On Dec. 23, 1973, cars formed a double line at a gas station in New York City. The Arab oil embargo caused gas shortages nationwide and shaped U.S. foreign policy to this day. Marty Lederhandler/AP hide caption
On Dec. 23, 1973, cars formed a double line at a gas station in New York City. The Arab oil embargo caused gas shortages nationwide and shaped U.S. foreign policy to this day.Marty Lederhandler/AP
Forty years ago this week, the U.S. was hit by an oil shock that reverberates until this day.
Arab oil producers cut off exports to the U.S. to protest American military support for Israel in its 1973 war with Egypt and Syria. This brought soaring gas prices and long lines at filling stations, and it contributed to a major economic downturn in the U.S.
The embargo made the U.S. feel heavily dependent on Middle Eastern oil, which in turn led the U.S. to focus on instability in that region, which has since included multiple wars and other U.S. military interventions.
"The oil crisis set off an upheaval in global politics and the world economy. It also challenged America's position in the world, polarized its politics at home and shook the country's confidence," author and oil analyst Daniel Yergin wrote in an op-ed in The Wall Street Journal.
While these concerns linger, the world energy market has changed dramatically over the past four decades. U.S. energy production is rising. Less than 10 percent of U.S. oil comes from the Middle East. Global prices are relatively stable.
All this has spurred debate about whether the U.S. is too focused on the Middle East and its oil when it does not appear to pose much of an economic threat to America. We won't try to answer that question today, but we did want to point out things that were very different back in the fall of 1973:
Leon Mill spray-paints a sign outside his Phillips 66 station in Perkasie, Pa., in 1973 to let his customers know he's out of gas. An oil crisis was the culprit, squeezing U.S. businesses and consumers who were forced to line up for hours at gas stations. AP hide caption
Leon Mill spray-paints a sign outside his Phillips 66 station in Perkasie, Pa., in 1973 to let his customers know he's out of gas. An oil crisis was the culprit, squeezing U.S. businesses and consumers who were forced to line up for hours at gas stations.AP
Saudi Arabia was a leading proponent of the 1973 embargo. For many Americans, Saudi Arabia was the symbol of the wealthy Arab monarchies that were inflicting so much pain on the U.S. Yet today, Saudi Arabia is one of the closest U.S. allies in the region and is currently pumping oil at high levels to keep world markets stable and offset lower production in places like Iraq, Iran and Nigeria.
Iran and the U.S. were allies. Under the shah, Mohammad Reza Pahlavi, Iran kept on producing and exporting throughout the six-month embargo that lasted until March 1974. After the shah was overthrown in 1979, the U.S. and Iran became sworn rivals, a confrontation that has lasted more than three decades. Iran is now the target of Western sanctions that took effect last year and have cut the Islamic Republic's oil exports by half, from 2.5 million barrels a day to around 1.2 million.
In response to the oil shock, Congress passed fuel economy standards. That 1975 measure required automakers to raise mileage from 13.5 miles per gallon to 27 mpg. Last year, the standards were again doubled, and vehicles must average 54 mpg by 2025. As a result, Americans are driving more without increasing the amount of gas they are using.
Soaring oil prices remade the global energy industry. As oil prices skyrocketed in the 1970s, producers were willing to travel to more remote and difficult places to drill, including Alaska, the North Sea, the Gulf of Mexico and the Canadian oil sands. World oil production today is 50 percent higher than it was in 1973. Also, the crisis prompted efforts to find and develop other power sources, from natural gas to wind to solar.
The U.S. is less dependent on the Middle East today. In the years that followed the 1973 embargo, a cutoff of Middle Eastern oil was regarded as a grave national threat.
Here's President Jimmy Carter in his 1980 State of the Union address:
"An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America. Such an assault will be repelled by any means necessary, including military force."
In reality, Middle Eastern oil has never been a huge part of the overall U.S. supply. Imports from the Middle East never accounted for more than 15 percent of the U.S. oil supply and now they account for only about 9 percent.
The U.S. now imports more oil from Canada than anywhere else. Saudi Arabia is the only Middle Eastern nation among the top five nations sending oil to America.
By limiting supply, OPEC was able to cause oil price spikes in the 1970s and '80s. But it has much less power today, and a number of top producers, such as Saudi Arabia, work to stabilize prices rather than disrupt the market.
"For the last four decades, Washington's energy policy has been based on the faulty conclusion that the country could solve all its energy woes by reducing its reliance on Middle Eastern oil," Gal Luft and Anne Korin write in Foreign Affairs.
"The crux of the United States' energy vulnerability was its inability to keep the price of oil under control, given the Arab oil kingdoms' stranglehold on the global petroleum supply," the authors write.
