Lesson 9 brings us out of the late 1960s to the early 1970s. And with that decadal change, we see significant shifts in the oil industry. We will see changes in who is producing oil, how conflict influences oil as compared to WWII where oil influenced conflict, and how the business relationship between oil exporters, oil importers, national governments, and countries changed. Of significant note in this Lesson is the onset of the Age of Shortage. No longer are we basking in a global surplus, but instead becoming increasingly vulnerable to cutoffs and shortages.
By the end of this lesson, you should be able to:
This lesson will take us one week to complete. Please refer to the Course Syllabus for specific time frames and due dates. Specific directions for the assignment below can be found within this lesson.
Activity | Location | Submitting Your Work |
---|---|---|
Read | The Prize: Chapters __ (select sections) The Quest: Chapter __ (select sections) |
No Submission |
Discuss | Participate in the Yellowdig discussion | Canvas |
Complete | Complete the Unessay Project Proposal | Canvas |
Each week an announcement is sent out in which you will have the opportunity to contribute questions about the topics you are learning about in this course. You are encouraged to engage in these discussions. The more we talk about these ideas and share our thoughts, the more we can learn from each other.
During the years covered in Chapter 28, we see a power shift so to speak in the Middle East. The British leave which creates a power vacuum, quickly filled by Iran, while the Russians arm Iraq. This period also saw the birth of the United Arab Emirates. Libya comes on strong and shifts the balance of power. The countries themselves started flexing their muscle, pressuring the companies into price and production ultimatums. OPEC was finally having the influence they had always hoped for, but they had to deal with rogue nations- Libya and Venezuela. On a global scale however, there were other challenges- mainly demand was catching up with supply and the surpluses and buffers that existed for a while were rapidly dwindling.
Dependency on foreign oil increased, and there was an alarming decrease in the margin of error. Any glitch in the supply chain, even if the supply of oil was sufficient, could cause shortages and stresses. It was more than finding recoverable oil, it also needed reliable transportation, refining, and distribution systems to be working optimally.
Helping the supply/demand issue was the discovery of North Sea oil fields and the incredible find on the North Slope of Alaska. These two areas would become two of the most productive oil regions in the world for many decades to come. And not being in the Middle East or in areas of political instability provided a supply line less threatened by conflict. Not all was hunky-dory though as these areas were very challenging technologically to develop, and the environmental movement was introducing roadblocks and barriers. Companies who were extremely competitive saw that “the enemy of my enemy is my friend,” and decided to work together to push back against the governments of the oil producing countries to avoid being completely overrun. Both countries and companies realized that joint “participation” in development was better than nationalizing the oil industry. Countries didn’t want to become de facto oil companies and the existing companies wanted to participate in the producing regions and get the oil to global markets. It was just smarter to work together in a more productive fashion, than take adversarial roles that would not help anyone. Unfortunately, oil consuming and importing countries, especially the US, didn’t seem to notice the writing on the wall and downplayed the growing threats to reliable and secure oil supplies from abroad. As we will learn, that proved to be a fatal error, and one that we seem to be repeating again in the 2020s.
The 1970s introduce the new term that exist still today- “energy crisis.” During the early 70s, the crisis was largely due to the growing fragility of the marketplace combined with conflict. In WWII, we learned how oil supply influenced the war by impacting how the countries fought. But in the 1970s, we learned how a local war could have global impact through the role of oil. The greatest conflicts of that time were the Arab-Israeli engagements.
Because the US was seen as an ally to Israel, it got caught up in the conflict. Oil was now, itself, a weapon, used to drive policy and get concessions. A friend of Israel was an enemy to the Arab states and therefore vulnerable to attack. The most effective use of the weapon was production cutbacks more so than embargos. A country can get around an embargo by moving oil from countries that aren’t embargoed to those that are. But the producing countries realized that it was more effective to simply reduce production so there is not enough oil to move around.
This period saw the end of 12-year surplus and a shift from the 30-year post-war way of doing business to this new world where the power was seated with the producing countries, and they knew it! Unfortunately for the US, the Watergate scandal introduced doubt in the minds of other countries about American leadership, and this further emboldened the producing countries. It also did not help that we ignored the warning signs leading up to the early 1970s, and we found ourselves vulnerable in terms of reliable supply of foreign oil, and not enough production in the US. The two diagrams below show the great shift from restricting foreign oil to support domestic producers, to importing as much as possible to have enough.
