Another Oil Crisis?

On the 25th anniversary of the Arab embargo, disturbing trends stir concern. But the energy environment is different now.

To many young managers, it was a distant event that they have only read about -- like, say, the stock-market crash of 1929, the seizure of the steel industry in 1951, or the breakup of Standard Oil Co. in 1911. To veteran managers who actually experienced it, however, it seems all too recent and vividly real. The event was the 1973-74 Arab oil embargo. It began 25 years ago last month. In the U.S., motorists could buy gasoline only on alternate days, were forced to wait in lines that often were blocks long, and then paid as much as $4 a gallon in today's dollars. Companies often had to limit -- or even shut down -- production because they couldn't get fuel through the federal government's hastily conceived allocation and price-control system. Imposed by Arab oil producers through the then-powerful cartel, the Organization of Petroleum Exporting Countries (OPEC), the embargo itself lasted only five months. But it triggered worldwide energy shortages that lasted eight years, a global recession, and permanent changes in the oil market. Throughout the '70s and early '80s, the price and supply of fuel was a critical concern of doing business -- as important a factor in corporate planning as interest rates or market demand. In the U.S., President Carter, clad in a cardigan sweater in front of the White House fireplace, went on national television in 1977 -- more than three years after the embargo -- to declare "the moral equivalent of war" on the nation's dependency on imported oil. His alarm was well founded. A CIA analysis warned that a major oil shortage would cause a world economic crisis by the mid-1980s. Similarly dire forecasts came from the Club of Rome, the Organization of Economic Cooperation & Development, and the Massachusetts Institute of Technology. Today, though, all those gloomy prognostications seem as silly as they were unfounded. The energy environment has changed dramatically. The price of oil, still the world's primary energy source, is a mere $14 a bbl -- less than half its peak of $32 a bbl in 1981. World production of oil and its sister fuel, natural gas, has soared to record levels. Gasoline, at least in the U.S., costs less than ever before. And industry managers -- in sharp contrast with those of a generation ago -- take ample, cheap energy for granted. But should ample, cheap energy be taken for granted? Is the world vulnerable to another oil-induced crisis? The 25th anniversary of the embargo prompts those questions. Two statistics give reason for concern:

