Fundamental shift in world power: Oil used as economic weapon

At the start of the 1970s, the U.S. had become accustomed to abundant supplies of cheap energy. Low-cost fuel stoked U.S. industries, and was one of the primary reasons that the economy had grown and prospered. At the beginning of the decade, oil and natural gas supplied approximately 75% of the nation’s energy requirements. To assure continued economic growth, the U.S. needed to maintain an abundant supply of domestic production to meet high consumption rates, and satisfy increased demand in the coming years.

However, the U.S. government had stripped the petroleum industry of two key tax incentives, including a 28% depletion allowance on production and the 7% drilling investment tax credit. Additionally, the price of natural gas was being regulated at the wellhead by the Federal Power Commission, and leasing of federal lands for oil and gas exploration was being restricted or denied. The U.S. also lacked a comprehensive energy policy.

The unfavorable political climate slowed expenditures for exploration and development drilling. The reduced activity caused production to decline in 67% of the 31 producing states, resulting in an increased centralization of the industry in Texas and Louisiana. In an exclusive interview with World Oil Editorial Director Donald E. Kliewer, in September 1971, U.S. Senator John G. Tower (R-Texas) forewarned, “We must not become overly dependent on foreign supply to satisfy our tremendous energy needs. Foreign sources are always subject to interruption for a variety of reasons.”

OPEC TAKES CONTROL

The Organization of Petroleum Exporting Countries (OPEC) took the world’s stage in the early 1970s by asserting its authority and enforcing its petroleum policies established in 1960. Its member countries began to exercise their “inalienable right of permanent sovereignty” over their natural resources, when Algeria, Libya, Iraq, Venezuela and Kuwait nationalized large portions of Western oil concessions. This gave control of a significant portion of the world’s total reserves to OPEC countries, and enabled them to play a major role in the pricing of crude benchmarks and products.

In 1973, OPEC’s Arab producers launched an oil embargo against the U.S. for supporting Israel in the Yom Kippur war. The embargo also affected the UK, Canada, Japan and the Netherlands. By the time the embargo ended in March 1974, oil prices had surged from $3/bbl to $13/bbl. By nationalizing its assets and then restricting supply, OPEC established oil as a powerful weapon to wage economic war and to achieve political goals. The embargo exposed the weaknesses of net importing nations, creating a fundamental shift in the power structure between the Middle East and Western countries. 

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com