So the oil industry is a very different place. But not everything has changed:
The Israelis and the Arabs are still feuding. The 1973 Middle East war was essentially a draw, and Israel and Egypt then made peace before the decade was over. Israel also has a peace treaty with Jordan, but it is still at odds with its other immediate neighbors, the Palestinians, Lebanon and Syria. And Israel considers its biggest threat to be Iran, arguing that Tehran is trying to develop nuclear weapons, which Iran denies.
Further information: 1973 world oil market chronology
The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo was targeted at nations perceived as supporting Israel during the Yom Kippur War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia and South Africa. By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock."
The embargo was a response to American involvement in the 1973 Yom Kippur War. Six days after Egypt and Syria launched a surprise military campaign against Israel, the US supplied Israel with arms. In response to this, the Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab members of OPEC plus Egypt and Syria) announced an oil embargo against Canada, Japan, the Netherlands, the United Kingdom and the United States.
The crisis had a major impact on international relations and created a rift within NATO. Some European nations and Japan sought to disassociate themselves from United States foreign policy in the Middle East to avoid being targeted by the boycott. Arab oil producers linked any future policy changes to peace between the belligerents. To address this, the Nixon Administration began multilateral negotiations with the combatants. They arranged for Israel to pull back from the Sinai Peninsula and the Golan Heights. By January 18, 1974, US Secretary of StateHenry Kissinger had negotiated an Israeli troop withdrawal from parts of the Sinai Peninsula. The promise of a negotiated settlement between Israel and Syria was enough to convince Arab oil producers to lift the embargo in March 1974.
Independently, OAPEC members agreed to use their leverage over the world price-setting mechanism for oil to stabilize their incomes by raising world oil prices after the recent failure of negotiations with Western oil companies.
The embargo occurred at a time of rising petroleum consumption by industrialized countries and coincided with a sharp increase in oil imports by the world's largest oil consumer, the United States. In the aftermath, targeted countries initiated a wide variety of policies to contain their future dependency.
The 1973 "oil price shock", with the accompanying 1973–74 stock market crash, was regarded as the first discrete event since the Great Depression to have a persistent effect on the US economy.
The embargo's success demonstrated Saudi Arabia's diplomatic and economic power. It was the largest oil exporter and a politically and religiously conservative kingdom.
US oil production decline
In 1970, US oil production started to decline, exacerbating the embargo's impact. Following this, Nixon named James E. Akins as US Ambassador to Saudi Arabia to audit US production capacity. The confidential results were alarming—no spare capacity was available and production could only decrease.
The oil embargo had little effect on overall supply, according to Akins.
The Organization of the Petroleum Exporting Countries (OPEC), which then comprised 12 countries, including Iran, seven Arab countries (Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates), plus Venezuela, Indonesia, Nigeria and Ecuador, was formed at a Baghdad conference on September 14, 1960. OPEC was organized to resist pressure by the "Seven Sisters" (seven large, Western oil companies) to reduce oil prices.
At first, OPEC operated as an informal bargaining unit for resource-rich third-world countries. OPEC confined its activities to gaining a larger share of the profits generated by oil companies and greater control over member production levels. In the early 1970s it began to exert economic and political strength; the oil companies and importing nations suddenly faced a unified exporter bloc.
End of the Bretton Woods currency accord
On August 15, 1971, the United States unilaterally pulled out of the Bretton Woods Accord. The US abandoned the Gold Exchange Standard whereby the value of the dollar had been pegged to the price of gold and all other currencies were pegged to the dollar, whose value was left to "float" (rise and fall according to market demand). Shortly thereafter, Britain followed, floating the pound sterling. The other industrialized nations followed suit with their respective currencies. Anticipating that currency values would fluctuate unpredictably for a time, the industrialized nations increased their reserves (by expanding their money supplies) in amounts far greater than before. The result was a depreciation of the dollar and other industrialized nations' currencies. Because oil was priced in dollars, oil producers' real income decreased. In September 1971, OPEC issued a joint communiqué stating that, from then on, they would price oil in terms of a fixed amount of gold.
This contributed to the "Oil Shock". After 1971, OPEC was slow to readjust prices to reflect this depreciation. From 1947 to 1967, the dollar price of oil had risen by less than two percent per year. Until the oil shock, the price had also remained fairly stable versus other currencies and commodities. OPEC ministers had not developed institutional mechanisms to update prices in sync with changing market conditions, so their real incomes lagged. The substantial price increases of 1973–1974 largely returned their prices and corresponding incomes to Bretton Woods levels in terms of commodities such as gold.
