In 1973, after the Yom Kippur war between Israel and a coalition of Arab countries, Middle Eastern oil producers declared an embargo on oil exports to the United States as punishment for its support of Israel. What followed was an energy crisis of epic proportions. According to Daniel Yergin, the current energy crisis could be worse.
In the 1970s oil crisis, the price of oil soared fourfold over three months following the embargo. At the time, the United States had thought that the lost market share would hurt the producer states financially. But instead, those producers made up for that market share loss with considerably higher prices.
Consumers in the United States, however, suffered a severe blow in the form of fuel shortages and urgent energy conservation measures as the country’s consumption of oil had been growing incessantly for decades thanks to the cheap Middle Eastern oil.
Interestingly, although the embargo did not involve Europe, the continent suffered an even more severe blow because of the way prices rose following the Arab producers’ move. Fuel rationing was put in place and national speed limits were introduced to conserve fuel.
The latter measure, about speed limits, may sound familiar to those following the International Energy Agency’s recommendations for energy conservation: it is one of the ten steps the IEA listed as necessary to reduce the EU’s reliance on Russian fossil fuels.
The fact that today’s shortage involves all the fossil fuels rather than just oil is one of the reasons this crisis could be worse than the one in the 1970s, according to Yergin, who made his comments in an interview with Bloomberg this week.
“I think this is potentially worse,” the expert told Bloomberg. “It involves oil, natural gas, and coal, and it involves two countries that happen to be nuclear superpowers.”
Leaving aside the understandable unease that the latter part of the statement would spark in anyone in Europe or North America, the first one is telling. Europe depends on Russia for close to half of its coal and natural gas imports and about a quarter of its crude oil imports. And the EU just decided to ban Russian coal imports in an attempt to hurt the Russian economy as punishment for Russia’s actions in Ukraine.
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Here’s what happened after the announcement of the ban, which has yet to be approved, by the way. Indonesia hiked its own coal prices by 42 percent, Australian coal miners reported they have limited ability to replace Russian coal, and Asian coal prices soared amid reports that European buyers were hunting for replacement coal.
What’s happening in coal is pretty much what will be happening in oil and gas. As Yergin noted in his interview with Bloomberg, the global natural gas market is already quite tight, and there is no ready replacement for Russian gas should it stop flowing. That’s despite efforts on the part of U.S. LNG producers to boost exports.
Another energy expert, David Blackmon, went a step further this week on the Energy Transition podcast, saying that the U.S. did not have the physical means to fulfill the promise President Biden made to the EU of supplying an additional 15 billion cubic meters of gas in the form of LNG. Blackmon noted the time it takes to boost gas production and expand liquefaction capacity as well as the limited LNG tanker fleet and already existing LNG export commitments to other buyers.
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In this environment of tight fossil fuel supply and demand that seems to significantly exceed this supply, things are already critical without any oil or gas embargos, which a senior EU official mentioned might become “necessary” at some point. The cost of living is rising across the continent, and governments are struggling to rein it in. If the EU goes down the embargo road the results could be disastrous, as virtually every analyst has been warning for weeks.
By Irina Slav for Oilprice.com
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Even before the Ukraine crisis developed into an armed conflict, prevailing conditions in the global oil market were developing into similar conditions that prevailed before the Arab oil embargo was imposed in 1973.
The shared conditions are: (1) A rapid expansion in the global economy. (2) A global oil market operating at virtually full capacity. (3) A declining global investment in oil exploration and capacity expansion.
However, there is one major difference between the 1973 embargo and the global market conditions now. In 1973 only oil was involved. Today the crisis involves all fossil fuels (oil, natural gas and coal).
Another difference is that the 1973 embargo caused global GDP to decline by an estimated 5.0%-6.0% affecting countries of the world without exception. In today’s crisis the global economy could virtually collapse if a ban is imposed on Russian oil and gas exports with the United States’ and the EU’s economies most adversely affected because of their sizes. The EU’s economy could plunge into the worst energy crisis in its history with its economic growth reduced to almost zero.
The United States is the world’s second largest importer of crude oil after China importing an estimated 9.0 mbd. The US economy is more vulnerable to price shocks than the other major economies.
No one single oil producer in the world or a group of producers including OPEC+ and US shale oil can replace Russian crude oil production now or ever. Before the pandemic, Russia was the world’s largest crude oil producer and exporter producing 11.7 million barrels a day (mbd) and exporting 8.3 mbd according to the 2021 BP Statistical Review of World Energy composed of 5.0 mbd of crude and 3.3 mbd of refined products. Despite the OPEC+ cuts. Russia is still exporting 8 mbd (5.0 crude and 3 refined products).
Even the combined LNG exports of the United States, Qatar and Australia can’t replace Russian gas supplies partly because of their long-term contractual arrangements with customers in the Asia-Pacific region and also lack of enough LNG terminals and storage space in the EU to receive even modest volumes if LNG.
And while the EU’s energy crisis is forcing it to pay sky-high prices for LNG, sooner or later the economy will reach a point where it can’t afford these prices. The EU will then realize the benefits of the cheaper Russian piped gas. That is when it will be forced to accept President Putin’s demand for ruble-for-gas.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London