When oil disruptions lead to crises: Learning from the Arab oil embargoes 1967 and 1973-74
What is oil dependence and how can it lead to energy crises? What lessons can be learned from history to tackle new energy crisis? And why do some oil disruptions lead to crisis while other do not?
by Johan Landgren | Energy Bulletin |Nov 30 2011
This article looks at the Arab Oil Embargo of 1967 and the Arab Oil Embargo of 1973-74 and examines why theArab oil embargo against the US in 1967 did not lead to a crisis while the Arab oil embargo against the US in 1973-74did.
This article focuses on two factors potentially able to contribute to an oil crisis: the extent of vulnerability to an oil disruption and OAPEC's[1] market power. These two factors are measured by looking at, for example, alternative sources to oil imports from OAPEC and OAPEC´s market power, OAPEC´s unity behind the embargo and the relations between OAPEC and the international oil companies.
This, of course, could be of interest to future energy emergency planners in the US and elsewhere with regard to Peak Oil. The findings could also be of interest to anyone who wants to get an increased understanding of oil dependence and how it can lead to energy crises but also how one can start planning for a future of expensive oil.
Variations in U.S vulnerability to an oil disruption in 1967 versus 1973-74
At the start of the 1967 Arab oil embargo the US reserve capacity production was sufficient, while increased oil imports from Venezuela, Iran and Indonesia helped to replace the lost access to oil imports from OAPEC. At the same time US domestic oil production increased, peaking in 1970.
In contrast, by 1971 (two years prior to the 1973 oil embargo), the US reserve capacity was gone, and all domestic production was running at 100% of its capacity with no room for increased production in case of an emergency.
Thus, these two fundamental factors, loss of reserve capacity and the peak in US oil production, predictably made the US more vulnerable to the Arab oil embargo in 1973-74 than it was in 1967.
Table 2: Oil export from OAPEC and other major oil exporting countries to the US
Sources: To calculate OAPEC´s export to the US and the data for Venezuela, Iran and Indonesia and total the US import the following sources were used: the US Energy Information Administration (EIA) Annual Energy Review 2009, Table 5.4 Petroleum Imports by Country of Origin” 1960-2009, U.S Census Bureau, Statistical Abstract of the US: Table No 856, 1960-1973, Table No 910, 1965-1975.
(1) OAPEC: includes: Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia, United Arab Emirates, the Neutral Zone (between Kuwait and Saudi Arabia), Algeria and Libya.
Table 2 above shows US oil imports during the two embargo periods.
Moreover, the increase in US vulnerability to an oil disruption was also influenced by several other important factors. When the environmental movement grew in the years after the 1967 embargo and demands for a cleaner environment intensified it resulted in domestic coal being replaced by imported oil. Going from one finite resource to another lead to increased imports and consumption as well as having a detrimental impact on the environment. This reflected the more or less total unawareness of the US foreign oil dependence and the facts of energy supply.
Since the oil price remained unchanged prior to and after 1967 there were no incentives for either the industry or the public to think of alternative measures to be taken.
Prior to the 1973-74 embargo, energy awareness remained low despite increasing imports and decreasing domestic oil production. This time, because price controls and subsidies kept the oil price in the US at a low level, the energy industry saw no reason to invest in the development of more energy efficient technology, like smaller cars or more fuel efficient air planes. Instead, more oil imports were encouraged because development of domestic oil production was seen as a more expensive alternative in the US. The fact that Nixon in the middle of the 1973 crisis announced “Project Independence”, aiming at becoming totally energy independent by 1980 is quite symptomatic of the lack of long term energy policy and realistic planning in the US prior to and during the crisis.
Indeed, in 1981 (that is, a year after the US should supposedly have been energy independent) the GAO instead acknowledged that the US was “totally unprepared for the oil import interruptions…such as the 1973 oil embargo”. Yet lack of awareness of the facts of energy dependence, decreased domestic refining capacity and production and increasing demand were not the only reasons why the US was unprepared and more vulnerable in 1973-74 than in 1967. Another crucial factor was the refinery capacity and the US Naval reserves.
The Naval petroleum reserve in California was not only dedicated to the Navy in case of an emergency. If, for example, oil imports suddenly were cut off, the President could authorize the use of the Naval petroleum reserve, after a joint resolution by the Congress, and increase oil production and refining capacity to get more gasoline for the nation.
To the author’s knowledge, there were no documented discussions on US Naval petroleum capacity prior to or during the 1967 embargo. However already in 1969 the Navy requested funds to fully develop the largest four petroleum reserves in the area. The Navy requested $21.6 million and got only $4 million. In 1972, the Department of the Navy and the Department of Interior reported that the US Naval petroleum reserves were poorly developed, which meant a deficient US emergency preparedness.
