In October 1973, Gulf states led by Saudi Arabia cut off oil sales to western states in retaliation for their support of Israel during the Yom Kippur War. It was one of the most significant economic shocks to the global economy since the end of the Second World War.
The Saudi embargo quadrupled world oil prices, pushed consumer inflation into double digits and tipped the US and states across Europe into painful recessions. Some argue that it even helped wreck the credibility of centre-left governments in the 1970s, ushering in the neoliberal revolution of the following decade.
The extrajudicial murder of exiled Saudi journalist Jamal Khashoggi by perpetrators allegedly linked to the Saudi ruling family, and particularly the ambitious and overweening crown prince Muhammad bin Salman, has introduced discussion of possible sanctions against Saudi Arabia – a scenario that Saudi’s brutal war in Yemen has not to date precipitated. I empathize “discussion” because there is a many a slip twixt the cup and the lip – Saudi’s western allies have long been complacent about and at times complicit in the kingdom’s many misdeeds in the interests of intelligence, security, and contracts; and also, in opposition to their mutual Iranian enemy, and the ambivalent, and in practical terms, tepid support for the US’ quixotic ‘war on terror” (in conflicts that Saudi Arabia has in many instances fermented with its export and funding of fundamentalist Islam and its support for Islamist groups worldwide.
The kingdom has threatened retaliation in the (unlikely) prospect that sanctions are indeed implemented – the USA and its western allies are reluctant to take such a big stick to this strategically important ‘partner in freedom”.
Predictably, commentators, and presumably policy-makers, are asking whether therefore we’ll see repeat of 1973. Many observers of a certain age recall the pain of what was to become a great economic and political re-calibration – of kowtowing to Gulf tyrants, and of endeavours to reduce dependence upon the old producers of the Middle East. But few tend to focus on the gains to economies and corporate bottom lines during the years that followed.
The massive increase in oil revenues flowing into Gulf coffers kick-started a veritable “gold rush” as westerners beat a congested path to the open doors and chequebooks of the kings and emirs who now sought to “modernize” their medieval backwaters with industrial plants, high rises and condos, conspicuous consumption of luxury goods, and more weapons than countries of their size and population could ever require or use.
For over four decades, it was party-time for consultants, fixers and arms manufacturers as democratic governments turned a blind eye to the repression, intolerance and inequity that prevailed among these valued customers. As was said about Catherine the Great and the partition of Poland, they weep as they take.
Visitors and expats sing the praises of these “miracles in the desert”, with their highways and shopping malls, but the kingdoms and emirates are still governed by medieval mindsets in which autocracy, patronage, patriarchy and misogyny, and religious intolerance and obscurantism contradict the values of the western nations who regard them as indispensable allies in their quixotic defense of democracy and freedom.
So, how much economic and political disruption would a Saudi oil embargo actually do today?
The global energy market has evolved significantly over the past half century. Western countries have strategic reserves of oil and a wider range of suppliers. Recent years have highlighted the market’s resilience in the face of handbrake supply and demand turns. The “West” is not as dependent on Gulf oil as it was in the ‘seventies. A surge in domestic and non-Mid East sourced oil and gas, and in renewables has reduced Saudi Arabia’s economic clout.
Meanwhile, the autocratic kingdom is feeling the pinch of diminishing revenues, royal drones, growing populations, youth unemployment, and economic recession. An act of economic warfare as hinted by Saudi insiders, like an extreme oil production cut, would have but a limited impact upon the global economy, and would destroy Mohammed bin Salman’s “Vision 2030” economic reforms. His signature $500 billion dream of a high-tech city in the desert will never materialize without tapping western expertise and materièl, implying a free flow of knowledge, people and investment. And Saudi will not become a tourist destination, as the current leadership fervently hopes, if relations with the west utterly disintegrate. Saudi Arabia itself has the most to lose economically, politically and diplomatically in any standoff.
For other articles on the Middle East in Into That Howling Infinite, see: A Middle East Miscellany
The 1973 Saudi embargo quadrupled world oil prices, pushed consumer inflation into double digits and caused painful recessions, but the global energy market has evolved significantly over the past half century, writes Ben Chu in The Independent, 29 October 2018
How important is the kingdom of Saudi Arabia to the global economy? Does Riyadh hold the world’s economic destiny in its hands?
These questions are not academic given the profound uncertainty over how the Jamal Khashoggi case will play out in the coming days and over how western governments could respond if credible evidence emerges that the dissident Saudi journalist’s killing was not a “mistake” made by “rogue” operatives but was, in fact, explicitly ordered by the all-powerful crown prince Mohammed bin Salman himself.
Donald Trump has threatened “very severe” consequences under those circumstances. And, for their part, the Saudi government also last week made it clear they would not passively soak up western sanctions or other forms of punishment.
Oil was not specifically mentioned. But then it doesn’t really need to be.
The Saudi-led oil embargo of 1973, when Gulf states stopped sales to the likes of the US, the UK, Canada and Japan in retaliation for western support of Israel, was one of the most significant economic shocks to the global economy since the end of the Second World War.
It is branded in the memory of politicians and civil servants of a certain age, but also on the inherited folk memory of the current generation. The Saudi embargo quadrupled world oil prices, pushed consumer inflation into double digits and tipped the US and states across Europe into painful recessions. Some argue that it even helped wreck the credibility of centre-left governments in the 1970s, clearing the way for the neoliberal revolution of the following decade.
So would we be going back to the 1970s? How much economic and political disruption would a Saudi oil embargo actually do today?
The global energy market has evolved significantly over the past half century.Western countries have strategic reserves of oil and a wider range of suppliers. Recent years have highlighted the market’s resilience in the face of handbrake supply and demand turns.
The recent spike in oil prices in 2010, when prices hit $125 a barrel, stimulated the domestic US shale oil and gas production sector. The industry grew so fast that domestic energy production today is almost 90 per cent of US consumption. A decade ago the US had net daily imports of 10 million barrels of oil and petroleum products. In 1973 it was 6.4 million. Today that is down to just 2.3 million.
Indeed, the US this year, thanks to shale, overtook Saudi Arabia as the world’s largest daily crude oil producer.
It’s true that the UK and western Europe are still heavily reliant on imported energy and therefore appear particularly vulnerable to a sudden jump in global oil prices. But the European share of renewables as a source of final energy consumption has also been rising rapidly, hitting 17 per cent in 2016. A spike in oil prices would be likely to accelerate this switch away from fossil fuels (just as the 1973 embargo encouraged western energy conservation measures such as the Nixon administration’s 50mph US highway speed limit). Again, while this could actually be beneficial in the medium term for the west, it would hardly be in the Saudi economic interest.
The oil price has been rising since the middle of last year and is now close to a four-year high at $80. One Saudi newspaper columnist has suggested that, if faced with severe western sanctions, Riyadh could slash its roughly 10-million-barrel-a-day production by two-thirds, sending the global price back to $100, or perhaps even on to a record $400 a barrel.
It’s clear why. An act of economic warfare like an extreme oil production cut would destroy Mohammed bin Salman’s “Vision 2030” economic reforms. The crown prince’s $500bn dream of a high-tech city in the desert will never materialize without tapping western expertise, implying a free flow of knowledge, people and investment. And Saudi will not become a tourist destination, as the current leadership fervently hopes, if relations with the west utterly disintegrate. Saudi Arabia itself has the most to lose economically in any standoff.
There are certainly reasons why the west should tread carefully with Saudi Arabia, from state-to-state co-operation on terror intelligence, to considerations of geopolitical stability. But fears of a repeat of the 1970s oil embargo should not, whatever folk memory holds, be high on the list.