The Oil Crisis

Fiona Venn

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317883999
• Topic: Historia
• Subtopic: Historia del mundo

In October 1973 two crises – one economic, one political – intersected, with dramatic and long term consequences for international relations. On 6 October, Egypt and Syria launched an attack on Israel, and within a few days the major Arab oil producers announced their support by use of the 'oil weapon', including a boycott of supplies for countries friendly to Israel and a programme of production cuts. This was followed by the unilateral declaration of a steep increase in the price of oil by the Organization of Petroleum Exporting Countries (OPEC). The result was international panic and world recession. Crude oil prices soared by a massive fourfold in just three months. The West's vulnerability had been exposed: it was being held hostage to oil. Yet, despite efforts to address this dependence on oil imports in following years, the 1979 Iranian Revolution triggered a further upward surge in prices. Today, the importance of oil remains at the forefront of the West's foreign policy calculations in the Middle East. In this fascinating and timely new look at the oil crisis, Fiona Venn examines these issues and the more unexpected effects of the crisis. She asks just how much really changed in the economic balance of power. Most importantly she argues that OPEC was used as a scapegoat for the world recession, which had been already underway when the crisis detonated.

1

A DECADE OF CRISIS: 1973 AND 1979

During the 1970s, in the course of six years, the world experienced two major oil shocks; in both cases, sudden and dramatic increases in the price of oil accompanied political turmoil in the Middle East. There were, however, marked differences as well as similarities between the two: while the first, in October 1973, combined a new outbreak of violence in the long-standing Arab–Israeli conflict with a real shortage of supply in the oil market, the second revolved around domestic revolution in Iran on the one hand, and an anticipated shortage of oil on the other. Both, however, caused consternation among consumers, and had wide-reaching, and often unanticipated, consequences. This chapter looks in turn at how each crisis unfolded.

October 1973

The October 1973 ‘oil crisis’ was really the conjuncture of four separate crises which intersected with each other over a short space of time in the turbulent month of October 1973. The first was an independent decision by the major oil exporters, expressed through the Organization of Petroleum Exporting Countries (OPEC) to wrest control of oil prices from the major oil companies, and thereafter to decide production and price levels independently of the corporate interests that had traditionally dominated their oil industries. The second was the long-standing Arab–Israeli dispute, which in 1967 had resulted in a short, decisive and – for the Arabs – humiliating war, at the end of which Israel had occupied territories in the Sinai Peninsula, the West Bank and the Gaza Strip, which increased considerably the area under its control (Map 1). The third, interrelated, crisis was the decision by a group of Arab oil-producing states, linked through the Organization of Arab Petroleum Exporting Countries (OAPEC), to impose an oil boycott on selected countries regarded as sympathetic to Israel, and also to implement cuts in production in an attempt to persuade the West, particularly the United States, to moderate their support for Israel. At the same time as responding to each of these three crises during the critical month of October 1973, the American President Richard Nixon was also facing a number of critical domestic problems, including the resignation of Vice President Spiro Agnew and escalating pressure upon the White House as a consequence of the Watergate investigations into the President’s own conduct during the 1972 Presidential election. Each of these crises is described separately below: the key dates are also outlined in the selective chronology (Appendix Three).

The first factor listed above was the decision by the members of OPEC – many of which were not Arab and had no particular commitment to the Arab cause – to address the oil price issue. Despite company concessions in 1971, by 1973 the real price paid to the governments of the main oil-exporting countries had been eroded by problems in the world economy, which led to the devaluation of the dollar and worldwide inflation. By September 1973 the member governments of OPEC were keen to renegotiate the arrangements on price and agreed on a target posted price of 6 dollars for oil from the Persian Gulf. On 8 October 1973, negotiations between the Gulf states of OPEC and the oil companies opened in Vienna, but while the companies initially offered an increase of 45 cents, and their negotiators were authorized to offer up to 60 cents extra, the producers demanded a doubling of the posted price, representing an increase of around 3 dollars per barrel, as well as an automatic mechanism for adjusting posted prices in line with market prices and an inflation index. The companies consulted the governments of the main consuming countries, but found no support for substantial concessions to the OPEC position. It soon became apparent that rapid agreement was unlikely, and hence on 12 October the companies asked for an adjournment. However, only four days later the main Persian Gulf producers met in Kuwait, where they were attending an OAPEC meeting, and decided to act unilaterally, setting the price of Arabian light crude at 5.12 dollars, an increase of over 70 per cent on the prevailing 3.01 dollars. The individual producer governments’ share of the price was also increased, from 1.99 dollars per barrel to 3.44 dollars.¹ These increases were for purely economic, not political, reasons and were made possible by the prevailing tight market in oil supply. While the accompanying Arab–Israeli War may have been a factor in increasing the willingness of OPEC members to challenge the companies and, indirectly, the leading consuming nations of the world. Ian Skeet² concludes that ‘the writing was already on the wall’.