Yom Kippur War
On October 6, 1973, Syria and Egypt, with support from other Arab nations, launched a surprise attack on Israel, on Yom Kippur. This renewal of hostilities in the Arab–Israeli conflict released the underlying economic pressure on oil prices. At the time, Iran was the world's second-largest oil exporter and a close US ally. Weeks later, the Shah of Iran said in an interview: "Of course [the price of oil] is going to rise... Certainly! And how!... You've [Western nations] increased the price of the wheat you sell us by 300 percent, and the same for sugar and cement... You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid us... It's only fair that, from now on, you should pay more for oil. Let's say ten times more."
On October 12, 1973, US president Richard Nixon authorized Operation Nickel Grass, a strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt.
In response to American aid to Israel, on October 16, 1973, OPEC raised the posted price of oil by 70%, to $5.11 a barrel. The following day, oil ministers agreed to the embargo, a cut in production by five percent from September's output and to continue to cut production in five percent monthly increments until their economic and political objectives were met. On October 19, Nixon requested Congress to appropriate $2.2 billion in emergency aid to Israel, including $1.5 billion in outright grants. George Lenczowski notes, "Military supplies did not exhaust Nixon's eagerness to prevent Israel's collapse...This [$2.2 billion] decision triggered a collective OPEC response." Libya immediately announced it would embargo oil shipments to the United States. Saudi Arabia and the other Arab oil-producing states joined the embargo on October 20, 1973. At their Kuwait meeting, OAPEC proclaimed the embargo that curbed exports to various countries and blocked all oil deliveries to the US as a "principal hostile country".
Price increases were also imposed greatly. Since short-term oil demand is inelastic, immediate demand falls little when the price rises. Thus, market prices rose from $3 per barrel to $12 per barrel to reduce demand to the new, lower level of supply. The world financial system, which was already under pressure from the Bretton Woods breakdown, was set on a path of recessions and inflation that persisted until the early 1980s, with oil prices remaining elevated until 1986.
Over the long term, the oil embargo changed the nature of policy in the West towards increased exploration, alternative energy research, energy conservation and more restrictive monetary policy to better fight inflation.
- January 1973—The 1973–74 stock market crash commences as a result of inflation pressure and the collapsing monetary system.
- August 23, 1973—In preparation for the Yom Kippur War, Saudi king Faisal and Egyptian president Anwar Sadat meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the "oil weapon" as part of the military conflict.
- October 6—Egypt and Syria attack Israeli-occupied lands in the Sinai Peninsula and Golan Heights on Yom Kippur, starting the 1973 Arab–Israeli War.
- Night of October 8—Israel goes on full nuclear alert. Kissinger is notified on the morning of October 9. United States begins to resupply Israel.
- October 8–10—OPEC negotiations with major oil companies to revise the 1971 Tehran price agreement fail.
- October 12—The United States initiates Operation Nickel Grass, a strategic airlift to provide replacement weapons and supplies to Israel. This followed similar Soviet moves to supply the Arab side.
- October 16—Saudi Arabia, Iran, Iraq, Abu Dhabi, Kuwait and Qatar raise posted prices by 17% to $3.65 per barrel and announce production cuts.
- October 17—OAPEC oil ministers agree to use oil to influence the West's support of Israel. They recommended an embargo against non-complying states and mandated export cuts.
- October 19—Nixon requests Congress to appropriate $2.2 billion in emergency aid to Israel, which triggers a collective Arab response.Libya immediately proclaims an embargo on oil exports to the US. Saudi Arabia and other Arab oil-producing states follow the next day.
- October 26—The Yom Kippur War ends.
- November 5—Arab producers announce a 25% output cut. A further 5% cut is threatened.
- November 23—The Arab embargo is extended to Portugal, Rhodesia and South Africa.
- November 27—Nixon signs the Emergency Petroleum Allocation Act authorizing price, production, allocation and marketing controls.
- December 9—Arab oil ministers agree to another five percent production cut for non-friendly countries in January 1974.
- December 25—Arab oil ministers cancel the January output cut. Saudi oil minister Ahmed Zaki Yamani promises a ten percent OPEC production rise.
- January 7–9, 1974—OPEC decides to freeze prices until April 1.
- January 18—Israel signs a withdrawal agreement to pull back to the east side of the Suez Canal.
- February 11—Kissinger unveils the Project Independence plan for US energy independence.
- February 12–14—Progress in Arab-Israeli disengagement triggers discussion of oil strategy among the heads of state of Algeria, Egypt, Syria and Saudi Arabia.
- March 5—Israel withdraws the last of its troops from the west side of the Suez Canal.
- March 17—Arab oil ministers, with the exception of Libya, announce the end of the US embargo.
- May 31—Diplomacy by Kissinger produces a disengagement agreement on the Syrian front.
