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Pain at the Pumps: The 1973 Oil Embargo and Its Effect on U.S. Foreign Policy

It may be a challenge for those who did not experience it to imagine a time when the supply of gas was so restricted it had to be rationed, leading to massive lines at gas stations across the country. Yet this was the situation the United States found itself in during the autumn of 1973, when an oil crisis was in full swing. The shortage was related to political developments in the Middle East resulting from the 1973 Arab-Israeli War, or as some refer to it, the Yom Kippur War.

On October 6, 1973, Egypt and Syria attacked Israel’s forces in the Sinai Peninsula and the Golan Heights. Wanting to avoid both an Arab defeat and military intervention, the Soviets began to resupply Egypt and Syria with weapons. By October 9, following a failed Israeli Defense Forces counter-attack against Egypt’s forces, the Israelis requested that America do the same for them. Not wanting to see Israel defeated, President Nixon agreed, and American planes carrying weapons began arriving in Israel on October 14. 

In response to American aid to Israel, on October 16, 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC) raised the posted price of oil by 70 percent, and the next day, oil ministers agreed to a cut in production. Saudi Arabia and the other Arab oil-producing states joined the embargo on October 20, 1973. The effects were felt across the country. The price of oil went from around $3 to nearly $12 per barrel. Gasoline prices that had been hovering around 34 cents per gallon pre-embargo shot up to 84 cents per gallon and rationing was enacted in many states. The domestic automobile industry also suffered, as consumers soon started buying smaller, more fuel-efficient foreign cars.

Francis M. Kinnelly handled economic issues in the Department’s Bureau of European Affairs (EUR). Peter Swiers worked in the Department’s Office of Policy Planning. They were both interviewed by Charles Stuart Kennedy, beginning in June 1997 and June 1994 respectively.

Read other Moments on the Middle East.

 

“The U.S. was no longer able to supply other countries, let alone itself”

Francis M. Kinnelly, EUR, Economic Affairs

KINNELLY:  The Egyptians and Syrians decided to have another go at Israel. The Egyptians had talked beforehand with the Saudis in particular, probably with other Gulf Coast states about support in the event they did go to war. They succeeded really in making it a surprise attack. The Israeli forces withstood the attack pretty well, but very quickly were running out of war materiel. So, the U.S. came to Israel’s aid.

Before the war broke out, the oil suppliers were already getting into a stronger position. U.S. domestic production had peaked a couple of years before and the U.S. was no longer able to supply other countries, let alone itself, fully in case of any cut-off of supplies. The Middle East oil producers were realizing this and were asserting greater strength in negotiating with the big sisters, the oil companies, and were ratcheting up prices as well as their share of the profits. So, this was going on.

In fact, the OPEC countries were meeting in Vienna when the war broke out. So, we had this pressure for higher prices, which had been going on already for a year or two. People were already talking about an oil crisis before the war. Then suddenly the war, followed by an Arab embargo against the U.S. because we were supplying Israel with war materiel. Then all sorts of panic broke out here.

The shortfalls in supply were made all the worse because we still had a lot of regulations on the U.S. market to protect domestic producers, governing supply and where that supply could go. Because of these regulations, U.S. companies had a hard time moving oil around the U.S. market. We had these long gas lines and all.

The OECD [Organization for Economic Cooperation and Development] was a key forum in the multilateral response to the crisis. The OECD Economics Division, which was really very good at that time, looked at the impact of the much higher oil prices on member countries’ economic growth prospects, and also on balance of payments and inflation, and did some excellent analysis about the impact of the crisis on the Western world in terms of lower growth, higher inflation, what would turn out to be called “stagflation” [stagnation and inflation].

Our office supported a key meeting, the Washington Energy Conference, which Secretary [Henry] Kissinger chaired, and which involved the finance ministers and in some cases foreign ministers from the Western countries in trying to reach agreement on a coordinated response to the crisis. There were great debates with the French, who did not want to be coordinated. They had special connections with the Arab producers and they wanted to protect these connections.

But the conference did reach agreement on programs to align policies more carefully and also to study what was happening more fully. A new agency, the IEA [International Energy Agency], was set up at that point to coordinate Western energy policies. It never really succeeded in doing this function, but it became an important consultative and analytical body. It is still functioning as an OECD-affiliated agency.

I think it was really the start of Middle Eastern diplomacy involving Secretaries of State, a process that continues to the present day.

“Instead of seeing the developing countries turn their wrath on the oil producers, they turned their wrath on us”

Countries reacted differently. The Saudi embargo also went against Holland and one or two other of the smaller European countries, but not France. So, the participants in this game came in with different sets of interests. We were interested in taking a hard line against the oil producers. We thought that if we really took a strong united front, they would have to yield for they would see that it was not in their interest to fight us.