The oil boycott imposed the following day by Arab producers, and discussed below, further tightened supplies, and by December 1973 the producer governments were receiving bids for their so-called ‘participation oil’ far in excess of the set price, even as high as 20 dollars or more per barrel for crude from the Mediterranean producers. Led by Iran, which was neither an Arab country nor a participant in the boycott, and supported by Kuwait and Iraq, some OPEC members argued for a much higher price to be set – a position opposed by Saudi Arabia, which had taken the initiative in implementing the oil boycott but was now concerned inter alia that excessively high oil prices could trigger a major economic depression in West Europe and Japan.³ It was finally agreed that from January 1974 the posted price would be 11.65 dollars per barrel, including a government take of 7 dollars.⁴

Two days before the members of OPEC first began discussions on price with the oil companies, events in the Middle East had reached flash point. On 6 October 1973 (the Jewish religious festival of Yom Kippur), two Arab states, Egypt and Syria, launched an attack on Israeli troops on the Golan Heights and the Sinai Peninsula in an attempt to recapture territory occupied by Israeli forces as a result of the 1967 war. This was the most visible, and potentially serious aspect of the complex month of crisis. Although the combined attacks of the two front-line Arab states apparently took the Israelis by surprise, and indeed the West too, there had been indications for some time that a resumption of war between Israel and its hostile neighbours was likely. Egyptian President Anwar Sadat had planned for a military solution to the Arab–Israeli conflict since he had succeeded to the Presidency following the death of President Nasser in October 1970. Preparations for a military Arab response had already begun: on 27–29 January 1973 there was a meeting of the Arab League Defence Council, suggesting that unified planning was in hand.⁵ The Defence Council agreed that the Arabs would be justified in using military means to regain the occupied territories. As part of Sadat’s preparations, he had sought (unsuccessfully) to obtain advanced offensive Soviet weaponry; but in the early part of 1973 he apparently decided to launch an attack against Israeli positions in the Sinai Peninsula at some point during that year. To increase pressure upon Israel, Sadat and President Hafiz al-Assad of Syria agreed on a two-fronted, coordinated plan of attack. Meanwhile the Soviets, while still denying Egyptian requests for MIG-23s did provide SCUD surface-to-surface missiles and resumed regular shipments of military equipment and spare parts. The Syrians were also supplied with more SAMs and MIG-21s, although the MIG-23s were denied to them too.⁶ Sadat may have originally planned to attack in May, but changed his mind because of delays in the promised Soviet arms deliveries, and also to avoid taking action during the planned Soviet-American summit scheduled to begin at the end of that month. Nonetheless, there was sufficient evidence of a possible attack that Israel put a partial mobilization in place, and the following month held military exercises in Sinai.

By now, it was clearly a matter of time before war began. The Soviets, however, continued to urge the Egyptians to accept their own preferred solution, a negotiated peace settlement. The Arab–Israeli conflict was now more than just a matter of regional politics, as the consolidation of the ‘special relationship’ between Israel and the United States, mirrored by the strong links between the Soviet Union and a number of radical Arab regimes (Egypt, Syria and Iraq) had turned a regional conflict into superpower conflict by proxy. Aware of the Egyptian plans for a military solution, as early as June 1973 General Secretary Leonid Brezhnev of the Soviet Union had issued a warning to President Nixon at their summit meeting in California, and similar warnings were relayed by Foreign Minister Andrei Gromyko in his address to the United Nations General Assembly on 23 September 1973 and in a meeting with Nixon in the White House on 28 September. Kissinger, however, dismissed the warnings in the belief that if fighting broke out Israel would win a quick and decisive victory.⁷ The Administration also ignored warnings from the Saudi Arabians of a possible oil boycott should war result. However, the Egyptians and the Syrians were moving closer to war. There was a joint command meeting from 22 to 26 August 1973, and at the end of August an October date was finally agreed. On 3 October, the Egyptians informed the Soviets that the attack was imminent; on 4 October the Syrians told them the exact timing. On the same day the Soviets began to evacuate their civilians from Egypt, an operation carried out without secrecy over the next two days. On 5 October the Soviets also moved their ships out of Egyptian ports.⁸ However, despite these signals, which had been picked up by the Americans, the outbreak of war took the United States by surprise; only the previous day the CIA had reported that war in the Middle East was unlikely.⁹