- December 1974—The 1973–74 stock market crash ends.
Immediate economic effects
The effects of the embargo were immediate. OPEC forced oil companies to increase payments drastically. The price of oil quadrupled by 1974 to nearly US$12 per barrel (75 US$/m3).
This price increase had a dramatic effect on oil exporting nations, for the countries of the Middle East who had long been dominated by the industrial powers seen to have taken control of a vital commodity. The oil-exporting nations began to accumulate vast wealth.
Some of the income was dispensed in the form of aid to other underdeveloped nations whose economies had been caught between higher oil prices and lower prices for their own export commodities, amid shrinking Western demand. Much went for arms purchases that exacerbated political tensions, particularly in the Middle East. Saudi Arabia spent over 100 billion dollars in the ensuing decades for helping spread its fundamentalist interpretation of Islam, known as Wahhabism, throughout the world, via religious charities such al-Haramain Foundation, which often also distributed funds to violent Sunni extremist groups such as Al-Qaeda and the Taliban.
Control of oil became known as the "oil weapon." It came in the form of an embargo and production cutbacks from the Arab states. The weapon was aimed at the United States, Great Britain, Canada, Japan and the Netherlands. These target governments perceived that the intent was to push them towards a more pro-Arab position. Production was eventually cut by 25%. However, the affected countries did not undertake dramatic policy changes.
In the United States, scholars argue that there already existed a negotiated settlement based on equality between both parties prior to 1973. The possibility that the Middle East could become another superpower confrontation with the USSR was of more concern to the US than oil. Further, interest groups and government agencies more worried about energy were no match for Kissinger's dominance. In the US production, distribution and price disruptions "have been held responsible for recessions, periods of excessive inflation, reduced productivity, and lower economic growth."
The embargo had a negative influence on the US economy by causing immediate demands to address the threats to U.S. energy security. On an international level, the price increases changed competitive positions in many industries, such as automobiles. Macroeconomic problems consisted of both inflationary and deflationary impacts. The embargo left oil companies searching for new ways to increase oil supplies, even in rugged terrain such as the Arctic. Finding oil and developing new fields usually required five to ten years before significant production.
OPEC-member states raised the prospect of nationalization of oil company holdings. Most notably, Saudi Arabia nationalized Aramco in 1980 under the leadership of Saudi oil minister Ahmed Zaki Yamani. As other OPEC nations followed suit, the cartel's income soared. Saudi Arabia undertook a series of ambitious five-year development plans. The biggest began in 1980, funded at $250 billion. Other cartel members also undertook major economic development programs.
US retail price gas prices rose from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974. State governments requested citizens not to put up Christmas lights. Oregon banned Christmas and commercial lighting altogether. Politicians called for a national gas rationing program. Nixon requested gasoline stations to voluntarily not sell gasoline on Saturday nights or Sundays; 90% of owners complied, which produced long queues.
The embargo was not uniform across Europe. Of the nine members of the European Economic Community (EEC), the Netherlands faced a complete embargo, the UK and France received almost uninterrupted supplies (having refused to allow America to use their airfields and embargoed arms and supplies to both the Arabs and the Israelis), while the other six faced partial cutbacks. The UK had traditionally been an ally of Israel, and Harold Wilson's government supported the Israelis during the Six-Day War. His successor, Ted Heath, reversed this policy in 1970, calling for Israel to withdraw to its pre-1967 borders.
The EEC was unable to achieve a common policy during the first month of the War. It issued a statement on November 6, after the embargo and price rises had begun. It was widely viewed as pro-Arab supporting the Franco-British line on the war. OPEC duly lifted its embargo from all EEC members. The price rises had a much greater impact in Europe than the embargo.
Despite being relatively unaffected by the embargo, the UK nonetheless faced an oil crisis of its own—a series of strikes by coal miners and railroad workers over the winter of 1973–74 became a major factor in the change of government. Heath asked the British to heat only one room in their houses over the winter. The UK, Germany, Italy, Switzerland and Norway banned flying, driving and boating on Sundays. Sweden rationed gasoline and heating oil. The Netherlands imposed prison sentences for those who used more than their ration of electricity.
A few months later, the crisis eased. The embargo was lifted in March 1974 after negotiations at the Washington Oil Summit, but the effects lingered throughout the 1970s. The dollar price of energy increased again the following year, amid the weakening competitive position of the dollar in world markets.
Price controls and rationing
Price controls exacerbated the crisis in the US. The system limited the price of "old oil" (that which had already been discovered) while allowing newly discovered oil to be sold at a higher price to encourage investment. Predictably, old oil was withdrawn from the market, creating greater scarcity. The rule also discouraged development of alternative energies. The rule had been intended to promote oil exploration. Scarcity was addressed by rationing (as in many countries). Motorists faced long lines at gas stations beginning in summer 1972 and increasing by summer 1973.
