EGEE 120
Oil: International Evolution

The Prize Chapter 29: The Oil Weapon


The Prize Chapter 29: The Oil Weapon

Anwar Sadat’s Plans for War as “The Continuation of Politics by Other Means”

Consider the following questions:

  • What enabled the Arabs to use the oil weapon?
  • Why did they consider using the oil weapon?
  • How did OPEC control of the price of oil change the United States?
  • Consider the impact of non-oil related crisis on the price of oil.
Colored Photo of Anwar Sadat
Anwar Sadat

Nasser died in 1970 and was replaced by Anwar Sadat. Sadat was a nationalist and didn’t pursue Nasser’s ideal of pan-Arabism. He wanted peace but needed leverage and operated on Clausewitz’s dictum that “War was the continuation of politics by other means.” In July 1972, he removed the pro-Soviet Egyptians and threw out “the arrogant Soviet military advisers.” Sadat began to plan for war with Israel with Syria’s President, Hafez al-Assad. His aim was not so much to gain territory as to change the attitudes from the stalemate situation towards negotiation. Thus, his approach was more psychological and diplomatic than military. King Faisal of Saudi Arabia was also involved in the military/war plans and that meant oil would be entering the fight. King Faisal of Saudi Arabia, who hated Israel and Zionism as any other Arab leader, at first, had always gone out of his way to discourage the use of the oil weapon, as he felt politics and oil should not mix. But due to political factors and economic considerations, he changed his mind in 1973 and urged the wielding of the “oil weapon” in the upcoming conflict, if need be. For one thing, Saudi had become the supplier of last resort and the swing producer for the whole world.

Colored Photo of King Faisal waving
King Faisal
Credit: Wikimedia Commons

Faisal warned the US to move its position regarding Israel closer to the Arabs, as he felt “Zionism and the Communists were on the verge of having American interests thrown out of the area.” Sheikh Yamani also warned Aramco of the impending conflict. Texaco, Chevron, and Mobil all publicly called for a change in US Middle East policy. Nixon and Henry Kissinger met with Soviet General Leonid Brezhnev who warned them a war might start soon in the Middle East. The Soviets were then supplying arms to the Arabs and had a good knowledge of what was happening. Warnings of a pending war abounded, yet no change in American foreign policy nor any actions to prevent it. Other oil consuming nations knew trouble was brewing and started researching energy and oil alternatives. Interestingly, Israel did not take the warnings seriously. On August 23, 1973, Sadat visited King Faisal of Saudi Arabia unannounced, raising the stakes.

Tightening Market Conditions Lead to Abolishing Quotas and Higher Market Prices

The main concern of the Nixon Administration when it entered office in 1969 was the rapid increase in oil imports. With oil quotas under fire, Nixon established a Cabinet Task Force on Oil Import Control chaired by George Shultz, the Labor Secretary. The committee recommended abolishing the quotas and instead recommended imposing tariffs. The imbalances from price controls on oil had discouraged domestic oil production and encouraged and stimulated consumption. In fact, the number of drilling rigs hit its lowest point since 1955 in 1970-71.

In April 1973, with a gasoline shortage on the horizon, Nixon abolished the quota system and introduced a voluntary allocation system meant to ensure supplies to independent refiners. This was included in the first ever Presidential address on energy where he announced the abolishing of the quotas. Quotas were to manage and limit supplies, whereas allocations were to distribute the supplies. Also, the wage & price controls at the time served as an anti-inflation measure.

Before 1973, US government places quotas to limit the amount of foreign oil that entered the domestic oil market.
Quotas Illustrated
Credit: K. Jensen, June 2017
Following President Nixon's speech in 1973, the US government sllowed for allocations to distribute oil supplies available in world shortage.
Importing Oil into the United States
Credit: K. Jensen, June 2017

With energy issues constantly on the political agenda, James Akins, a Foreign Service Officer, was assigned at the White House to work on the issue, and he concluded the world oil industry was in “the last gasp in the buyers market” and that “by 1975, we will have entered a permanent sellers market.” His report titled “The Oil Crisis: This Time the Wolf Is Here” advocated for the US to reduce growth in consumption, raise domestic production, and import from secure sources. He even proposed measures to counter the growing energy threat that included expanded use of coal, development of synthetic fuels, and increased levels of conservation and research and development. Nobody in the White House, however, paid much attention to his report/advice.