Thus, the US was aware of this prior to the 1973-74 embargo, but no measures were taken to address the problem. Additionally, infrastructure that could handle a fully developed refining capacity, let alone production capacity, was absent.
Clearly no integrated plan for the Naval reserves existed prior to the 1973-74 crisis. Low oil prices seemed to have led the US administration to think that the Naval reserves lack of refining capacity and production capacity wouldn´t be necessary to use. To develop the production and refining capacity in the Naval reserve could have made the 1973-74 crisis less severe to the US, probably only to a small degree because the time to develop new oil production and oil refineries normally takes years. Yet I argue that the alternative least discussed and not used to explain US vulnerability to an oil disruption both in 1967 and 1973-74, in terms of alternatives in the US, is the US lack of total refining capacity, (not only at the Naval reserve), to process imported oil.
To illustrate the importance of and problems with the lack of refining capacity in the US I have made Table 3below.
Table 3: the US Refinery Capacity VS the US Consumption, 1965-1974
Source: EIA, table 5.9 “Refinery Capacity and Utilization”, for consumption data: BP Statistical Review of World Energy 2010 “Oil Consumption”.
As the European countries pointed out in the report by GAO in 1973, they were the ones that had to export refined oil (like gasoline) to the US because the US did not have enough refineries to process it autonomously. Now, looking at Table 3 above, one can clearly note how the US oil refineries are processing less of the US oil consumption each year. Even prior to and during the 1967 embargo the US had to import gasoline. Thus, US vulnerability to an oil disruption is clearly connected to its refining capacity. Had the US built more refineries before 1973-74, it would not have had to import gasoline or other refined oil products that were needed in Europe during the crisis as well. This becomes apparent when looking at the gap between the US oil demand and oil refining capacity in 1973. A simple conclusion is that the US could clearly have diminished its vulnerability to an oil disruption, particularly in 1973-74, by building more refineries instead of importing more oil.
OAPEC Market Power
Unity within OAPEC behind the two embargoes
In 1967 OAPEC clearly was politically and ideologically divided. Monarchists feared that the Nasserites’ agenda was to overthrow the Monarchists, led by Saudi Arabia. Simultaneously, the Monarchists were under great pressure and were forced to walk a delicate balance between Arabic nationalism and economic catastrophe which a fully implemented embargo would lead to if the oil production was stopped completely. Yet at the same time the Nasserites and Monarchists shared a common base in the oil and the power and money it generated.
In 1973-74 the ideological and political conflicts among the OAPEC members were less pronounced. Arabic nationalism within the Monarchists’ camp was weaker, Nasser was gone, and perhaps just as important, US demand for oil was on the rise, and thus the oil price started increasing prior to the embargo in 1970-1972 (see table 4 below). Since it created higher revenues, the 1973-74 embargo could have been politically and economically motivated, unlike the one in 1967. Indeed, while production and export by OAPEC decreased, the oil price increased fourfold and money was flowing in like never before. This, in turn, meant that in 1973-74 OAPEC could agree on cutting down production and export which, unlike in 1967, led to a successful implementation of the embargo in terms of US being struck by an oil shortage.
Table 4: World Oil Price Development 1965-1974
Source for data: BP Statistical Review of World Energy 2010, “Oil: Crude Oil prices 1861-2009”
At the same time, the unity behind the 1973-74 embargo was by no means unanimous. Saudi Arabia still had its own interest in preserving good long term relations with the US. Both in 1967 and in 1973-74 there seemed to have been a common reason why Saudi Arabia was unwilling to fully implement the embargoes the official way. Saudi Arabia wanted to maintain the balance in the region by supporting the only superpower that could prevent the Soviet Union from gaining clout in the Middle East. This can be exemplified by the fact that Saudi Arabia, despite the official unity against in particular the US, provided the US military forces with oil which was needed in the Vietnam War. Notably, this was being done in the middle of both the 1967 and the 1973-74 embargoes.
OAPEC vs. International Oil Companies
Already months before the 1967 Arab embargo OAPEC members threatened nationalization of the oil companies’ production facilities. This was brought up as a concern by oil companies in a meeting during the embargo. This fear was shared by the US administration, but the threats of nationalization never came true either during or before the 1967 embargo. Profits were shared equally between OAPEC and the international oil companies in 1967. But in 1970 OAPEC strengthened their positions in relation to the oil companies. Qadaffi started negotiations with the American oil company “Occidental” under threats of nationalization, resulting in a profit share of 55/45 (in Qadaffi’s favor). In 1973 the changed profit share was 55/45 for the whole OAPEC, indicating a change in the balance of power between the oil companies and OAPEC compared to 1967. What is clear from the empirical evidence is that the oil companies in 1967 played the role of informal ambassadors to the US administration by their communication and meetings with leading OAPEC members. Thus the oil companies became an important bridge between OAPEC and the US administration in the negotiations.