In 1973, Nixon named William E. Simon as the first Administrator of the Federal Energy Office, a short-term organization created to coordinate the response to the embargo. Simon allocated states the same amount of domestic oil for 1974 that each had consumed in 1972, which worked for states whose populations were not increasing. In other states, lines at gasoline stations were common. The American Automobile Association reported that in the last week of February 1974, 20% of American gasoline stations had no fuel.
Odd–even rationing allowed vehicles with license plates having an odd number as the last digit (or a vanity license plate) to buy gas only on odd-numbered days of the month, while others could buy only on even-numbered days.
In some states, a three-color flag system was used to denote gasoline availability at service stations—green for unrationed availability, yellow for restricted/rationed sales and red for out of stock.
Rationing led to violent incidents, when truck drivers chose to strike for two days in December 1973 over the limited supplies Simon had allocated for their industry. In Pennsylvania and Ohio, non-striking truckers were shot at by striking truckers, and in Arkansas, trucks of non-strikers were attacked with bombs.
America had controlled the price of natural gas since the 1950s. With the inflation of the 1970s, the price was too low to encourage the search for new reserves. America's natural gas reserves dwindled from 237 trillion in 1974 to 203 trillion[clarification needed] in 1978. The price controls were not changed despite president Gerald Ford's repeated requests to Congress.
Conservation and reduction in demand
To help reduce consumption, in 1974 a national maximum speed limit of 55 mph (about 88 km/h) was imposed through the Emergency Highway Energy Conservation Act. Development of the Strategic Petroleum Reserve began in 1975, and in 1977 the cabinet-level Department of Energy was created, followed by the National Energy Act of 1978. On November 28, 1995, Bill Clinton signed the National Highway Designation Act, ending the federal 55 mph (89 km/h) speed limit, allowing states to restore their prior maximum speed limit.
Year-round daylight saving time was implemented from January 6, 1974, to October 27, 1975, with a break between October 27, 1974 and February 23, 1975, when the country observed standard time. The move spawned significant criticism because it forced many children to travel to school before sunrise. The prior rules were restored in 1976.
The crisis prompted a call to conserve energy, most notably a campaign by the Advertising Council using the tagline "Don't Be Fuelish". Many newspapers carried advertisements featuring cut-outs that could be attached to light switches, reading "Last Out, Lights Out: Don't Be Fuelish."
By 1980, domestic luxury cars with a 130-inch (3.3 m) wheelbase and gross weights averaging 4,500 pounds (2,041 kg) were no longer made. The automakers had begun phasing out the traditional front engine/rear wheel drive layout in compact cars in favor of lighter front engine/front wheel drive designs. A higher percentage of cars offered more efficient 4-cylinder engines. Domestic auto makers also began offering more fuel efficient diesel powered passenger cars as well.
Though not regulated by the new legislation, auto racing groups voluntarily began conserving. In 1974, the 24 Hours of Daytona was cancelled and NASCAR reduced all race distances by 10%; the 12 Hours of Sebring race was cancelled.
In 1976, Congress created the Weatherization Assistance Program to help low-income homeowners and renters reduce their demand for heating and cooling through better insulation.
Alternative energy sources
The energy crisis led to greater interest in renewable energy, nuclear power and domestic fossil fuels. According to Peter Grossman, American energy policies since the crisis have been dominated by crisis-mentality thinking, promoting expensive quick fixes and single-shot solutions that ignore market and technology realities. He wrote that instead of providing stable rules that support basic research while leaving plenty of scope for entrepreneurship and innovation, congresses and presidents have repeatedly backed policies which promise solutions that are politically expedient, but whose prospects are doubtful.
The Brazilian government implemented its "Proálcool" (pro-alcohol) project in 1975 that mixed ethanol with gasoline for automotive fuel.
Israel was one of the few countries unaffected by the embargo, since it could extract sufficient oil from the Sinai. But to supplement Israel's over-taxed power grid, Harry Zvi Tabor, the father of Israel's solar industry, developed the prototype for a solar water heater now used in over 90% of Israeli homes.
The crisis was a major factor in shifting Japan's economy away from oil-intensive industries. Investment shifted to industries such as electronics. Japanese auto makers also benefited from the crisis. Increased fuel costs allowed their small, fuel-efficient models to gain market share from the "gas-guzzling" American competition. This triggered a drop in American auto sales that lasted into the 1980s.
