Chaos in Energy Markets Then and Now: 50 Years After the 1973 Arab Oil Embargo — A Review

This report summarizes discussions at the 2023 event, “Chaos in Energy Markets Then and Now: 50 Years After the 1973 Arab Oil Embargo,” which explored lessons learned from the embargo and their renewed relevance in today’s energy crises. The conference took place at Rice University’s Baker Institute for Public Policy on Oct. 17, 2023. A recording of the event is available here.

Overview

The 1973–74 oil embargo began after Arab members of OPEC, angered by U.S. support for Israel in its war with neighboring states, cut exports to the U.S. and other countries. Crude oil prices quadrupled, with massive consequences for the global economy, geopolitics, and public policy — including a shift in the control of global oil production from Western companies to governments in the Middle East and elsewhere. The embargo lasted until March 1974.

Fifty years later, the embargo’s legacy includes vehicle fuel efficiency standards and greater interests in domestically produced energy, drilling in deep waters and Alaska, nuclear energy, liquefied natural gas (LNG), and renewable energy. And today, energy is again in the headlines, with global energy crises triggered by Russia’s full-scale invasion of Ukraine in 2022 and the risks presented by climate change.

A comprehensive exploration of the consequences of the oil embargo on global energy markets and geopolitics was conducted; participants reflected on changes in the global economy, particularly in the oil and energy sectors, highlighting the diminished dominance of OPEC and increased efficiency in energy use — as well as the continued importance of oil in the energy mix, and therefore its continuing economic and strategic importance. Speakers also underscored the unintended consequences of policy interventions, which can promote efficiency, diversification, and innovation, but can be counterproductive if implemented hastily. Ultimately, the conference sought to examine lessons learned from the embargo so that challenges and opportunities in the current global energy landscape can be better navigated.

A Perspective from His Royal Highness Prince Turki Al Faisal Al Saud

His Royal Highness Prince Turki Al Faisal Al Saud, former Ambassador of Saudi Arabia to the U.S., offered valuable insights into the Saudi perspective on the 1973 embargo as well as the latest Israel-Hamas war, which began 10 days before the conference. Prince Turki opened his speech by reflecting on how U.S.-led pushes for rapid post-war economic growth led to a higher demand for oil, which resulted in a growing reliance on the Middle East for the resource. During the late 1960s and early 1970s, Arab countries, particularly Saudi Arabia, gained increasing influence over prices as their share in world oil production rose. Prince Turki noted that while the embargo expedited the rise in oil prices, the 1971 U.S. decision to unpeg the price of gold from the U.S. dollar also played a major role by diminishing the dollar’s purchasing power.

Prince Turki remarked that in the years leading up to 1973 — when OPEC’s share of the world oil trade was 75% — Arab states had grown increasingly frustrated with Israeli aggression. The 1973 Arab-Israeli war was “not an Arab attack on Israel, but an Arab counterattack to Israel’s aggression in 1967,” said Prince Turki. He cited the decision of then Secretary of State Henry Kissinger and President Richard Nixon to resupply weapons to the Israeli battlefield as the tipping point that triggered the Saudi-led embargo against the U.S. and the 5% rollback of oil production.

Prince Turki addressed the consequences of the oil embargo and the ripple effects of the unpegging of gold from the dollar. He speculated that the choice likely contributed to the Iranian Revolution in 1978–79 due to the Shah’s profligate spending and subsequent income inequalities, Saddam Hussein’s rise in Iraq, and the Soviet invasion of Afghanistan.

Reflecting on current developments in the Middle East, Prince Turki pivoted his focus to the Israel-Hamas conflict. He declared that all militarily occupied people have a right to resist their occupiers and advocated for the use of civil insurrection and disobedience against occupiers. Prince Turki condemned Hamas’ use of violence against Israeli civilians, along with the Oct. 7, 2023, attack’s role in giving Israel “an excuse to ethnically cleanse Gaza” and its hindrance of Saudi efforts to end Palestinians’ plight peacefully. He equally condemned Israel’s indiscriminate bombing of innocent Palestinian civilians in Gaza, the attempt to “forcibly drive them into Sinai,” and the indiscriminate arrests of Palestinian children, women, and men in the West Bank.

Prince Turki further condemned the American media’s portrayal of the Oct. 7 attack as “unprovoked” and decried Western politicians for “shedding tears” for Israelis but not Palestinians. “There are no heroes in this conflict, only victims,” said Prince Turki. He concluded by urging Israel to take advantage of the Arab Peace Initiative, deemed by him as “the only viable alternative to this bloodbath.”

Keynote Address

Adam Sieminski, senior advisor to the board of the King Abdullah Petroleum Studies and Research Center (KAPSARC) and former administrator at the U.S. Energy Information Administration (EIA), offered valuable insights into global oil price cycles. He opened by giving a brief overview of the history of oil by decades, and illustrated how prices have fluctuated dramatically over time:

• Increasing in the 1970s due to the disruptions.
• Decreasing in the 1980s thanks to diversification.
• Going up in the 2000s due to China's oil growing demand.
• Decreasing again in the 2010s with the development of shale oil.

