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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.

Key points:

  • 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

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

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.

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