Western central banks decided to sharply cut interest rates to encourage growth, deciding that inflation was a secondary concern. Although this was the orthodox macroeconomic prescription at the time, the resulting stagflation surprised economists and central bankers. The policy is now considered by some to have deepened and lengthened the adverse effects of the embargo. Recent research claims that in the period after 1985 the economy became more resilient to energy price increases.
The price shock created large current account deficits in oil-importing economies. A petrodollar recycling mechanism was created, through which OPEC surplus funds were channeled through the capital markets to the West to finance the current account deficits. The functioning of this mechanism required the relaxation of capital controls in oil-importing economies. It marked the beginning of an exponential growth of Western capital markets.
Many in the public remain suspicious of oil companies, believing they profiteered, or even colluded with OPEC. In 1974, seven of the fifteen top Fortune 500 companies were oil companies, falling to four in 2014.
America's Cold War policies suffered a major blow from the embargo. They had focused on China and the Soviet Union, but the latent challenge to US hegemony coming from the third world became evident.
In 2004, declassified documents revealed that the U.S. was so distraught by the rise in oil prices and being challenged by under-developed countries that they briefly considered military action to forcibly seize Middle Eastern oilfields in late 1973. Although no explicit plan was mentioned, a conversation between U.S. Secretary of DefenseJames Schlesinger and British Ambassador to the United StatesLord Cromer revealed Schlesinger had told him that "it was no longer obvious to him that the U.S. could not use force." British Prime MinisterEdward Heath was so worried by this prospect that he ordered a British intelligence estimate of U.S. intentions, which concluded America "might consider it could not tolerate a situation in which the U.S. and its allies were at the mercy of a small group of unreasonable countries," and that they would prefer a rapid operation to seize oilfields in Saudi Arabia and Kuwait, and possibly Abu Dhabi in military action was decided upon. Although the Soviet response to such an act would likely not involve force, intelligence warned "the American occupation would need to last 10 years as the West developed alternative energy sources, and would result in the ‘total alienation’ of the Arabs and much of the rest of the Third World."
Western Europe began switching from pro-Israel to more pro-Arab policies. This change strained the Western alliance. The US, which imported only 12% of its oil from the Middle East (compared with 80% for the Europeans and over 90% for Japan), remained staunchly committed to Israel. The percentage of U.S. oil which comes from the nations bordering the Persian Gulf remained steady over the decades, with a figure of a little more than 10% in 2008.
With the embargo in place, many developed countries altered their policies regarding the Arab-Israeli conflict. These included the UK, which refused to allow the United States to use British bases and Cyprus to airlift resupplies to Israel along with the rest of the members of the European Community.
Canada shifted towards a more pro-Arab position after displeasure was expressed towards Canada's mostly neutral position. "On the other hand, after the embargo the Canadian government moved quickly indeed toward the Arab position, despite its low dependence on Middle Eastern oil".
Although lacking historical connections to the Middle East, Japan was the country most dependent on Arab oil. 71% of its imported oil came from the Middle East in 1970. On November 7, 1973, the Saudi and Kuwaiti governments declared Japan a "nonfriendly" country to encourage it to change its noninvolvement policy. It received a 5% production cut in December, causing a panic. On November 22, Japan issued a statement "asserting that Israel should withdraw from all of the 1967 territories, advocating Palestinian self-determination, and threatening to reconsider its policy toward Israel if Israel refused to accept these preconditions". By December 25, Japan was considered an Arab-friendly state.
The oil embargo was announced roughly one month after a right-wing military coup in Chile led by General Augusto Pinochet toppled socialist president Salvador Allende on September 11, 1973. The response of the Nixon administration was to propose doubling arms sales. As a consequence, an opposing Latin American bloc was organized and financed in part by Venezuelan oil revenues, which quadrupled between 1970 and 1975.
A year after the start of the embargo, the UN's nonaligned bloc passed a resolution demanding the creation of a "New International Economic Order" under which nations within the global South would receive a greater share of benefits derived from the exploitation of southern resources and greater control over their self-development.
Prior to the embargo, the geo-political competition between the Soviet Union and the United States, in combination with low oil prices that hindered the necessity and feasibility of alternative energy sources, presented the Arab States with financial security, moderate economic growth, and disproportionate international bargaining power.
The oil shock disrupted the status quo relationships between Arab countries and the US and USSR. At the time, Egypt, Syria and Iraq were allied with the USSR, while Saudi Arabia, Turkey and Iran (plus Israel) aligned with the US. Vacillations in alignment often resulted in greater support from the respective superpowers.
When Anwar Sadat became president of Egypt in 1970, he dismissed Soviet specialists in Egypt and reoriented towards the US. Concerns over economic domination from increased Soviet oil production turned into fears of military aggression after the 1979 Soviet invasion of Afghanistan, turning the Persian Gulf states towards the US for security guarantees against Soviet military action.
