Our past often determines our present circumstances. The ongoing turmoil in West Asia bears testimony to it.
As the Israel-Hamas war continues, market watchers worry about the conflict’s cascading effect on oil prices and the global economy. Their fears are not unfounded, but deeply rooted in recent history.
In October 1973, a coalition of Arab countries, primarily led by Egypt and Syria, surprised Israel by launching a combined attack on Yom Kippur — the holiest day for Jews.
Western nations led by the United States immediately came out in support of Israel, their long-time ally in West Asia. The then US President Richard Nixon announced his decision to supply Israel with arms worth $2.2 billion.
But this move irked the oil-rich Arab world, which did not recognise Israel’s right to exist as a nation. As a result, the OAPEC, which stands for Organisation of Arab Petroleum Exporting Countries, decided to impose an oil embargo on the West.
Subsequently, a series of production cuts and rate hikes led to skyrocketing oil prices. A barrel of oil traded for around $3 before the Yom Kippur war. It rose four-folds to nearly $12 per barrel by March 1974, when the embargo was lifted.
The United States, a major oil consumer, was badly hit by the embargo, as fuel prices rose from an average of 39 cents per gallon to 53 cents by 1974.The oil embargo came at a wrong time for the world’s largest economy.
Even before the crisis, wholesale prices of industrial commodities were rising at an annual rate of over 10 per cent, while many major industrial materials were in short supply. Moreover, it is widely believed the U.S. oil industry at the time did not posses excess production capacity, especially in times of a crisis.
More than the US, the embargo had a massive impact on Western Europe, ending its three-decade-long period of unaffected prosperity. For some context: Aided by the Marshall Plan, Western Europe witnessed unprecedented levels of economic boom after the second world war.
Western Europe largely depended on oil-rich West Asia for its energy needs, and the embargo not only led to high fuel prices but also exposed the region’s fragile energy security. In fact, fuel rationing and dim streetlights, as seen during a wartime, became common in several European countries.
On a wider economic level, some estimates suggest that the oil crisis led to a 4.7 per cent decline in the US’ GDP and a 2.5 per cent cut in Europe’s GDP.
The West’s loss, however, was a massive gain for the oil-producing Arab nations.
While the embargo ended in March 1974, oil prices remained elevated for much of the 1970s. Consequently, high prices helped several oil producing countries to maintain a healthy trade and current account surplus with the West.
Notably, the crisis gave rise to the term ‘petro dollar’, which is still used in the matters of oil trade, as the commodity is heavily traded in the official US currency.
But the biggest geo-economic impact of the crisis, which can be felt in 2023 too, was the mainstreaming of energy security through oil. Until then, the question of energy security rose only intermittently and was limited to a few countries.
But the global impact of the oil crisis forced countries, especially those in the developed world, to prioritise alternate energy sources and energy conservation.
All in all, the impact of the 1973 oil crisis reverberates to this day.