After the outbreak of the 1973 Yom Kippur War, the Organisation of Arab Petroleum Exporting Countries instituted a total oil embargo against Israel’s Western allies. In the NS, John Maddox not only analysed the direct economic fallout but also speculated on the future of British energy security beyond the petroleum age.
Nicholas Harris
There is just a chance that if the United States Administration had decided three years ago that the pipeline from Alaska must be built, the Arab governments would not have had an oil weapon to brandish at their meeting in Kuwait last week. For the United States is not yet dependent on the Middle East for much more than 4 per cent of its petroleum; imports as a whole account for only 7 per cent of total consumption of 850 million tons a year (in 1972).
What the Arab governments have recognised is that in the next few years the United States would be able to meet the rapid growth of domestic consumption only with the help of the Middle East. Nobody pretends that the petroleum under the North Slope of Alaska is either as plentiful or cheap as that in, say Saudi Arabia, but there is certainly enough of it to meet the growth of American consumption for three or four years and possible many more. The pipeline could have been delivering its first oil early next year so that American dependence on the Middle East might have been postponed until the 1980s. Now there will be at least three uneasy years.
The first temptation will be to blame the environmentalists for opposing the pipeline, but the real culprit is the Administration. which has been reaching energy crisis for at least 18 months, but which has failed to intervene decisively on the pipeline question until the past few weeks. The muddle over the pipeline is characteristic of the Administration’s energy policy. Since the mid-1960s it has been clear that the days of self-sufficiency were numbered.
Until this summer American gasoline was half the price of petrol elsewhere in the world. Natural gas prices have been kept so low that exploration has been un-economic. Steps have been taken to clean the air by burning oil low in sulphur (which is part of the reason why Libyan crude is much sought after) and by treating exhaust fumes from motor vehicles (which may increase gasoline consumption by as much as a third).
Cheap commodities and clean air are virtuous objectives, everybody will agree, but it is extremely odd that until the past few weeks, the United States Administration has pursued them without counting their implications for energy policy. As it happens, the United States may just be able to squeak through the next few years economising (gasoline consumption in the summer was a 5 per cent less than expected) and at the same time introducing measures to stimulate exploration for petroleum and the development of new energy sources. By the end of the decade there could be a permanent shift in the pattern of energy consumption in the United States, with petroleum stagnant but other energy sources such as nuclear power, oil shale and coal meeting the growth of demand.
Europe will find the going harder, at least if last week’s Kuwait communiqué means what it says. Western Europe uses nearly much petroleum as the United States (775 million tons in 1972) but three-quarters of it comes from the Middle East. Japan is even more dependent on the Middle East. The best hope is that the vagueness of the Arab governments’ announcement of a monthly 5 per cent reduction of oil production conceals a willingness to be flexible. Presumably it will be left to individual Arab governments to decide which customers for oil are better friends of the Arab than the Israeli cause. It is also worth remembering that some Arab oil-producing countries have an urgent need of cash – Iraq, for example, is up to its eyes in an ambitious development programme. Then the war will no doubt have to be paid for somehow.
Whether or not there will be a physical shortage of petroleum, there is no doubt about the way in which prices are moving. Last week’s two-thirds increase of the posted price (the reference price from which royalties are calculated) does imply that the producing countries will get the higher prices on which they have set their sights. A year ago people wondered if the actual cost of Middle East oil would exceed $5 a barrel before the decade was out. That has already happened.
Where will it all end? There is nothing to suggest that the oil-producing governments are unrealistic in their calculations of what the market will bear. Indeed, with the rapid increase of prices in the past year or so, it may have been weak of the producers to convert an increasing quantity of rapidly appreciating petroleum into depreciating cash.
By the end of the century petroleum will be a scarce commodity in the sense that reserves will not be sufficient to sustain continual increases of consumption. Then, oil-producers can expect that the price petroleum is determined by the cost of replacing the most costly market for petroleum by other sources of energy. In short, in the 1980s and 1990s we can expect that the price of petroleum will be linked to the likely cost of making liquid fuels (for aircraft as well as for the fashionably unpopular motorcars) from other materials (such as sugar cane) by technologies which do not yet exist.
The implications for fuel policy, short and long term, are plain. From now on the use of petroleum as a source of heat in generating electricity, providing process heat for industry and heating houses and offices will become uneconomic. Coal and nuclear power have now become more attractive than for a decade. People would be switching eagerly from oil to something else if there were not a lot of capital tied up in existing equipment. In any case, it will be some years before supplies of coal and nuclear power can be increased.
So what should Western governments do? If the shortage is acute, rationing will no doubt be necessary. Time will tell. But whatever happens European governments have a duty to anticipate the changes in the pattern of petroleum consumption forced on us by the rising trend of prices. In Europe, at least, governments can do a lot to discourage the use of oil for making electricity. Elsewhere in industry, arm-twisting and exhortation will not be sufficient, which is why there is reason for tilting the balance still further against oil as a source of heat by clapping on an extra tax. Paradoxically there is a case for exactly the opposite strategy for petrol. For one thing the new prices will be inflationary. For another the oil-producing countries have no need to take account of the customers’ taxation levels?
But surely this does not affect Britain, blessed now with the North Sea? This is a beguiling line of argument, and indeed there is a chance that for a brief spell in the early 1980s, the United Kingdom could be self-sufficient in petroleum. One obvious difficulty is that the threat of a reduction of supply has come now, not a decade hence. There is also some doubt whether it would be permissible, under the rules of the European Community, for Britain to keep its oil to itself – and the North Sea is unlikely to amount to more than 15 per cent of Europe’s total oil requirement in 1980.
In any case, no matter how prolific the North Sea turns out to be it can only help to postpone the time at which a shift in the pattern of energy consumption is forced on us. Petroleum reservoirs are going to be increasingly hard to find, which means that the price will increase and that a cumulative growth of consumption cannot indefinitely be met. There is nothing more in this than that, in the next half-century, the role of petroleum will be radically changed. There is nothing cataclysmic about this. Much more profound changes have taken place in the past two centuries. But there is no resisting it.
[See also: There won’t be a “final victory” for Iran or Israel]
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This article appears in the 25 Jun 2025 issue of the New Statesman, State of Emergency