x Abu Dhabi, UAEMonday 24 July 2017

The oil embargo of 1973 unlikely to be repeated

Tactical supply cuts, rather than embargoes, keep the balance of global trade in Opec's favour.

It was a matter of time before someone would call on the Islamic world to use the oil weapon to force a halt in the violence in Gaza. And it comes as no surprise that the call to deny the US and other allies of Israel came from Iran, a supporter of Hamas, which is under fire from the Israeli army. In view of the suffering of innocent civilians in Gaza, many in the Gulf might be tempted to use any and every means possible to stop the violence. Indeed, the UAE was a notable supporter of the 1973 Arab oil embargo.

But since then Gulf oil producers have learned to wield their oil power more effectively. On the economic front, embargoes have proved to be of limited economic value when imposed from a position of weakness. Indeed, they often end up harming those who enforce them more than their intended targets. The Arab oil embargo, for example, may have had enormous political significance, coinciding with a coming-of-age for Arab nationalism.

But for the Gulf economies it was an experience that most are reluctant to repeat. By choking off supplies to their main customers, Gulf oil exporters created a reputation as unreliable suppliers of energy that still reverberates in western policy circles today. That economic war fuelled a severe recession in the industrialised world, which ended up impacting on the Gulf. Demand for energy took a hit in the long term because of slower economic growth and energy conservation. Meanwhile, western governments took steps to cut reliance on Middle Eastern energy by building up huge emergency stockpiles of oil and developing alternatives such as nuclear power.

Because Iran and Iraq both broke the embargo, those participating ended up handing market share to rival producers. In the hands of western powers, however, individual embargoes have been much more effective. The US uses them effectively against Cuba and Iran, preventing those nations accessing markets and developing new technology. Iran has been subject to a US embargo since the 1980s, and the ban on oil trade with Tehran since 1995 has curbed its ability to develop its petroleum resources.

Russia also wields embargo power to great effect, as shown in the case of its exports of natural gas to Ukraine. But the call on Sunday by Commander Bagherzadeh, the director of Iran's Foundation for the Preservation of Works and Publications of Sacred Defence Values, for a new embargo over Gaza has fallen on deaf ears. Today, Gulf exporters see their national economic interests better served by a more subtle management of oil supplies to the world market.

As reserves and spare production capacity is increasingly concentrated in the Gulf, it has become easier for these nations to control the availability of oil and extract optimal revenues from their resources. Nationalism in economic policy today is more commonly expressed as "resource nationalism": optimising revenues by keeping ownership of oil and gas industries and exports at a level that moderates the accumulation of stockpiles in the West.

Having ceded to political pressure to increase production over the summer, when prices were above US$100 a barrel, Opec is now chasing to catch up with dwindling global demand for fuel. With oil prices below $50, all signs are that the 12-member group is quickly ratcheting down its production to stop the rot. Even Venezuela, Angola and Nigeria - often cited as the most liable to ignore quotas because of budget difficulties - appear to be complying to the letter with the reductions.

These tactical supply cuts, rather than embargoes, keep the balance of global trade in Opec's favour while sustaining the long-term demand for the commodity. While some Gulf producers may feel that prices are too low, today's price means other producers are not rushing to replace the volumes removed from world markets by Opec. Output from the largest rival producers - Mexico, Norway, Russia and the US - is falling, too.

To keep ahead of the game, the next step for the low-cost producers of the Gulf would be to add to their production capacity during the downturn. That way they would be better placed to keep up with the next jump in global demand for crude, prevent bubbles forming in the futures markets and increase confidence in their ability to manage the global energy market. tashby@thenational.ae