  • World demand for oil continues to rise, setting a record in 1997 of nearly 3.5 billion tons of oil equivalent -- 35% of total energy consumption. Demand promises to rise even more sharply as developing nations, especially China, industrialize.
  • Two-thirds of the world's oil supply still comes from the Middle East -- a political tinderbox that could result in another cutoff at any moment. Such a cutoff likely wouldn't come in the form of a 1973-style embargo, analysts believe, but as the result of a military action (such as the 1991 Persian Gulf War) or political instability.
The U.S., long the world's dominant energy consumer, seems particularly at risk. The nation's oil consumption, after dropping in the mid-1970s in response to OPEC price increases, has been rising steadily for 18 years. Last year, spurred by a surge in sales of gas-guzzling sport-utility vehicles, it soared to 18.6 million bbl/day -- near the all-time record. Yet U.S. crude-oil production continues its downward spiral, falling last year to 22 billion barrels -- 14 billion below 1972's pre-embargo level. To make up the difference, the U.S. increasingly depends on imports, which now account for 48% of the nation's supply. That compares with only 34% just before the embargo. Warns Christopher Flavin, senior vice president of Worldwatch Institute, a private Washington environmental-research group, "If radical elements were to overthrow the royal family in Saudi Arabia -- the world's largest energy producer -- there'd be chaos. The U.S. would be powerless to intervene. We're dependent on the longevity of a few old men in a rather ancient Middle Eastern kingdom." Lest you despair too much, however, many other analysts are more upbeat. "There's very little reason to be worried," assures one, Christopher Ross, Houston-based vice president of Arthur D. Little Inc. consultants and senior director of the firm's international energy practice. "The geopolitical drivers that led to the embargo in 1973 are no longer present. . . . Everything in the energy environment is amazingly different now than in 1973." Instead of the "rampant nationalism" prevailing then, he observes. "there's now more global integration." Among other trends, he points out, several oil-producing countries have privatized their previously nationalized oil industries; the "push for independence from the old colonial powers" by many oil nations has been replaced by global oil interdependence; the bipolar environment of the Cold War has given way to "increasing multipolarity"; national control of media has ebbed as global networks (such as CNN) have come on the scene; there's greater private investment in most economies; and worldwide inflation of the early '70s no longer is a problem. Although he acknowledges that flare-ups in the Middle East are a continuing possibility, he believes the world is better equipped to live with resulting oil-supply threats. "The world has learned to adjust," he says, pointing to experience gained in coping with the 1973 embargo, the 1979 Iran revolution, and the 1991 Persian Gulf War. "We've been there, done that." Even the U.S.' heavy import dependence isn't cause for major concern, he and other experts insist. The increased interdependence of the oil market is one reason. Another is the fact that the nation now imports less than 20% of its oil from the Middle East, with most of the supply coming from more stable Western Hemisphere sources. (Venezuela and Canada are the U.S.' top two oil suppliers, while Mexico is No. 4, only slightly behind Saudi Arabia.) Besides, the U.S. has a comfortable, six-month supply of oil stashed in the government's Strategic Petroleum Reserve. A further cause for optimism is the onrush of petroleum technology. Startling advances in exploration and production techniques, as well as sophisticated computer software, are enabling the oil industry to discover and extract greater yields of oil more efficiently than ever. Only a decade ago, for example, oil companies considered themselves fortunate if they could recover 30% of the crude oil in a given field. Now, in the North Sea, they can recover as much as 60% or 70%. New technology is a reason why world oil production continues to increase, and also why there is optimism for bringing on new reserves. Considered among high-potential areas for new or expanded oil development are countries around the Caspian Sea, as well as Alaska, the Canadian Arctic, China (although it probably will need to use all its resources), Russia, West Africa, and Latin America. The march of technology also is helping to make renewable energy sources, long held back by their high cost in an era of cheap oil, more competitive. Flavin notes that the solar-power industry has been growing at a rate of 16% a year and wind power at a 14% clip. Contributing to the increases, he says, have been stepped-up tax incentives for the technologies provided by governments, especially in Western Europe and Japan. Still, oil figures to be King Fuel for the foreseeable future. And, fortunately, "the world is not about to run out of it," declares the dean of U.S. oil analysts, John Lichtblau, long-time chairman of the Petroleum Industry Research Foundation, New York. More worrisome than the supply of oil, he suggests, are the environmental problems springing from the use of oil -- for example, the pollution caused by those inefficient sport-utility vehicles. Environmental problems, he says, are "something that the world is only beginning to deal with." Ironically, Lichtblau sees another constraint on supply. Although the interdependence of the oil market no longer makes it impractical for oil-exporting nations to use embargoes, he says, "a different type of embargo has emerged. We're now seeing [oil] exporting countries restricting their exports because of sanctions from consuming countries." Whatever the long-term outlook, energy organizations are seizing on the 25th anniversary of the embargo to promote their own causes. An example is the Solar Energy Industries Assn., the trade group for U.S. solar-equipment manufacturers. Speaking at a Washington, D.C., rally Oct. 25 marking the 25th anniversary of the embargo's start-up date, Executive Director Scott Sklar declared that "it is inconceivable" that U.S. policymakers would allow the nation to be so heavily dependent on oil imports "when U.S. industry has the ability to produce clean, reliable, and cost-effective energy right here at home." Similarly, Richard Kolodziej, president of the Natural Gas Vehicle Coalition, a 180-company alliance of natural-gas suppliers and equipment firms, says that America's increasing dependence on oil shows that "we have learned nothing from the past." He urges legislation to boost use of alternatives to gasoline and diesel fuel -- specifically natural gas. And Joe Colvin, president and CEO of the Nuclear Energy Institute, argues that concern over global climate change and EPA's tougher clean-air rules point to a "rebirth of the need for nuclear energy." The oil industry is no exception. Michael Canes, policy vice president of the American Petroleum Institute, warns that the U.S. will be vulnerable to Middle East supply disruptions unless oil companies are given drilling access to areas now off limits -- particularly Alaska's Arctic National Wildlife Refuge, certain offshore areas, and some federal lands in Western states. To industry managers who suffered through the time, the embargo is something they would just as soon forget. But memories of it are sure to live on, influencing all future energy-policy decision-making. As Jay E. Hakes, administrator of the Energy Information Administration, a unit of the U.S. Dept. of Energy, puts it, "1973 was the most pivotal year in energy history." Few people would disagree.
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