With the tightening market conditions by Fall 1973, there was no spare capacity, and with demand exceeding supply, the market price soared past the posted price. As an illustration of the growth in demand, by the summer of 1973, US imports were 6.2 million bpd, compared to 3.2 in 1970 and 4.5 in 1972. The prior oversupply of oil had previously led to market prices being below the posted prices, which caused tensions between the companies and producing governments. With market prices exceeding the posted prices upon which taxes and royalties were based, the exporting countries sought to change their participation agreements to increase their share of the rising price increases.

The 4th Arab-Israeli War and the Exposure of the Hidden US Hands

OPEC called for renegotiating the Tripoli and Tehran contracts to increase the posted price at a meeting in September 1973 in Vienna. To them, the Tripoli and Tehran agreements were no longer valid. Another meeting was scheduled to start on October 8th in Vienna at which representatives of the oil companies were to appear. For the oil companies to negotiate as a group, they sought approval from a skeptical US Justice Department in order not to violate anti-trust laws.

Although the State Department was worried, war in the Middle East did not make much sense, as they were convinced Israel had no reason to go to war and dared not launch another preemptive strike as in 1967; and the Arabs, on the other hand, would be foolish to start a war in which they knew they would be soundly defeated. Thus, both the US and Israel consistently dismissed and disregarded all the warning signs. But on October 6th, 1973, during the Jewish holiday of Yom Kippur, a time for meditation, introspection, soul-searching, and prayer, Egypt and Syria launched their surprise attack on Israel (the 4th Arab-Israeli War!). Despite the war, the OPEC negotiations continued in Vienna. The companies offered a 15% increase in the posted price. The exporters wanted a 100% markup. The consuming governments (US, Japan, and a half dozen Western European governments) told the oil companies not to give OPEC another offer, for fear of it being accepted. When the negotiation was at an impasse, George Piercy of Exxon asked what would happen next, and Yamani replied, “Listen to the radio.”

The Israelis were caught unaware from miscalculations that there would be no war at all. Besides they assumed that their available supplies for three weeks of war were more than enough based on the 1967 six-Day War experience. That was a grave miscalculation. The Israelis were caught off guard by the first strike. They were forced to retreat and consume their resources faster. The US did not want to become directly involved and wanted a truce. Conversely, the Soviet Union was actively engaged in providing massive supplies to Syria and Egypt. On Oct. 11, the US realized Israel could lose the war, and on Oct. 12, Nixon received two private letters, one from the Chairmen of the four Aramco companies (Exxon, Mobil, Texaco, and SoCal) & the other from Golda Meir, Prime Minister of Israel. This introduced the divide between ideology and best business.

The first letter, from the oilmen, argued for the US not to get involved in the war, as doing so would cause a snowballing effect which would lead to a major oil supply crisis and also the jeopardizing of the position, economic and security interests of the US in the Middle East. The second, from Golda Meir, pleaded desperately for help, as the survival and lives of Israelis were at stake. The US decided to send supplies in unmarked planes and under the cover of darkness. Thus, Henry Kissinger, Secretary of State, agreed to airlift supplies to Israel, but only during the night when planes couldn’t be identified by Arabs. Unfortunately, due to weather conditions (crosswinds at Lajes airfield in the Azores where the planes had to refuel, the first planes arrived visibly in the middle of the afternoon on October 14th. The OPEC negotiations also ended without a new deal on that day. By October 15th, the superior Israeli military had halted the Egyptian advance and began a series of counteroffensives.

Color photo of Richard Nixon and Henry Kissinger standing outside
President Richard Nixon and Henry Kissinger
Credit: Wikimedia Commons

The OPEC officials of five Arabs and an Iranian reconvened in Kuwait City on the 16th and announced a 70% increase in the posted price, claiming market mechanisms as their justification. The two-fold significance of this action was the price increase itself and the unilateral way in which it was imposed. This marked the end of the postwar petroleum order. Exporting countries were now making their own prices without the consent of the companies, and seemed to hold all cards. This clearly demonstrated complete transition from the days when the companies unilaterally dictated the price, to the days when the exporters at least had veto power, to the times when prices were jointly negotiated, to this time when the exporters unilaterally determined prices.