We had a bunch of conflicting policy interests. We also wanted to be sure that Iran remained a strong bulwark against communist encroachment in the Middle East, and Iraq as well. So, we obviously couldn’t push that game too far.

My main activity was in dealing with the OECD staff concerning their analysis of what the impact would be on the Western world. Working with the Treasury and Federal Reserve, we then fed this into what the impact would be on the U.S. The Council of Economic Advisors was closely involved as well. So, it was a heady time.

Here the sudden shock had come to our economy and our economic prospects. What did this all mean? It was a great time for economists to run their analyses, to run their models and such.

Q: It was a little later, was it, where the great concern for all the money flowing from everywhere into the Arab world?

KINNELLY: No, that came very closely thereafter. The money was really flowing out to them. We were seeing this taking place from the perspective of the OECD economies and trying to gauge the impact, but for the developing world this really was a very bad shock. I think we lost the game there.

The Saudis of all people took the lead in speaking for the Third World and in responding to their calls for help. The Saudis said, “We can help you, yes. We’ve achieved a new relationship as a supplier of oil, but you can do the same as a supplier of coffee or teak or whatever. We can help you get a better deal from the West in terms of commodity trade if you are all aligned. We can help you in that.”

That’s really, I think, the start of the North-South discussions, the special session of the UN General Assembly, and the New International Economic Order. That whole story, I think, came out of the energy crisis and its impact on developing countries.

But instead of seeing the developing countries turn their wrath on the oil producers who were taking in all the money, they turned their wrath on us. It certainly was quite a victory for the oil producers.

“There was a sea change in that American foreign policy was close to being entirely Eurocentric”

Peter Swiers, State Department, Policy Planning Staff

SWIERS:  There was an Arab oil embargo, and as we discovered, we were then substantially under 50% dependent on foreign oil and more specifically Middle East oil. It is interesting because today we’re more than 50% dependent on foreign oil. Then and now we have a real shortage of fossil fuel products in the United States, and we understood our real dependence on that. The decisions on how to deal with the Arab world came home to us.

We had to deal with Europe because the embargo dealt a blow that could have been near fatal for European integration since Europe was so totally dependent on foreign oil. The doubling or tripling of oil prices in Europe was a disaster for what had been a very smooth and rapid growth throughout Western Europe and particularly throughout the countries of the then European Community. Europe lost confidence in its ability to manage its own affairs from which I don’t think it has recovered.

The reality of the United States as the deciding factor in European affairs was really cemented then…. There were a whole series of policies that had to be drawn up to address. First of all we had to give to the Europeans some sense of confidence that the United States was still there. At the same time, we had to bolster their confidence in themselves so that the process of integration would continue. That was a key of United States foreign policy which we wish to maintain.

The embargo also forced us to give greater attention to Latin America — e.g. Mexico, Venezuela.…There was a certain sea change in the sense that American foreign policy was close to being entirely Eurocentric; everything proceeded from that. What came home to us was Number One, we had to have clear goals regarding the Middle East.

We had to develop some clear idea of what were the United States goals vis-a-vis the Middle East — i.e., what are our policy objectives there were — and clearly we had to focus in on Latin America again. In a sense, I would say that we ended the old type of foreign policy, what everyone called the banana republic policy, and shifted to something else regarding Latin America. We recognized the importance of Mexico to us, the importance of Venezuela, which I think may have diminished, although I think our interest in Mexico has increased.

For Asia, it was a different type of attitude that was driven not so much by the energy crisis except probably for our relationship with Japan which had to shift because on the energy crisis bought home to the Japanese how totally dependent they were on foreign oil resources.

You can hearken back to some of the reasons for the Japanese attack on Pearl Harbor, and the expansion of the Japanese empire, which was related to this rapidly industrializing country which had no natural resources at all. That reliance on foreign resources was raised again, but obviously the Japanese were not going to repeat their 1941 policy, and therefore a new relationship evolved with the Japanese. At the same time the Japanese also began to understand even more than in past their need to export and develop real competitive export capability.

We had to address some of those issues. I remember very vividly the Policy Planning staff meetings we had with the Japanese Policy Planning staff which was one of the earliest set of meetings to develop. The Japanese had great difficulty in engaging in policy planning. They were willing to have open dialogue, not just with us, but actually you might say among themselves in our presence. That was quite a development for the Japanese and I think it helped modernize the Japanese approach to their foreign affairs.

I would say that the China policy was very little affected by the oil crisis. The policy had been set in motion with the Shanghai communiqué.…

A very important part of our attitude towards the Pacific was in national security terms. We saw the beginning of an increased U.S. attention to the Pacific which did not diminish the importance of the Atlantic and Europe in our national security thinking, but raised our consciousness of the Pacific area….