Markets and Economy
The Oil Crisis That Never Happened
The September attack on Saudi oil facilities briefly raised fears of a crippling oil shock like the 1973 OPEC embargo. But lessons learned from that period of time have helped the global economy through this recent disruption.
- Last month’s drone attack on Saudi oil facilities had a muted impact on oil markets.
- The resilience of global energy supplies is a testament to the safeguards enacted following the oil shocks of the 1970s.
- Countries have built up strategic petroleum reserves and increased domestic oil production, making the global economy less dependent on any single energy exporter.
A drone attack on Saudi Arabia’s oil facilities last month prompted panic among those who lived through—or know about—the devastating oil shocks of the 1970s. The attack temporarily shut down almost half of Saudi Arabia’s oil production and drew comparisons to the politically-fueled embargo of the 1970s and fears of similarly crippling consequences today.
But energy markets have remained relatively tranquil in the aftermath, with thanks, in part, to higher petroleum reserves and domestic oil production. These buffers, enacted in response to the 1973 OPEC embargo, have done their job, helping the global economy move through the current disruption.
The Potential for Crisis
While the recent panic may seem premature, it has roots in historical precedence. Saudi Arabia remains the world’s largest oil exporter—providing about 5 percent of the global supply. This significant stake means that the temporary shutdown of oil processing facilities had the potential for broad repercussions.
However, even a minor supply disruption has the potential to cause dramatic price swings to highly sensitive fuel demand. For example, in 2015, the US shale boom created a modest oversupply of oil, and the ensuing glut sent oil prices tumbling by more than half. Therefore, severe consequences in response to recent events were more than probable—especially for nations, like the US, that rely on imported energy to meet their transportation and industrial needs.
The 1973 Embargo Versus Today
It’s important however to distinguish the differences in response to the 1973 embargo and September’s temporary shutdown. In 1973, the embargo began when OPEC nations cut oil production and halted exports to Israel and its allies, including the US, during the fourth Arab-Israeli war. As a result, oil prices doubled in the US, creating fuel shortages and threatening to drive the country into a recession.
Conversely, the impact of the drone attack on Saudi facilities was muted. When facilities were shut down, oil prices jumped $7 initially, briefly cresting above $60 per barrel before falling back to around $55 in the week after the attack.
When this article was written, the price per barrel was only about $2 higher than before the attacks. It seems the lessons from the OPEC embargo have helped global energy markets remain tranquil in the face of an unexpected disruption.
3 Lessons From the OPEC Embargo
Action: In 1973 the US government rationed fuel through purchasing restrictions determined by whether the last digit on a consumer’s license plate corresponded with odd or even days of the week.
Reaction: Rationing fuel may have exacerbated the shortage by encouraging people to buy as much fuel as possible when it was available on their day.
Conclusion: The restrictions were a price signal that prevented long lines at the pump—in the short term. But in the long term, allowing prices to float freely will have the opposite effect. Why? Because demand for fuel is relatively inelastic—commuters can’t cancel their daily commute and investing in efficiency takes years to decrease demand.
Action: Following the 1973 embargo, governments around the globe built up their petroleum supplies. Now, governments of oil importing nations keep 4 billion barrels of petroleum in reserve as a buffer against supply shocks.
Reaction: In the aftermath of the September attacks, governments around the world opened their strategic petroleum reserves to compensate for the lost supply.
Conclusion: Governments didn’t need to predict the oil supply shock, because they were prepared to weather it. It would take approximately 30 months of sustained supply disruption from these recent attacks to drain the world’s strategic reserves of petroleum.
Action: Following the 1973 embargo, the US became the world’s largest oil producer. Now the country boasts 12.5 million barrels of daily domestic production.
Reaction: Since 2014, price per barrel has dropped from $100 per barrel to around $50 per barrel. Analysts believe the break-even point for most shale drilling operations now lies between $60 and $70 per barrel.
Conclusion: Beyond strategic reserves, the US positioning as an oil producer is ideal. The US is still a net oil importer, but if disruptions abroad were to push prices above that point for a prolonged period, a surge of domestic production could help meet the nation’s energy needs.
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Jim Glassman, Head Economist, Commercial Banking
Jim Glassman, Head Economist, Commercial Banking
Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.