The Arab Oil Embargo Against US and Other Countries Friendly to Israel

On October 17, Nixon and Kissinger met with a delegation of four Arab foreign ministers, and Nixon pledged a ceasefire that would honor the UN Resolution 242 that required Israel to move to the pre 1967 borders. But, on the same day at the meeting of the OPEC group in Kuwait City, radical Iraq demanded that OPEC target its anger against the US and nationalize all American companies in the Middle East. This would include withdraw all their accounts from US banks, and institute a complete oil embargo on the US and countries friendly to Israel. When the plan was rejected, Iraq withdrew from the meeting. The Arab oil officials (minus Iraq, whose delegate left early), agreed to cut their production by 5% monthly and make the US the target of most of these production cuts on October 17th. The normal amount of oil was to be maintained for “friendly states,” but not enough to relocate any to the US. The combination of the monthly cutbacks and the categorization created uncertainty, tension, and rivalry among the consuming nations.

In reality, the two OPEC meetings in Kuwait City that resulted in price increase and the seizure of price setting authority on October 16 and the decision to use the oil weapon on October 17 were not connected. Nixon met with his Cabinet on the 18th and proposed a $2.2 billion aid package to Israel on the 19th. Libya announced an embargo of oil to the US the same day, and on the 20th, in retaliation for the US aid package, Saudi Arabia and other OPEC countries ceased all shipments of oil to the US. The embargo, to a large extent, came as a surprise to oil companies and the US, but the public resupply to Israel and the $2.2 billion aid pushed Saudi over.

Trouble at Home: Watergate and the Conspiracy Theories

Unfortunately, things weren’t any better in the US, as the “Saturday Night Massacre” also occurred on the 20th. Nixon had fired the appointed prosecutor in charge of the Watergate scandal (Archibald Cox), and Attorney General (Elliot Richardson) and his chief deputy (William Ruckelshaus) had quit in protest, leading Alexander Haig (White House Chief of Staff) to say to Kissinger on the phone that, “And now, all hell has broken loose.” Nixon was preoccupied during the entire war, leaving Kissinger mostly in charge. Vice President Agnew had also resigned on the 9th (over tax evasion and criminal/corruption charges), and Gerald Ford was sworn in as VP on the 12th.

With the overpowering Watergate Scandal and diminishing presidential authority, Henry Kissinger ended up being the symbol of authority who filled the vacuum and set US policy. Certainly, the weakening of the president by Watergate had major impact on Middle East and oil policy. There are some who even believe that Sadat would not have gone to war if a strong Nixon had forced a dialogue between Egypt and Israel after being elected in 1972. In addition, an undistracted president may have also been able to focus attention on the pending energy issues. The coincidence of events led to many conspiracy theories between the oil companies and the government and the war. There are those who believed Kissinger engineered the oil crisis to improve the economy of the US relative to Europe and Japan. Some speculated that Nixon encouraged the war and embargo to divert attention from Watergate. And others thought the oil companies manipulated the many events (war, embargo, and energy crisis) out of greed!

Kissinger managed to negotiate a cease fire in Moscow. However, when neither side was observing the ceasefire and it looked like Egypt was rapidly losing ground with its Third Army on the verge of being destroyed (which would have destroyed Soviet credibility in the Middle East and made them look silly/bad), the Russians threatened direct intervention to prevent the defeat of the Third Army. This obviously could not be tolerated by the US as it would have changed the international order. The detection of neutron emissions from a Soviet freighter even suggested a nuclear warhead might be in the area. The US refused to be bullied and was prepared to fight if need be and even went on a nuclear alert on October 25. But the fighting stopped on Oct. 26, 1973 with the Third Army being resupplied, the ceasefire going into effect, and the superpowers pulling back from their nuclear alerts. The oil embargo, however, remained in place, as we will see in the next chapter, with consequences extending far beyond the October War a.k.a Yom Kippur War.

Photo headshots in the order shown in the caption
(from left to right) Archibald Cox, Elliot Richardson, and Spiro Agnew.
Credit: Wikimedia Commons