The USSR's invasion of Afghanistan was only one sign of insecurity in the region, also marked by increased American weapons sales, technology, and outright military presence. Saudi Arabia and Iran became increasingly dependent on American security assurances to manage both external and internal threats, including increased military competition between them over increased oil revenues. Both states were competing for preeminence in the Persian Gulf and using increased revenues to fund expanded militaries. By 1979, Saudi arms purchases from the US exceeded five times Israel's.
In the wake of the 1979 Iranian Revolution the Saudis were forced to deal with the prospect of internal destabilization via the radicalism of Islamism, a reality which would quickly be revealed in the Grand Mosque seizure in Mecca by Wahhabi extremists during November 1979, and a Shiite Muslim revolt in the oil rich Al-Hasa region of Saudi Arabia in December of the same year, which was known as the 1979 Qatif Uprising.Saudi Arabia is a near absolute monarchy, an Arabic speaking country, and has a Sunni Muslim majority, while Persian speaking Iran since 1979 is an Islamist theocracy with a Shiite Muslim majority, which explains the current hostility between Saudi Arabia and Iran.
In November 2010, Wikileaks leaked confidential diplomatic cables pertaining to the United States and its allies which revealed that the late Saudi King Abdullah urged the United States to attack Iran in order to destroy its potential nuclear weapons program, describing Iran as "a snake whose head should be cut off without any procrastination".
The oil crisis sent a signal to the auto industry globally, which changed many aspects of production and usage for decades to come.
After World War II, most West European countries taxed motor fuel to limit imports, and as a result most cars made in Europe were smaller and more economical than their American counterparts. By the late 1960s increasing incomes supported rising car sizes.
The oil crisis pushed West European car buyers away from larger, less economical cars. The most notable result of this transition was the rise in popularity of compact hatchbacks. The only notable small hatchbacks built in Western Europe before the oil crisis were the Peugeot 104, Renault 5 and Fiat 127. By the end of the decade, the market had expanded with the introduction of the Ford Fiesta, Opel Kadett (sold as the Vauxhall Astra in Great Britain), Chrysler Sunbeam and Citroën Visa.
Buyers looking for larger cars were increasingly drawn to medium-sized hatchbacks. Virtually unknown in Europe in 1973, by the end of the decade they were gradually replacing saloons as the mainstay of this sector. Between 1973 and 1980, medium-sized hatchbacks were launched across Europe: the Chrysler/Simca Horizon, Fiat Ritmo (Strada in the UK), Ford Escort MK3, Renault 14, Volvo 340 / 360, Opel Kadett, and Volkswagen Golf.
These cars were considerably more economical than the traditional saloons they were replacing, and attracted buyers who traditionally bought larger vehicles. Some 15 years after the oil crisis, hatchbacks dominated most European small and medium car markets, and had gained a substantial share of the large family car market.
See also: Malaise era
See also: Automotive industry in the United States
Before the energy crisis, large, heavy, and powerful cars were popular. By 1971, the standard engine in a Chevrolet Caprice was a 400-cubic inch (6.5 liter) V8. The wheelbase of this car was 121.5 inches (3,090 mm), and Motor Trend's 1972 road test of the similar Chevrolet Impala achieved no more than 15 highway miles per gallon. In the fifteen years prior to the 1973 oil crisis, gasoline prices in the U.S. had lagged well behind inflation.
The crisis reduced the demand for large cars. Japanese imports, primarily the Toyota Corona, the Toyota Corolla, the Datsun B210, the Datsun 510, the Honda Civic, the Mitsubishi Galant (a captive import from Chrysler sold as the Dodge Colt), the Subaru DL, and later the Honda Accord all had four cylinder engines that were more fuel efficient than the typical American V8 and six cylinder engines. Japanese imports became mass-market leaders with unibody construction and front-wheel drive, which became de facto standards.
From Europe, the Volkswagen Beetle, the Volkswagen Fastback, the Renault 8, the Renault LeCar, and the Fiat Brava were successful. Detroit responded with the Ford Pinto, the Ford Maverick, the Chevrolet Vega, the Chevrolet Nova, the Plymouth Valiant and the Plymouth Volaré. American Motors sold its homegrown Gremlin, Hornet and Pacer models.