Sieminski explained the large changes in oil pricing by noting the fact that oil supply and demand are very inelastic, meaning that they are not sensitive to changes in prices.

He added that current trends indicate an increase in demand for fossil fuels worldwide, especially in those parts of the world where populations are growing rapidly, such as non-Organization for Economic Cooperation and Development (OECD) countries — hence the importance of investing in energy resources that can help reduce the usage of fossil fuels. Some of the solutions include further exploration of methane, nature-based solutions like mangroves, and direct air captures.

To conclude, Sieminski mentioned key takeaways from the 1973 embargo, including continuing OPEC spare capacity (which has saved the global economy $200 billion a year) and ensuring that the U.S. has strategic oil reserves, so they can be used to manage shortages and prices. On the flip side, he noted that price controls, import and export controls, and a windfall profit tax should be avoided.

Panel I — How Did the Embargo Impact Global Energy Markets and Policy?

Moderated by Mark Finley, fellow in energy and global oil at the Baker Institute, the first panel featured Sarah Emerson, president and head of research and market analysis at ESAI Energy; Robert McNally, president of Rapidan Energy Group; Ichiro Kutani, director of energy security at the Institute of Energy Economics, Japan; and Mahmoud A. El-Gamal, Baker Institute Rice faculty scholar, Chair in Islamic Economics, Finance and Management, and professor of economics.

Emerson opened the conversation by exploring the changes that have taken place since 1973. She drew attention to the shift from administered pricing to market pricing: Prices are no longer dictated by large oil companies, OPEC producers, or governments as they were in the 1960s and 1970s. Another important change Emerson mentioned was the emergency preparedness efforts made by countries, highlighting how the U.S., Europe, and Japan have drawn up strategic stocks and created the International Energy Agency (IEA), forging solutions to deal with crises like the one in 1973. She ended by discussing the slowdown of oil demand growth from 7–8% per year during the 1960s and 1970s to 1.5–2% thereafter. This slowdown was partly achieved by implementing policies and providing incentives to reduce the use of fuel oil and discouraging the use of middle distillates for electricity generation — although its use for transportation continued to increase — and encouraging the use of coal, natural gas, and nuclear energy.

McNally addressed the historical context, outlining interventions in the oil market by Rockefeller’s Standard Oil Trust and the Texas Railroad Commission. He underscored the loss of spare U.S. capacity in 1972 as a critical event leading to the Arab oil embargo in 1973 and subsequent market tumult during the Iran-Iraq war in the 1980s. In addition, McNally expressed current concerns, such as the depletion of strategic reserves to fund nonenergy initiatives, strained relationships with key oil producers in the Middle East, a lack of investment in upstream oil and gas, and the IEA deviating from its watchdog role for energy security and aligning more closely with climate-focused agendas.

Kutani provided direct insights into Japan’s vulnerability to external shocks. While he recognized that Japan has succeeded in improving the diversity of its energy supply, he noted that other areas have shown decline. In particular, he drew attention to the 2011 earthquake and tsunami, and the subsequent shutdown of nuclear power plants, which damaged Japan’s self-sufficiency (with indigenous energy forms falling from 20 to 6% of domestic energy use) and diversification of energy systems. Kutani also discussed Japan’s oil supply dependence on the Middle East, which is at historically high levels: 95% of Japan’s crude oil comes from Gulf countries. He called on Japan and its partner nations to take further energy measures that are compatible with climate change actions, such as:

• Promoting more renewable energy.
• Accelerating the resumption of nuclear power operation.
• Pursuing the possibilities of technologies that make fossil fuels carbon neutral.
• Addressing emerging risks like technology and critical mineral supply.

El-Gamal addressed the cyclical nature of oil prices, which he attributed to a business cycle closely linked to global GDP fluctuations. He pointed out how a previous oil embargo at the time of the Six-Day War between Israel and its Arab neighbors in 1967 had little effect on economies because it happened at the bottom of the business cycle when prices were low, while the 1973 embargo had such a significant impact because demand was high and inventory was low. Moreover, the influx of financial liquidity from the Vietnam War era and the closing of the gold window contributed to the price shock. Further, El-Gamal raised the subsequent oversupply issues after the 1973 oil embargo, linking them to the overshooting of oil prices, and the low absorptive capacity of oil exporters’ economies. Finally, he observed that OPEC leaders have coordinated cuts in production quotas in anticipation of a predicted 2024 recession and have signaled investment in increasing production capacity in 2025 when the economy is predicted to recover.

Q&A Session

In the Q&A session, panelists agreed that the world is better prepared for another oil crisis but remains at risk due to factors such as investing too hastily, fraying relationships with the Middle East, and an inability to meet the increase in LNG demand. On the role of inventories, Emerson suggested mandatory stock percentages, McNally warned about OPEC+’s vulnerability to internal cheating, and El-Gamal recommended that the government mandate regulations. There was equally consensus among the panelists that prices were driven by fundamentals as much as by the embargo and the shortages were caused by price controls in consuming countries.