In both 1967 and 1973 the oil companies were also directly involved in oil supplies to the US military. Demonstrating that American oil companies’ interests did not necessarily coincide with US national interests, the US oil company Exxon released critical classified US military oil data during the 1973-74 embargo. This shows that the relationship between the oil companies and OAPEC in 1973-74 was significantly more complicated than previously imagined. It is reasonable to believe that Exxon shared the classified information with the Arab oil producers to protect its long term business interests, while disregarding the short term national threats an oil shortage could create to the US. Exxon must have known that the US imported 30% of its total oil consumption in 1973, of which about 14% came from OAPEC. Exxon further must have known that the US domestic production had been decreasing since 1970 and thus saw nothing breaking the trend in increased dependence on imported Arab oil and increasing OAPEC power. In this light Exxon may have looked beyond the embargo and looked at its long term interests.
Why the US Department of Defense authorized Exxon to disclose the classified information is left to speculation, but the US national interests and the US oil companies´ interests diverged during the 1973-74 embargo. This conflict of interests and the US’ increasing dependence on OAPEC´s oil gave OAPEC the leverage to enforce an embargo in 1973-74. In 1967 however, the US total import was 20%, of which OAPEC stood for only 6.9% and the US domestic oil production at the same time was increasing not decreasing.
Conclusions and how to address emergency energy planning
This article shows that today´s globalized world makes states vulnerable to oil disruptions, regardless of military capability because our intertwined economic and political world makes states dependent on factors beyond its own control. At the same time by looking at what I call “vulnerability to an oil disruption” applied to the US, showed that a state can affect its own vulnerability to an oil disruption to a certain degree. In the case of the US, however, both in 1967 and 1973-74 the US was steered by its ignorance of the extent of its energy dependence and short term economic and political interests.
Simultaneously, looking at “OAPEC Market Power” showed that when a small group of states controls a vital resource and can unite politically and economically against other states, it possesses a great power even beyond the control of the strongest military power in the world. In the case of the US, it acted, prior to both the embargoes, as if it did not depend on other states´ oil, by consuming more and importing more oil without considering alternatives at home or creating sustainable relations with the states it actually depended on to sustain its way of life.
A state should therefore coordinate its foreign policy with its national energy security, support research within sustainable energy, i.e. non-fossil liquid fuel based energy, raise taxes on petroleum products and subsidize energy efficient solutions for cars, transport and heating, for example. These policies apply not only to the US but to most states in the world.
Finally, the fact that the Peak in US oil production in 1970 clearly was one of the important factors that affected the difference in how the United States could handle the two Arab embargoes has important implications for present and future emergency planning in the US as well as in other countries.
Emergency planners in any state dependent on oil to any degree need to address the following:
- What a global peak in oil production would mean for the energy vulnerability of the state. This means considering the price and supply of oil to the world oil market when a global Peak ultimately may lead oil producers to start restraining their oil production and/or export, to save it for their own use. We can already notice how states like Saudi Arabia consume more of their own oil production as their own economy develops more and more into a consumer economy. More oil consumed in the Middle East means less oil to export.
- The state´s relations to members of OAPEC (and obviously OPEC) and be aware that different oil producing countries are at different stages of their oil production, (several have peaked), while others have not (at least not officially). In other words, even before a global peak, what particular oil exporter a state relies on matters already now and how one can rely on this/these exporters once a global peak becomes mainstream is just as important.
- Drawing on the experience of the Arab embargoes of 1967 and 1973-74, OAPEC with its member´s often divergent interests will most likely find it increasingly difficult to cooperate, especially when some of its members reach Peak production while others continue to increase the production. This along with increased demand for cheap oil from exporting countries´ own populations clearly adds new pressure on the security of the state and obviously affects the security between states as well.
- Nixon´s Project Independence totally failed but was considered by policy makers as realistic at the time. Therefore emergency planners now need to look for NEW ways that the state and its institutions can support the domestic energy market to work towards both short and long term energy plans that are sustainable. While these energy plans are being developed, emergency planners need to be aware that a top down approach takes too long time to implement to make any fundamental change to the vulnerability of the state in the short term and therefore the priority must be to encourage local and regional solutions first. Since local energy independence is more realistic and can make the overall national burden in terms of Peak Oil less severe and the transition towards a local and regional economy easier, it must be prioritized.
*OAPEC- the Arab states within OPEC
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