BusinessMay 8, 2023
Recalling OPEC's oil embargo 50 years ago — and its Cape Girardeau impact
In October 1973, members of the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, proclaimed an oil embargo. The express purpose of the embargo was to punish nations — the U.S., Canada, Japan, Netherlands and the United Kingdom — that had supported Israel during the Yom Kippur War. Later, OPEC extended the embargo to Portugal, Rhodesia (now Zimbabwe) and South Africa...
In October 1973, members of the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, proclaimed an oil embargo.
The express purpose of the embargo was to punish nations — the U.S., Canada, Japan, Netherlands and the United Kingdom — that had supported Israel during the Yom Kippur War. Later, OPEC extended the embargo to Portugal, Rhodesia (now Zimbabwe) and South Africa.
President Richard Nixon, a month later, called for fuel conservation measures, which led to many service stations — including those in Cape Girardeau — voluntarily suspending Sunday gasoline sales.
On Nov. 26, 1973, a Southeast Missourian story quoted station owners' fear that their gasoline allotments would run out before the end of the month.
Before the embargo was lifted in March 1974, the price of oil had risen approximately 300% and with it U.S. pump prices rose accordingly.
The embargo lasted until March 1974, but the era of using oil as a political football was here to stay.
The Southeast Missourian looked back at the half-century-old embargo with GasBuddy chief petroleum analyst Patrick De Haan and invited him to put the situation into context today.
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The year 1973 and the OPEC oil embargo of that year seem to have launched the time of higher gas prices, which continues today. Is this an accurate representation of history in your mind?
1973's oil embargo certainly was a jolt. As the world has developed, it has consumed more and more oil because oil is the critical ingredient in a functioning economy. 1973 was a wake-up call that oil was being depended on more and more, and there's a finite amount of it available. If you look at the rate of inflation, there have been jolts over the years in gas prices, no question. Most recently, the war in Ukraine, just over a year old, has had a political impact on gas prices because Russia, Ukraine's opponent, is a major oil producer. If we were in normal times, without the pandemic, without Russia's Ukrainian invasion, consider this. From 2015 through 2019, pre-COVID, you saw gasoline prices in line with where they were back in the '70s, adjusted for inflation. There's an ebb and flow to gas pricing. Gas was high in the '70s after OPEC acted, but prices subsided in the '80s and '90s. When OPEC tinkers with supply and demand, as it has in the past, you can have jolts.
Context is important. I don't like paying over $3.50 a gallon, which is what I'm doing here in the Chicago area, but the price of rising income largely has been consistent with the hike in pump prices. Purchasing power is greater today. I offer one case to illustrate: The minimum wage is much higher now than in the 1970s. We're talking a federal minimum of $1.60 an hour in 1973 compared to Missouri's current minimum of $12, which is considerably higher than half a century ago, even if you account for inflation.
Let's look at some representative prices over the years. According to auto club federation AAA, in 1929, a gallon of leaded gasoline, on average, cost 21 cents. In 1946, post-World War II, the average price was also 21 cents. Remarkable stability over a quarter of a century. In 1960, OPEC was formed. By the time the '70s came around, did the original oil-producing countries — Saudi Arabia, Iraq, Iran, Kuwait, Venezuela — look at one another and say, "We can make a lot more money, and since we're upset with U.S. policy regarding Israel, let's band together and make a shocking statement." That's debatable, but knowing the broad sweep of history, do you think it's ever possible to achieve again the gas price stability seen between 1929 and 1946?
No. OPEC realized banding together is going to lead to the best pricing outcome for those member countries. They realized they had power in numbers. We'll never get back to what the U.S. might regard as halcyon days of very low gas prices because OPEC acts as a lever in its own best interest. It can go the other way — in 2015, OPEC saw the power of the U.S. oil industry and responded by flooding the market with cheap oil, thinking inexpensive crude would disincentivize American companies from raising production. It did not, though. OPEC uses its lever to its main goal of looking out for its member countries by getting them the best prices. The power of the cartel is never going away because there is power to be had and money to be made. It should be said that this is not the 1920s. There are a lot more vehicles on the road today in places like, say, China. More vehicles, more oil, higher gas prices. That's the lever, the stick, if you will, that OPEC has.
How does the prospect of more electric vehicles figure into OPEC's power structure?
Yes, this theoretically could have an impact on OPEC. However, there is a caveat. As the world moves toward EVs, oil companies presumably will have less and less incentive to produce and refine oil. As demand falls due to EVs, logic would tell you prices should also fall. But if oil companies suddenly shut down wells because the price of crude plummets, prices at the pump may not fall after all. Also, the auto with its traditional internal combustion engine is still a mainstay around the world, and it consumes oil. OPEC producers control a third of the world's oil production, and because of this reality, I don't see going back to a simpler era.
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