Panel II — How Did the Embargo Change Geopolitics?

The second panel featured Raad Alkadiri, then managing director of Energy, Climate & Resources at the Eurasia Group; Nathan Citino, Baker Institute Rice faculty scholar and Barbara Kirkland Chiles Professor of History; and Sara Vakshouri, founder of SVB Energy International and SVB Green Access. Moderated by Kristian Coates Ulrichsen, fellow for the Middle East at the Baker Institute, the panel examined the geopolitical landscape that defined the embargo and its aftermath.

Alkadiri explored what has changed and what has remained the same since the embargo. In 1973, war helped to make peace possible, he remarked, while right now, the prospect of peace may actually be driving war. Comparing the Abraham Accords of 2020 to the Camp David Accords in 1978, Alkadiri observed that both deals were driven by domestic interests of the parties and achieved at the expense of Palestinian interests. Despite decades of debate, the Palestinian issue remains salient, and the Israeli occupation of the West Bank and Gaza continues to evoke strong responses in Arab populations, contributing to regional discontent. He identified a key concern in the evolution of the Israel-Palestine conflict as the secular left is giving way to the religious right. While the issue is chiefly about land, he added, religious extremism has been transcribed onto political debates, resulting in extreme partisanship, with uncompromising opponents that seek zero-sum solutions. Alkadiri also discussed shifts in regional power dynamics, noting Iran’s initial role as an ally of Israel and Saudi Arabia’s ever-increasing dominance.

Citino discussed two historical agendas that he said defined the broader struggle for control over Gulf oil proceeds.

• The first looked to enhance the control of producing governments over resources and revenue, evident in actions such as nationalization and OPEC's establishment.
• The second sought to distribute revenues more widely throughout the Arab region for economic development and is often linked to pan-Arab nationalism and the cause of Palestine.

Citino observed that in the aftermath of the embargo there were attempts to formulate an economic sequel to decolonization, notably the New International Economic Order (NIEO) proposed in 1974. The NIEO sought to achieve a new equilibrium between developed and developing states but faced numerous challenges. He characterized the 1973 crisis as a realignment of the global economy, where major oil exporters emerged as the winners. The expansion announced in August 2023 at the Brazil, Russia, India, China, and South Africa (BRICS) summit in South Africa and BRICS’ efforts to develop a non-dollar oil market mark a new chapter in this realignment, said Citino. However, it remains to be seen whether developing countries, and not just oil exporters, will benefit as well.

Vakshouri focused on geopolitical changes since the 1973 oil embargo, observing key shifts in energy security. She explained that any energy crisis is usually a wake-up call for the world to move closer to a traditional view of energy security, which is “uninterrupted flow of energy at an affordable price.” One noteworthy change has been the push for diversification, extending beyond suppliers to encompass a diverse range of energy sources. Vakshouri observed that the affordability of energy — influenced by global prices and OPEC's decisions — remains a crucial issue today, impacting economies and food security. The market panic of 1973, she said, was overblown compared to the amount of oil cut back, underscoring a lack of data transparency that continues to be an issue. Lastly, Vakshouri identified a key market development since 1973: an increased emphasis on independence and reliability.

Q&A Session

In the Q&A session, the panel discussed how the Israel-Hamas war, China, and U.S. politics fit into today’s energy geopolitics. When asked about the risk that the conflict in Gaza would reduce Iranian oil production, Alkadiri minimized the threat of an embargo, determining that any effect from the war will likely be indirect. He went on to highlight Iran’s oil partnership with China and the challenges it poses for U.S. politicians seeking to sanction Iran and enforce Chinese companies’ cooperation. In addressing this challenge, Citino warned against the overuse of sanctions, which he said have introduced instability and lacked effectiveness. Vakshouri emphasized the utility of addressing China’s exports and not just its imports, pointing out that much of the oil China consumes is repurposed into products for export.

When prompted about domestic politics, the panelists agreed that U.S. policy toward Israel is unlikely to change, given the optical risks the conflict poses. Alkadiri noted that Biden will face domestic backlash if he appears not to support Israel, while Citino commented on the polarizing effect that Biden’s apparent support for Israel will have on the leftmost faction of the Democratic Party. The panelists agreed that the ripple effects of the current conflict would not just involve oil or markets — there would also be consequential political and diplomatic effects.

Conclusion

The intersection of energy and geopolitics which lay at the heart of the Arab oil embargo in 1973–74 is once again at the forefront of regional and international attention: The Russian invasion of Ukraine in 2022 and the current conflict in Gaza underscore how the world economy remains vulnerable to disruptive and unexpected shocks to trade routes and energy flows. We are now experiencing another period of geopolitical competition and strategic rivalry at the global level, in tandem with serious regional conflict, so the themes addressed by the panelists and keynote speakers provide a timely opportunity to consider the impacts — both immediate and longer term — of the oil embargo and to assess their relevance in today’s world.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.