Nonsense. It’s time that we exorcised the ghosts of 1973 once and for all. The embargo was a non-event. The production cutbacks were trivial. The wrong lessons were learned. In short, everything we think we know about the events triggered 30 years ago today is wrong.
Let’s start with the embargo. Most people believe that it was directly responsible for long gasoline lines and for service stations running dry. The shortages were, in fact, a byproduct of price controls imposed by President Nixon in August 1971, which prevented oil companies from passing on the full cost of imported crude oil to consumers at the pump (small oil companies, however, were exempted from the price control regime in 1973). In the face of increasing world oil prices, “Big Oil” did the only sensible thing: It cut back on imports and stopped selling oil to independent service stations to keep its own franchisees supplied. By May of 1973 (five months before the embargo), 1,000 service stations had shut down for lack of fuel and many others had substantially curtailed operations. By June, companies in many parts of the country began limiting the amount of gasoline motorists could purchase per stop.
In response, Congress passed the Emergency Petroleum Allocation Act about a month before the embargo, which made matters worse. The Act mandated that supply reductions had to be shared equally between independent and branded gasoline stations. It also put a small percentage of gasoline going to each state under the governors’ control, which they then could then allocate as they wished if shortages occurred. And occur they did, largely because of the withdrawal of supplies from the market necessary to put together the governors’ set aside.
Did the subsequent embargo stoke the crisis further? No — it was an economically meaningless gesture. That’s because the embargo had no effect on imports. Once oil is in a tanker, neither Petroleum Exporting Countries nor OPEC nor Knick-Knack-Paddywack can control where it goes. Oil that was exported to Europe during the embargo was simply resold to the United States or ended up displacing non-OPEC oil that was diverted to the U.S. market. Supply routes were shuffled but import volumes remained steady.
Saudi oil minister Sheik Yamani conceded afterwards that the 1973 embargo “did not imply that we could reduce imports to the United States … the world is really just one market. So the embargo was more symbolic than anything else.” It took a while, however, for Americans to figure this out. In his memoirs, then Secretary of State Henry Kissinger wrote that, looking back, “the structure of the oil market was so little understood that the embargo became the principle focus of concern. Lifting it turned almost into an obsession for the next five months. In fact, the Arab embargo was a symbolic gesture of limited practical importance.”
While the embargo was an illusion, the production cutbacks were real. But even here, there was less than meets the eye. Arab oil production between October and December was cut by 340 million barrels. But that cutback was less than the inventory buildup that had occurred earlier in the year. There was still plenty of oil to go around, but few were willing to sell it given the fear of future scarcity.
Moreover, the Petroleum Exporting Countries’ threat to gradually cut oil production to zero until Israel left the occupied territories lasted all of a month and a half. On Dec. 4, 1973, the Saudis cancelled their promised monthly 5 percent cutback and the rest of the Petroleum Exporting Countries followed. In January 1974, they ordered a 10 percent production increase. No more was heard of the threat.
What lessons can we learn from those 30-year-old events? First, oil embargoes are symbolic gestures and not worth worrying about. Second, oil producers will not sacrifice revenue to make political statements. Third, policymakers are economically illiterate and prone to hysteria.
In short, the oil weapon is a myth. It’s high time that we stop believing in ghosts.