The embargo and cutbacks by OPEC and the Arabs continued and caused more havoc. American gas prices rose by 40%, and suddenly the age of oil shortage was leading to lost economic growth, recession, and inflation, and the US was on the defensive and being humiliated by a few small nations. The effect of the embargo on the psyche of the US, Western Europe, and Japan was dramatic. Up until October 1973, the US public did not even know the US imported oil. The most visible symbol of the embargo in the US was the gas lines, as US motorists, who were used to driving until their gas gauge read “empty,” now filled the tank constantly, afraid that oil would run out. This created long lines and up to TWO HOUR waits at gas stations. Ironically, drivers waiting in long lines with their engines running and tempers rising seemed to burn even more gas than they were able to buy. Of course, panic buying meant extra demand in the market and higher prices!
The public blamed the oil companies and Nixon for the embargo, shortages, and price hikes. Misinformation, mistrust, confusion, and fear were the order of the day. Congress was engrossed in Watergate, and any presidential energy action lost out in news coverage to Watergate. Nixon tried a national conservation movement to save energy and we saw growing interest in using oil revenues to invest in new technologies and energy sources to reduce the risk of dependency on others for oil.
With the global agitation, anger, suspicion and suffering, the issue was how the available oil was going to be distributed/rationed/allocated. The Arabs masterfully managed to split and put a wedge between the industrial countries. Japan, without any local energy sources, was the most vulnerable, and interestingly, Britain was placed in the “friendly nations” category. OPEC was able to cut production and maintain a profit due to the high prices. Thus, they could sell less and earn more!
At the start of the embargo, the European allies, led by France, distanced themselves from the US, as they thought the US was too confrontational. The US, on the other hand, thought Europe was too soft on OPEC. Thus, the embargo divided the consuming countries based on the Middle East labels placed on each country (i.e., friendly - supported Arab states and got a lot of oil; neutral - did not support either side and got less oil; unfriendly - supported Israel and the US and got no oil).
The companies were caught in the middle. For example, how would it look to see an American company implementing an embargo against the US? The companies decided to use “equal suffering” and “equal misery”- production cutbacks would be applied equally among all countries, with Arab oil going to Arab friendly countries and non-Arab oil going to the US and other countries under the embargo.
There are many lessons learned from this period which seem lost on our current society. We have again let energy independence slide away and have become dependent on others for our energy security. We have also again learned the risks and impacts of fragile supply chains and how quickly even the perception of a problem can trigger panic, which in turn exacerbates the problem.
This Oil War is not as literal as the October War, yet it illustrates when a financial crisis spurs a similar but different shock to the world oil market. Earlier in the lesson, it was noted that Saudi Arabia became the Swing Producer; this carries through into our current time. Saudi Arabia frequently has struggles with other OPEC nations that do not stick to the agreed upon production. When these rebel OPEC members increase their production, the profit comes out of Saudi Arabia’s pocket more often than any other OPEC member.
We learned how even under an embargo; OPEC members still pushed the outer limits of production. They were sure to keep the US out of the share, but that meant the whole world market shrank, and thus OPEC countries were all losing income. In this section, Venezuela chooses to ignore the OPEC quotas and disregards the impact of world financial crisis. This makes each exporting country’s market share shrink, and so this rebellion by Venezuela hurts all the oil producers, OPEC and non-OPEC alike.
Chapter 8 - The Tightest Market
This section of The Quest Chapter compares the 1973 embargo to the more recent disruptions in the world oil market in 1996, 2003, 2005 - the world lacking a security cushion or the ability of the United States to raise production again as they did in response to the 1956 Suez Crisis and the 1967 oil embargo. There was no safety net - the market responded with higher prices to shrink the demand and signal for restraint in the market. These times were not planned as the oil embargoes were to modify the behavior of another country. There were different challenges that brought on these disruptions. So many times, the oil companies strive to find the balance in supply and demand, yet oil has broader implications beyond the basic supply and demand concept. War, weather, financial crisis, revolution, shift in political affiliations, religion, and technology are only a few non-oil related situations that also impact the oil supply and demand.
This section explains more details on the Jakarta Syndrome and how it applies to the oil industry. OPEC is striving to balance the market by controlling their production, which is the opposite goal of their oil embargoes when they were striving to give their customers an old-fashioned Rockefeller “good sweating” until they changed their actions. Here, OPEC is being proactive and trying to keep a balance in the world markets.
However, the future was not as the OPEC members anticipated - There was now too much oil! This could be compared to when, in the United States, there was fear of running out of oil, and the Black Giant struck and flooded the market. The price drops, and the oil exporting countries learn another valuable lesson about increasing production. The lessons continued to encourage efficiency and using technology to the best advantage by merging companies.
This can be brought even closer to our current time with the historical collapse in the price of oil from $140 per barrel in 2008 to a drop to around $50 per barrel in 2009, also brought on by a flood of oil in the world market. The price of oil continually fluctuates, but not usually this drastic of a change.