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. Last Updated: 07/27/2016

Thirty Years of Petro-Politics

Thirty years ago on Friday, a group of oil ministers gathered in Kuwait City and made a decision that shook world politics and ignited the energy crisis of the 1970s. It continues to shape the way we see energy issues today, when tight oil and gas markets and high prices are a key factor in our economy -- and when the strategic significance of oil is once again evident.

The 1973 oil embargo was the unsheathing of "the Arab oil weapon." Coming the day after a decision to double prices, it was meant to be an act of retribution -- punishing the United States for re-supplying arms to Israel, which at that moment was still reeling from the surprise attack on Yom Kippur, several days earlier. Beyond that, it was also meant to pressure the entire Western world, whose oil consumption had been rising rapidly, into supporting the Arab side in the Arab-Israeli confrontation.

Though hardly anyone anticipated such cuts, there had been warnings. Indeed, during the 1967 Arab-Israeli war, some of the Arab exporters had tried to impose an embargo. It failed because there was plenty of extra production capacity that could be called into service. But by 1973 the world market had changed: Every well in the world, it seemed, was producing flat out, at full capacity. The reason was the torrid growth in demand. The United States, its domestic production having flattened, had turned to the world market, and in a few short years went from minor importer to the world's largest importer. And this time there was no place to go for extra oil.

The embargo created a massive global panic as buyers competed furiously with each other to get what they could, pushing the price up further. In the United States, it hit home for most consumers in infuriating gas lines -- long waits for limited amounts of gasoline. (The lines were in fact largely self-inflicted, a result of government controls that prevented flexibility and accentuated shortages in the marketplace.)

The whole international order seemed to have been transformed. Now politics was also about economics. On the day the embargo was announced, President Richard Nixon told his advisers, "No one is more keenly aware of the stakes: oil and our strategic position." The vast flood of "petro-dollars" to the exporters turned "petro-power" into a central fact of international politics.

Prices went up fourfold in the crisis; then, a few years later, with the Iranian revolution, they doubled again. The oil crisis marked the end of the postwar economic boom and did much to turn the 1970s into the worst decade, in economic terms, since the Great Depression. Moreover, there were fears that the crisis portended a permanent shortage of oil. People speculated that the price of oil might go to $100 a barrel.

That's not how things turned out, of course. Within less than a decade, the "permanent shortage" turned into a glut, triggering a price collapse that, among other things, hastened the end of the Soviet Union, which had been depending on its oil exports as the lifeline to keep its economy alive.

There are many lessons here. Nations that had taken their energy supplies for granted suddenly realized how important reliable, reasonably priced supplies were to their well-being. Oil became high politics, and energy became part of public policy.

One of the less obvious but lasting lessons is that markets work, even in circumstances as dramatic as these were. Supply and demand adjusted. The United States and other industrial countries have since become much more efficient in the use of oil. Today -- sports utility vehicles notwithstanding -- the United States uses only half as much oil per unit of GDP as it did in the 1970s. New, non-OPEC sources of oil, led by Alaska and the North Sea, came on stream quickly. And the world switched from oil to other energy sources.

It is also now clear that the starting point for energy security is diversification of supplies -- that is, production coming from many sources. The United States now imports oil from a large number of countries; it has a Strategic Petroleum Reserve as a supply source of last resort and can coordinate with other countries through the International Energy Agency.

The response to the crisis also demonstrates the power of technology. Technological advances have brought both greater efficiency in oil consumption and greater range in production. The oil industry is able to accomplish feats -- such as drilling beneath the ultra-deep waters of the Gulf of Mexico -- that were simply inconceivable in the 1970s.

Exporters learned their own powerful lesson: Customers matter. When prices skyrocketed, the exporters found that they were losing market share; customers had choices. After the price collapse, most of the exporters set out to rebuild their credibility as reliable suppliers, which meant making oil nonpolitical again. Consumers worry about security of supply, but producers -- who often depend overwhelmingly on petroleum earnings for their national budgets -- learned they need to worry about security of demand.

Are we less vulnerable today than in the 1970s? Oil is still the preeminent strategic commodity. And in a tight market, even without the political motives that brought on the 1973 embargo, the oil market is vulnerable to shocks and disruptions. True, markets are flexible and can adjust more quickly, but extensive turmoil in the Middle East -- or other major oil-producing regions -- could send new shocks throughout the world. After the last OPEC meeting, oil prices are again hovering around $30 a barrel. All this has had a significant impact on the world economy.

In November 1973, a few weeks after the embargo went into effect, Nixon announced Project Independence to make the United States self-reliant in energy. Thirty years of rhetoric later, we are no closer to that goal -- indeed, we're farther away. At the time of the embargo, the United States was importing a third of its oil; today it's almost 60 percent. We will continue to hear much about energy independence, but the real challenge is how to manage our dependence through diversification, efficiency, technological advances and the stability of relations with a wide range of suppliers.

Daniel Yergin is chairman of Cambridge Energy Research Associates and author of "The Prize: the Epic Quest for Oil, Money, and Power." This comment appeared in The Washington Post.