The 50th anniversary of the 1973 oil embargo underscores the enduring need for diversified energy sources and global market integration. True energy security lies in reducing consumption and embracing policies that curb demand and diversify supply. As the world transitions to clean energy, applying this strategy to the critical minerals market, expanding strategic stockpiles, and enhancing international coordination are crucial to coping with evolving challenges of the energy transition.
In a new essay for The Wall Street Journal, Jason Bordoff, the Founding Director of CGEP, and Meghan O’Sullivan, Director of the Harvard Belfer Center for Science and International Affairs, reflect on the 50th anniversary of the 1973 oil embargo and highlight its enduring lessons for contemporary energy policy.
Fifty years ago this month, Arab members of the Organization of the Petroleum Exporting Countries cut off oil shipments to the U.S. in retaliation for American support of Israel during the 1973 Arab-Israeli War. The resulting energy crisis shocked the American people and rocked the economy. Iconic images of boxy sedans and wood-paneled station wagons lined up for miles at the gas pump were seared into our national memory. Even the White House Christmas tree was not spared, remaining unlit as a sign of austerity. The shock of the Arab oil embargo has shaped nearly every aspect of American energy and foreign policy for the last half-century. The specter of petrostates using oil as a geopolitical weapon has haunted politicians and led to an obsessive quest for “energy independence.” Such fears were allayed during the recent shale boom, which turned the U.S. into a net energy exporter for the first time since 1952.
In response to these uncertainties, many leaders have reached for policies from the 1970s. They are resuscitating schemes for price controls, calling for energy independence and raising alarms about imports. But the energy risks of that era were very different from those we now face: the growing rivalry between the U.S. and China, rising forces of fragmentation and protectionism, the disorderly dash to move from fossil fuels to clean energy, and the physical impacts of climate change. As the world marks the 50th anniversary of the embargo, leaders need to be cleared-eyed about the lessons of 1973. The need for the world economy to make a transition to clean energy has further complicated the landscape.
“Energy independence” is a chimera. The U.S. has long sought energy independence, but in a deeply integrated and interconnected global market, even the shift to being a net oil exporter has not protected the U.S. from the vagaries of the oil market. A disruption in oil supply in any country affects global oil prices for all countries where markets set the price of fuel. True energy security thus comes from using less oil, not just from importing less or producing more oil domestically. Indeed, the U.S. and others responded to the oil shock of the 1970s by taking steps to cut oil use, such as imposing fuel-economy standards and developing alternative forms of electricity generation.
Integrated energy markets can absorb shocks. Though the impulse of many in times of insecurity is to pull up the drawbridge, America’s participation in global energy markets is one of its strengths in times of uncertainty. True, shocks far away may be felt at home in a globally integrated market, but the impact of these shocks will be much more diffuse. Well-functioning energy markets increase security by allowing supply and demand to respond to price signals. The gasoline shortages of 1973 were caused not just by the embargo but by oil price controls and a complex allocation system adopted to cope with inflation. The policies made the problem worse, as oil companies responded to increasing world prices by cutting imports and limiting sales to retail stations.
“Safety and certainty in oil lie in variety and variety alone.” So Winston Churchill famously told Parliament in 1913. The Arab oil embargo demonstrated clearly the benefits of supply diversification. Today, the world’s three largest crude oil producers each produce around 10% of supply. If one of them were to cut off exports, it would lose a great deal of revenue, while the pain of higher prices would be spread among all countries, not borne only by the target of an embargo. The lesson of diversification is particularly important for the coming transition to clean energy, which will depend on the availability of critical minerals for everything from batteries to solar panels. The largest producers of lithium, cobalt and rare-earth elements each account for more than 50% of global supply. The vast majority of refining and processing happens in China. As with oil, security will be enhanced by diversifying suppliers through more trade partnerships, contrary to today’s rising protectionist trends.
Coping with price volatility requires a big toolbox. Energy supply disruptions are inevitable, whether caused by geopolitics, hurricanes or other factors. Extreme price volatility creates economic and political harm, so reducing it is a priority for politicians and the public. The history of oil policy has been, above all, a search for price stability, from the Texas Railroad Commission’s setting of production quotas in the half-century before 1973 to OPEC supply agreements since. The coming transition to clean energy risks more volatility, at least until the world achieves its climate goals. The unprecedented pace and scale of the transition will bring many uncertainties. For example, a failure to synchronize declines in oil supply and investment with declines in demand runs the risk of supply shortages, tight markets and less latitude for handling shocks. Moreover, the electricity grid will require unprecedented levels of flexibility to cope with vastly greater amounts of intermittent renewable energy. Energy systems will be challenged not just by the jagged pace of technological change but also by social mobilization for climate action and the effects of climate change itself.
The long lines of boxy sedans at gas stations may have disappeared over the past half-century, but the energy security concerns spawned by the 1973 oil embargo are alive and well, and the transition to clean energy will make them more urgent. We would be wise to mark the anniversary by heeding the lessons of that not-so-long-ago crisis.
/Center on Global Energy Policy, The Wall Street Journal, Jason Bordoff, Meghan O’Sullivan/