x Abu Dhabi, UAETuesday 25 July 2017

Legacy of October War is Opec's power over the oil markets

Focus: A strategic miscalculation and bad weather forever changed the global oil industry 38 years ago this Friday.

Motorists line up at a gas station on New York's Long Island, hoping to fill their tanks during the gasoline shortage of 1973-1974. Long lines and fuel restrictions were common across the country. (AP Photo)
Motorists line up at a gas station on New York's Long Island, hoping to fill their tanks during the gasoline shortage of 1973-1974. Long lines and fuel restrictions were common across the country. (AP Photo)

Thirty-eight years ago this Friday, a strategic miscalculation and unexpected weather changed the global oil industry forever.

Egypt and Syria were locked in mortal struggle with Israel in the October War. Taking advantage of the Jewish holiday of Yom Kippur, the Arab states had launched a surprise attack to regain the territory they had lost in 1967.

Having underestimated their opponents, the Israelis realised they were running out of military supplies. The Israeli defence minister Moshe Dayan told Golda Meir, the prime minister, that "the Third Temple is going under", fearing Israeli defeat, but also a coded reference to nuclear weapons.

Meir contacted Richard Nixon, the US president, to ask for supplies. Covert deliveries to Israel were authorised by Nixon, but the US's C5-A transport planes would require a refuelling stop. European countries, fearing a cut-off of Arab oil supplies, refused permission for the planes to land.

The Azores, Atlantic islands belonging to Portugal, hosted the Lajes NATO air base. Henry Kissinger, the USsecretary of state, threatened to abandon Portugal "to its fate in a hostile world", and Nixon put direct pressure on Marcelo Caetano, Portugal's prime minister. Portugal, which received most of its oil from its colony of Angola and needed US support for its struggle against independence fighters there, finally agreed to allow the use of Lajes.

The US hoped to land its resupply mission in Israel at night, unloading and taking off under cover of darkness. But heavy cross-winds at Lajes kept the planes grounded in the US for half a day. Instead of landing on Saturday evening, they touched down in Tel Aviv in broad daylight on Sunday.

Arab leaders assumed this was a deliberate, provocative show of support for Israel. The Opec countries had been entwined in intricate negotiations in Vienna with international oil companies, which still dominated operations in the Middle East. On the same day, they announced the failure of the talks and increased prices by 70 per cent, the first time they had ever done so unilaterally. Ahmed Zaki Yamani, the Saudi oil minister, said: "The moment has come. We are masters of our own commodity."

The political pressure to act had now become intolerable. Mr Kissinger said he would be surprised if the Arabs would use the "oil weapon", but that is exactly what they did.

The timing was ideal: driven by rapid demand growth and falling US production, the oil market was already tight. Arab oil ministers, meeting in Kuwait on their way back from the Opec talks, announced steep, increasing cut-backs in oil production. Supplies to the US were totally embargoed.

The 1973 oil crisis had begun. From US$5.11, prices went over $17 per barrel by December, equivalent to $75 per barrel in today's money.

In the industrialised countries, this brought on energy shortages, power cuts, reduced working hours, deep economic recession and inflation.

For oil-producing countries, above all in the Gulf, the oil shock created unprecedented riches, political prominence, economic development and bewildering social change. By the end of the 1970s, all the great western oil-producing interests in the Gulf had been nationalised, and the behemoth national oil companies - Saudi Aramco, Abu Dhabi National Oil Company, Kuwait Oil Company, National Iranian Oil Company - had reached largely the form they have today.

The shock, though dramatic, was only part of an inevitable process. Opec countries had gradually been negotiating more control over their oil industries and higher prices before 1973. As Opec awoke to its monopoly power, it realised its ability to restrain production and create greatly increased prices.

Had it happened a little earlier or later, the emergence of Opec's market power might have come steadily. The economic shock would have been less severe, for both consumers and producers.

The Middle East would have had more time to adjust to its sudden wealth. Instead, the destabilisation engendered by the boom led in quick succession to the fall of the Shah, and Iraq's attack on Iran. In turn, these events would ultimately produce Saddam Hussein's occupation of Kuwait, and the 2003 US invasion. In Saudi Arabia, social dislocations fostered a new breed of radicals, who in 1979 occupied the Grand Mosque in Mecca.

The confluence of higher prices with political objectives led to a lasting suspicion in the West of "unreliable" Middle Eastern oil producers, which persists today. And in the end, Opec overplayed its hand. Prices stayed too high for too long, and the resulting crash in 1986 ushered in a long period of austerity in the Gulf.

As a new wave of change sweeps the Middle East, we are still feeling the impact of those events 38 years ago. The October War, both accelerating and distorting the inevitable, shows how such random events and coincidences form ripples on the grand, remorseless tides of history.

Robin Mills is an energy economist based in Dubai, and author of The Myth of the Oil Crisis and Capturing Carbon