What About the Arab Oil Embargo?

Was not the Arab Oil Embargo a big deal?  No.  It was not.  It was a meaningless gesture but came to represent the energy crisis period of the 1970s in the perceptions of many media and academic commentators, government officials, and the public.  Many believe the Embargo caused the crisis. Wrong. 

The energy crisis, in terms of up to 5-fold oil price increases and changes of control of production and the supply system, was developing for three years before the embargo was imposed in October 1973, and continued for 12 years after the embargo ended in March, 1974.  

The misconception by the public and by U.S. Government officials alike was that because the US imported oil from Saudi Arabia, the U.S. was dependent on supplies from Saudi Arabia.  As noted in earlier Notes, however, the U.S. oil companies not only had many other sources of oil but also maintained a general supply overcapacity of about 12% of demand for use in just such a supply disruption.  When the Saudis imposed the Embargo the oil companies simply re-routed tankers.  

There was never a shortage of oil in the 1970s.  

The supply panic in the US Government, the media, and by the public, the gas station lines, the gasoline allocations, the 55-mph national speed limit, the price controls, the choking regulations, Jimmy Carter’s sweater and speech that the energy crisis was the moral equivalent of war, the skyrocketing inflation, the extreme interest rates, were all based on a problem that did not exist.  


I was a professor of petroleum engineering at the Colorado School of Mines in the 1970s.  Our Department had close ties with the oil and gas industry through research, alumni, and funding relationships. I and other faculty members all had worked for various major oil and gas companies and continued with consulting relationships.  In short, we had an extensive network of contacts in the industry, understood how it operated, and were familiar with the reality behind public and government perceptions.  Our initial reaction to the announcement of the Saudi Embargo was So What?  We expected the companies to do just what they did: Re-route tankers and supply the U.S. from other sources and send Saudi oil elsewhere.   

The embargo was imposed by Saudi Arabia, followed by other Arab governments in response to the US supplying ordnance to Israel in a war with Egypt and Syria.  The Nixon administration was severely crippled by the Watergate scandal investigations.  Henry Kissinger, one of the few people in the administration not involved in Watergate, had just been appointed Secretary of State.  After negotiating a cease-fire for the war, he negotiated an end to the embargo in 1974.  He pledged a renewal of U.S. guarantees of Saudi security; in effect renewing the original deal between President Franklin Roosevelt and Ibn Saud in 1945.  

The Arab governments had already imposed a 5-fold oil price increase and were taking much larger shares of the revenues.  The massive transfer of dollars to Saudi Arabia at the new price levels jeopardized US economic stability. US Secretary of the Treasury William Simon, a former Wall Street bond trader, negotiated a Saudi commitment they would buy US Treasury Bonds with all the dollars they received for oil and did not need for internal use.  

Thus was born the Petrodollar.

The Energy Crisis period during the 1970s and early 1980s was a turbulent 15-year period of international political, economic, financial, and industry turmoil and transition all based on the US, British, and European governments not understanding what they were doing.  The decisions made with this lack of understanding irrevocably changed the economies of the US and Europe.  Control of a major foundational requirement for advanced industrialized economies and a critical element of international trade and finance was abdicated to a group of third-world despotic governments – and still is.  

Kissinger described it:  

“Never before in history has a group of such relatively weak nations been able to impose with so little protest such a dramatic change in the way of life of the overwhelming majority of the rest of mankind.”

Years of Upheaval, 1982

For no good reason, the US and European governments abdicated control of the oil supply and price system they had established.   

Kissinger again:

 The structure of the oil market was so little understood that the embargo became the principal focus of concern.  In fact, the Arab embargo was a symbolic gesture of limited practical importance.

 The embargo was an inconvenience and an insult; it did not hurt us significantly.

 We were operating in a “never-never” land of national policy making.

The embargo agreements to repatriate excess Petrodollars by investing them in Treasury bonds firmly established the US dollar as the currency of the international oil market although American oil companies no longer controlled it.  Oil is the largest component of international trade so the dollar was further strengthened as the reserve currency of international trade. Thus, the US Government could run huge deficits financed by foreigners – which they came to resent. They have not been able to do anything about it but will at any opportunity.  The oil market and pricing system thus became intimately intertwined with the international financial system, exchanges, and capital markets which extended influence of the oil producer governments into the international finance and currency system.  

Western democracies lost control of their own fate with the energy crises of the 1970s and their societies lost their vigor and initiative; even their birth rates dropped.  Europe became an ineffective, charming museum. They set themselves up for the current energy crisis.


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