40 Years After Embargo, OPEC Is Over a Barrel

By Meghan L. OSullivan - Oct 17, 2013

Today marks the 40th anniversary of the Organization of the Petroleum Exporting Countries
embargo against the U.S. and states that supported Israel after Egypt and Syria initiated
simultaneous offensives against it on Yom Kippur in 1973. While its not an anniversary that many
will celebrate, its a good opportunity to reflect on how much more secure our energy situation is,
despite our continued heavy reliance on fossil fuels.
Most commentators have focused, with good reason, on the Wests greatly enhanced ability to
withstand similar shocks were they to occur today. Equally important, although generally
overlooked, is the reality that OPEC has no incentive or real ability to inflict them on the world.
Go to OPECs website and you will be greeted not by articles remembering the havoc the
organization caused in the name of Arab unity 40 years ago, but by a banner touting
Communication and cooperation. That much of the Western world is remembering the embargo
this week, while OPEC makes no mention of it, is not an effort by the organization to disguise its
latent power and ambitions. Rather, it is almost inconceivable that OPEC would start such an
embargo today.
Changed Mideast
Why? First, the 1973 embargo, for all the bedlam it caused, didnt work. The stated goal was ending
Western support for Israel in the Yom Kippur War, and that didnt happen. Second, the global
political landscape has changed remarkably. What issue would inspire OPEC -- and Saudi Arabia in
particular -- to take such measures against the U.S. and its other closest allies? The fault lines in
the Middle East are much less stark than in 1973, when no Arab country had yet made peace with
Israel.
While we cannot rule out black swan events, the two most explosive issues in the Middle East
dont even pit Israel against its Arab neighbors. Saudi Arabias biggest concerns in the region are
Syria and Iran. The Saudis, although unsuccessful, actually sought to garner Arab support for U.S.
strikes against Syria in the wake of the Bashar al-Assad regimes use of chemical weapons.
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Iran, and its pursuit of a nuclear weapon, is an even greater source of Arab unease. One hopes a
sound and enduring solution can be found through negotiations, such as those just held between
Iranian and Western diplomats in Switzerland. But if not, although Arabs may not cheer the use of
American (or even Israeli) force against Iran, many will see it as preferable to living with a nuclear-
armed regime in Tehran.
Third, the most powerful OPEC members dont want to see huge spikes in oil prices. There are still
price hawks within the organization: countries such as Iran and Venezuela, which see a higher
price of oil as their only path to greater revenue, given constraints on increasing their production.
But OPEC as a whole learned some powerful lessons from the 1973 embargo. The 1980s oil glut,
and the correspondingly low oil prices, was directly related to the price spikes of 1973 and 1979.
This contributed to the stagflation that plagued Western economies and tempered their demand
for oil.
The 1973 crisis also launched widespread efforts in the West to find and develop non-OPEC oil,
to increase energy efficiency, and to bring alternative sources of energy online. OPEC has no self-
interest in tanking the fragile economic recoveries of today with high oil prices -- or in further
catalyzing the already vigorous pursuit of non-oil energy sources.
Finally, re-creating a 1973-type oil embargo would require OPEC to take oil production off the
entire market, not just ban its export to specific countries. OPECs decision then to reduce oil
production by 5 percent per month is what caused the embargo to pinch; this was in contrast to the
two largely unremarkable oil embargoes undertaken in 1956 and 1967, which simply barred
exports to specific countries, resulting in initial hiccups that were quickly and relatively
inexpensively resolved through the redirection of oil trade.
Avoiding Unrest
A commitment to an across-the-board reduction today would require a level of discipline and
coordination that may be beyond OPECs capabilities. Unlike the 1970s, when the annual oil
revenue of many OPEC countries exceeded their immediate and pressing costs, most OPEC
countries today need all the revenue they can get to meet their budgets. In the wake of the Arab
revolutions, governments are wary of measures that would require reining in the generous social
and other expenditures seen as necessary to stave off political unrest. While Saudi Arabia has the
discipline to bear the burden of cutting oil production each month, it also has grave concerns about
steps that could jeopardize overall revenue -- and invite political instability to the kingdom.
All this is not to say that OPEC will never use the oil weapon again. But if I had to put money on
it, Id say the cartel is far more likely to increase global oil supply for political reasons than it is to
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restrict it. Fixated on avoiding a repeat of 1973, most of us tend not to appreciate that OPEC -- and,
again, Saudi Arabia in particular -- has more recently used its ability to lower the price of oil to
achieve political objectives than it has to raise it.
In the 1980s, the Saudis upped production to force down the price of oil in part to punish the
Soviet Union for its invasion of Afghanistan, which many analysts saw as a Soviet push toward the
warm waters of the Persian Gulf. In the 1990s, the Saudis did the same to discipline Venezuela for
its efforts to greatly expand its domestic production.
Shale Threat
Why might Saudi Arabia or OPEC as a whole take such an approach today? Two possibilities seem
plausible. First, they may see putting further economic pressure on Iran as instrumental in getting
Tehran to abandon its nuclear pursuits. Given how sanctions have already put enormous pressure
on Iran, Id consider this a low probability.
Second, and despite rhetoric to the contrary, the countries of OPEC (not just Saudi Arabia) are
surely nervous about the boom in U.S. shale oil production. They may decide that this surge will
remain limited to the U.S. and that production there will taper off in the 2020s. If so, OPEC may
just need to weather a few difficult years, with member countries drawing on their reserves in the
face of lower oil prices induced by this additional supply.
However, these are pretty big assumptions on which to bank your survival, especially considering
the constant technological advances of the industry. If shale oil turns out to be a bigger and longer-
lasting threat, OPEC faces an existential challenge. Some in the organization must at least be
attracted to the idea that a pre-emptive surge in OPEC oil production now could lower the cost of
oil worldwide, undermining the incentive for expanding unconventional oil production.
For OPEC, the challenge comes back to the questions of will and capability. First, many countries,
facing the political constraints of the post-Arab Spring era, are not going to be willing to risk the
possibility of decreased revenues. While a few might be able to capitalize on the higher demand
that would inevitably come with lower oil prices, most would simply be faced with less revenue.
Even Saudi Arabia would be nervous about initiating something that might get out of control; the
1980s and 1990s are testimony to how such a strategy is an art, not a science. In addition, there are
legitimate questions about how much sustainable spare capacity OPEC has now. Saudi Arabia
could produce more than the 10 million barrels a day it is tapping now, but it is unclear how long it
could maintain higher production.
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In short, there is little reason to worry about a repeat performance of a politically inspired OPEC
embargo in which global oil supply is gradually and systematically cut each month. Even the
opposite -- a conscious effort to force down the price of oil -- is unlikely.
If we want to worry about OPEC, there are certainly scenarios worthy of our concerns. Large
quantities of OPEC oil could come off the market in future months and years, but it will not be the
result of an intentional use of the oil weapon by OPEC, but rather the result of domestic
instability in Gulf countries. It is this possibility -- not a repeat of 1973 -- which should generate
angst.
(Meghan L. OSullivan, a professor at Harvard Universitys Kennedy School of Government and
former deputy national security adviser in the George W. Bush administration, is a Bloomberg
View columnist.)
To contact the writer of this article: Meghan L. OSullivan at Meghan_OSullivan@hks.harvard.edu.
To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.
2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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