Some buyers lamented the small size of the first Japanese compacts, and both Toyota and Nissan (then known as Datsun) introduced larger cars such as the Toyota Corona Mark II, the Toyota Cressida, the Mazda 616 and Datsun 810, which added passenger space and amenities such as air conditioning, power steering, AM-FM radios, and even power windows and central locking without increasing the price of the vehicle. A decade after the 1973 oil crisis, Honda, Toyota and Nissan, affected by the 1981 voluntary export restraints, opened US assembly plants and established their luxury divisions (Acura, Lexus and Infiniti, respectively) to distinguish themselves from their mass-market brands.
Compact trucks were introduced, such as the Toyota Hilux and the Datsun Truck, followed by the Mazda Truck (sold as the Ford Courier), and the Isuzu-built Chevrolet LUV. Mitsubishi rebranded its Forte as the Dodge D-50 a few years after the oil crisis. Mazda, Mitsubishi and Isuzu had joint partnerships with Ford, Chrysler, and GM, respectively. Later the American makers introduced their domestic replacements (Ford Ranger, Dodge Dakota and the Chevrolet S10/GMC S-15), ending their captive import policy.
An increase in imported cars into North America forced General Motors, Ford and Chrysler to introduce smaller and fuel-efficient models for domestic sales. The Dodge Omni / Plymouth Horizon from Chrysler, the Ford Fiesta and the Chevrolet Chevette all had four-cylinder engines and room for at least four passengers by the late 1970s. By 1985, the average American vehicle moved 17.4 miles per gallon, compared to 13.5 in 1970. The improvements stayed even though the price of a barrel of oil remained constant at $12 from 1974 to 1979. Sales of large sedans for most makes (except Chrysler products) recovered within two model years of the 1973 crisis. The Cadillac DeVille and Fleetwood, Buick Electra, Oldsmobile 98, Lincoln Continental, Mercury Marquis, and various other luxury oriented sedans became popular again in the mid-1970s. The only full-size models that did not recover were lower price models such as the Chevrolet Bel Air and Ford Galaxie 500. Slightly smaller models such as the Oldsmobile Cutlass, Chevrolet Monte Carlo, Ford Thunderbird and various others sold well.
Economical imports succeeded alongside heavy, expensive vehicles. In 1976 Toyota sold 346,920 cars (average weight around 2,100 lbs), while Cadillac sold 309,139 cars (average weight around 5,000 lbs).
Federal safety standards, such as NHTSA Federal Motor Vehicle Safety Standard 215 (pertaining to safety bumpers), and compacts like the 1974 Mustang I were a prelude to the DOT "downsize" revision of vehicle categories. By 1977, GM's full-sized cars reflected the crisis. By 1979, virtually all "full-size" American cars had shrunk, featuring smaller engines and smaller outside dimensions. Chrysler ended production of their full-sized luxury sedans at the end of the 1981 model year, moving instead to a full front-wheel drive lineup for 1982 (except for the M-bodyDodge Diplomat/Plymouth Gran Fury and Chrysler New Yorker Fifth Avenue sedans).
Decline of OPEC
Further information: 1980s oil glut
OPEC soon lost its preeminent position, and in 1981, its production was surpassed by that of other countries. Additionally, its own member nations were divided. Saudi Arabia, trying to recover market share, increased production, pushing prices down, shrinking or eliminating profits for high-cost producers. The world price, which had peaked during the 1979 energy crisis at nearly $40 per barrel, decreased during the 1980s to less than $10 per barrel. Adjusted for inflation, oil briefly fell back to pre-1973 levels. This "sale" price was a windfall for oil-importing nations, both developing and developed.
The embargo encouraged new venues for energy exploration including Alaska, the North Sea, the Caspian Sea, and the Caucasus. Exploration in the Caspian Basin and Siberia became profitable. Cooperation changed into a far more adversarial relationship as the USSR increased its production. By 1980 the Soviet Union had become the world's largest producer.
Part of the decline in prices and economic and geopolitical power of OPEC came from the move to alternate energy sources. OPEC had relied on price inelasticity to maintain high consumption, but had underestimated the extent to which conservation and other sources of supply would eventually reduce demand. Electricity generation from nuclear power and natural gas, home heating from natural gas, and ethanol-blended gasoline all reduced the demand for oil.
The drop in prices presented a serious problem for oil-exporting countries in northern Europe and the Persian Gulf. Heavily populated, impoverished countries, whose economies were largely dependent on oil—including Mexico, Nigeria, Algeria, and Libya—did not prepare for a market reversal that left them in sometimes desperate situations.
When reduced demand and increased production glutted the world market in the mid-1980s, oil prices plummeted and the cartel lost its unity. Mexico (a non-member), Nigeria, and Venezuela, whose economies had expanded in the 1970s, faced near-bankruptcy, and even Saudi Arabian economic power was significantly weakened. The divisions within OPEC made concerted action more difficult. As of 2015, OPEC had never approached its earlier dominance.
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