In October 1973, the Organisation of Petroleum Exporting Countries (OPEC) imposed an oil embargo on municipalities perceived to be supporters of Israel during the Yom Kippur War. Nations around the world were targeted, most of which experienced dramatic economic and geopolitical strain.
The fallout from the OPEC Oil Embargo of 1973/74 was extensive. A sudden spike in energy pricing, due to production cuts and outright sales bans, contributed to a deepening international recession. External factors such as the demise of the Bretton Woods Accords and a devalued United States dollar (USD) exacerbated the impact of the disruption to the oil supply chain.
In response, developed nations took new measures to ensure the situation was not to be repeated. Upon the official end to the embargo in March 1974, a new era in global oil had dawned. A system of trade reliant on USD-denominated transactions and reinvestment, known as the petrodollar, took the place of the existing regional agreements.
Enacting The Embargo: The Yom Kippur War
The Yom Kippur War, also referred to as the 1973 Arab-Israeli War, spanned from 6th October to 25th October 1973. The war was a product of prolonged land disputes between Israel, Egypt and Syria over settlements in the Sinai Peninsula as well as the Golan Heights.
The commencement of the Yom Kippur War flared international tensions. Global superpowers led by the U.S. and Soviet Union entered a period of tense standoff as each country's regional allies carried out military operations.
On 17 October 1973, OPEC enacted the oil embargo as a response to an uptick in Israeli fortunes against Syria and Egypt. The new policy was multifaceted and incremental in nature. In quick response to a U.S.-led aid mission known as "Operation Nickel Grass," OPEC banned direct sales of oil to the United States, the Netherlands and allied European partners.
In addition, OPEC pledged to reduce oil exports by 5% every month until Israel withdrew from territories occupied previously during the 1967 Arab-Israeli War. Global oil pricing immediately reacted and surged 70% overnight from just over US$3.00 per barrel to US$5.11 per barrel.
In addition to the 17th October pledged production cuts, another 25% reduction of output was enacted on 5th November, ten days after the war officially ended.
The November cut equated to approximately 5 million barrels per day. This decrease in production served as the primary catalyst for the 1973/74 four-fold spike in oil pricing from US$3 to US$12 per barrel.
Oil As A Weapon: Economic Fallout
Founded in 1960 by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela, OPEC strove to bring pricing stability to, and secure petroleum revenues for, oil-producing nations. During the Yom Kippur War, these objectives shifted into the de facto weaponisation of crude oil exports.
Although intense, the Yom Kippur War was brief. While the Soviet Union supported Egypt/Syria and the U.S. backed Israel, efforts stopped short of nuclear or "boots on the ground" military intervention. As a result, the Yom Kippur War drew to a close on 25 October 1973 with the adoption of Resolution 340 by the United Nations.) Regardless of the compressed timeline of the war, it set the stage for OPEC to flex its economic muscle.
The fallout from a sudden disruption to the global oil supply and rising energy prices created the first global "oil shock" felt during the post-World War II era.
The OPEC embargo created an atmosphere of energy scarcity worldwide, greatly impacting the U.K. and U.S. Gasoline shortages ensued, coupled with exploding prices.
- In the U.S., gas prices rose 37% and widespread rationing became part of everyday life throughout 1973-74. The aggregate impact proved significant, estimated to have shrunk U.S. economic output for the period by 2.5%.
- During the same period, rising energies prices were a vital component to an intense recession felt in the U.K. Amid fuel shortages and extreme transportation costs, the U.K. experienced an inflation rate topping 24%. A political change ensued in February 1974 and was widely viewed as a byproduct of the negative economic conditions stemming from the OPEC embargo.
Summary: Legacy Of The Embargo
Perhaps the greatest legacy of the OPEC Oil Embargo of 1973/74 was the influence it had on economics worldwide. Developed nations struggled due to the impact of a petroleum shortage for the first time since WWII. Inflation and unemployment grew, fostering the growth of a recessionary cycle spanning from the U.S. to Japan.
Ultimately, the embargo gave rise to the energy independence movement and a restructuring of the global oil trade. Extensive cooperation between the U.S. and Saudi Arabia ensued, serving as the launch point of the petrodollar system of oil exchange. Monumental investments in the development of the North Sea oil fields came to pass, as did the promotion of more fuel efficient automobiles.
While only a short-run geopolitical strategy, the OPEC Oil Embargo of 1973/74 proved to revolutionise the global oil trade for decades to come.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…