the embargo.
After the embargo was announced in 1973, OPEC countries opted to extend it to other western nations, as well as Japan. It was hoped that by cutting collaboration with major oil exporters, the west would abandon its pro-Israeli position in favour of stronger support for Arab countries. The economic consequences on countries that relied primarily on oil as fuel were dramatic.
The ‘oil weapon’ was used gradually against western countries. Oil production was cut by 25% below September 1973 levels, and exporters later doubled the price of crude oil.
Prices had quadrupled by 1974, causing significant slowdown in production and growth and rising inflation. As a result, the US started to look at alternative ways of supply oil, for instance by drilling the Arctic, but this solution required years of research and development.
Countries called for electricity and gas rationing and many even ‘banned’ Christmas to save fuel. Similar energy saving measures occurred throughout Europe as well, with no use of cars on Sundays and restrictions on flying and boating.
In the UK, the rising living standards that had developed since world war two – particularly the easy access to transport – were threatened by the oil shortage.
It exposed the weakness of economies based on a volatile and insecure form of fuel, leaving populations with the feeling that an energy crisis would be possible and incredibly hard to face, by relying on oil.
For the first time, countries started to speculate about alternatives such as the wind and sun, although the oil crisis also meant a greater reliance on nuclear and coal. It also started to develop the idea that resources needed to be used carefully, with less energy to be used for driving and heating.
Ironically, the embargo posed by OPEC countries also boosted the development of the North Sea oil industry in the UK, which would later become one of most significant oil exporters between 1980 and 2004. While Norway used these future revenues to build the world’s largest sovereign fund ($785 billion), the UK used the revenue to fund tax cuts and public spending. The US started to capitalise on domestic oil from Alaska and increase its production of gas.
Generally, the oil crisis made Europe reconsider its relationship with the Middle East, but it also shed light on important issues related to energy security. It became clear that relying excessively on finite resources, bought at volatile prices from unstable regimes, meant living in uncertainty and vulnerability.
The question is, 40 years on, have we learnt our lesson?
Further reading:
Why our quality of life is sacrificed by the continued use of fossil fuels
Consuming nothing to consume everything
Claims of oil prosperity fail to note the finite nature of fossil fuels