On 6 October 1973 the Egyptian and Syrian forces launched a co-ordinated attack on Israeli positions on the Golan Heights and in the Sinai Peninsula. Although Israel was able to consolidate its position on the Golan Heights, the Egyptians managed to cross the Suez Canal and establish a strong position on the East Bank. At this point, Egypt indicated to the United States that their intention was to wage a limited war, aimed not at the annihilation of Israel, but the return of the Occupied Territories and a negotiated peace settlement.¹⁰ Both countries had specific territorial goals: for Egypt, this was to reoccupy Sinai, or at least to occupy both banks of the Canal, and then trust that international pressure, particularly from the United States, might bring the Israelis to the negotiating table, with the ultimate Egyptian goal being a peace treaty in which Israel would surrender the rest of the Sinai area. Syria’s President Assad, on the other hand, hoped to retake the whole of the Golan Heights and, if possible, to occupy the bridges across the River Jordan. However, if the Syrian Army was unable to take and secure this area, Assad planned to call upon the Soviet Union to mediate a ceasefire, along with the United States, to halt hostilities between Syria and Israel.¹¹ These war aims had a number of important elements. First, neither major belligerent envisaged or even aimed at the ultimate defeat of Israel, but rather the return of the Occupied Territories; both hoped to make initial military gains, but then looked to the possibility of superpower intervention to achieve their ultimate ends; however, while Sadat’s policy was to look primarily to the United States as the power with the most direct influence on Israel, Assad still relied on the Soviet Union. Since both main belligerents had individual specific interests, this meant that their military tactics would not necessarily coordinate with each other, and this turned out to be the case. In the Sinai Peninsula, Egypt made an operational pause from 7 to 14 October, which allowed the Israelis to concentrate their efforts on the Golan Heights, where they made substantial gains.¹²

Initially the Arab attack proved successful, surprising many (including Kissinger and the rest of the Nixon Administration)¹³ whose judgement of the comparative strength of the two sides was related to the rapid outcome of the 1967 war. Within the first couple of days the Syrians made sizeable gains in the Golan Heights, while the Egyptians broke through the Israeli defences near the Suez Canal, the Bar-Lev line, within a few hours, crossing the Suez Canal in order to achieve this. As the war intensified, it became plain that questions of supply would be critical – in the first three days of the war Israel lost 60 aircraft.¹⁴ Israel in particular had stockpiled consumables for only a few days of fighting, and not only was it clear that the war would be longer than many had anticipated, but the ferocity of the fighting meant that it was rapidly exhausting its supplies. According to his biographer, President Nixon decided at an early stage that Israel must be rearmed, but the implementation of that decision was delayed, although it is unclear whether that was at the instigation of Secretary of Defence Schlesinger or Secretary of State Kissinger. It has been suggested that Kissinger had a vested interest in delaying shipments to emphasize to the Israelis how important the United States was to their future security, and thus make its government more amenable to American plans after the war.¹⁵

Both superpowers acted quickly to contain the conflict. The Soviet Union moved its ships further away from the region, demonstrating that its intention was not to intervene directly, while it pressed Egypt to agree to a ceasefire at an early point. Galia Golan¹⁶ concluded that the Soviet stance in 1973 was less bellicose than in 1967, and did not signal any intention to intervene. It seems probable that the Soviets wished to see an end to hostilities at a point where their clients were successful, and before any Israeli counter-attack could pose a sufficiently severe threat to Egypt and Syria that the Soviet Union would be under immense pressure to take action. The United States meantime tried to organize an urgent meeting of the Security Council, while maintaining contact with the Soviet Union. On 8 October the Council met; however, the Soviets were unwilling to support the American proposal for a ceasefire, which called for all belligerents to withdraw to the lines prevailing before October, thus negating any Arab gains. Instead they wished to link a ceasefire with an Israeli commitment to withdraw to the pre-1967 frontiers. Egypt had meanwhile rejected the Soviet pressure for a ceasefire. However, it soon became apparent that the Arabs’ initial successes were not being maintained. On 8 October Israeli troops began to recapture their positions on the Golan Heights, and on 9 October Israeli planes bombed Damascus, not only demonstrating the extent of their threat to the Syrian capital but also destroying the Soviet cultural centre, prompting an official complaint by the USSR to the UN Security Council. By 10 October Israel announced that it had recaptured all of its previous positions in the Golan Heights. With Israel now reversing the tide of battle, the United States was less concerned to pursue a ceasefire, while the Soviet Union wished to see the war halted before the defeat of its protégés in the region.

It was now apparent that the war would not result in a speedy victory for either side, making the issue of resupplying the belligerents a critical one. On 9–10 October the Soviets began an air and sea lift of arms to Egypt and Syria¹⁷; on 12 October a Soviet ship was sunk in Israeli raids on Syrian ports, prompting yet another complaint to the United Nations. On 9 October Israel urgently asked the United States for more arms, but although the Nixon Administration agreed to the request, the supplies were...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• List of Tables and Maps
• List of Abbreviations
• Preface
• Introduction
• 1 A Decade of Crisis: 1973 and 1979
• 2 A Turning Point for the Oil Industry?
• 3 A Turning Point for the Middle East?
• 4 A Turning Point for the Consumers?
• 5 A Turning Point for the World Economy?
• 6 A Turning Point for the Developing World?
• 7 Conclusion
• Appendix One: OPEC Members, 1960 to the Present
• Appendix Two: OAPEC Members
• Appendix Three: Chronology of a Month of Crisis: October 1973
• Guide to Further Reading
• Index