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By Robert Rapier on Oct 23, 2013 with 12 responses

The Lasting Impact of the 1973 Oil Embargo

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America’s Wake Up Call

Forty years ago Americans were getting a wake up call on energy security. For the first time, the point was being driven home that America’s energy security was increasingly determined by events beyond US borders. The events that took place in October 1973 had a tremendous effect on the American psyche, and continue to shape US energy policy to this day.

When President Richard Nixon took office in 1969, concerns about energy were not high on the list of American priorities, but that situation would change dramatically during Nixon’s presidency. US oil production had increased at a fairly steady pace for over 100 years, and in November 1970 would reach 10 million barrels per day (bpd). Today that mark still stands as the all-time high for US oil production.

Beginning in 1971, the Nixon administration began a series of price-control measures designed to combat rising inflation. By the summer of 1972, there were long lines at gasoline stations in some regions as shortages of gasoline were dealt with by rationing. (Many people associate the gas lines with the embargo that followed, not realizing that they were already happening as a result of the price controls).

The Embargo and Nixon’s Response

In October 1973, in retaliation for the West’s support of Israel in the Yom Kippur War, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) cartel stopped supplying the US and Western Europe with oil. US oil production had already begun to decline, and the US was unable to make up the supply shortage caused by the embargo. This resulted in a supply/demand imbalance. Oil prices quadrupled in a very short period of time, contributing to a deep global recession.

The embargo set US energy policy on a path that still guides us 40 years later. Every president since Nixon has placed energy security high on the list of presidential priorities, but each administration has attempted to deal with the problem in different ways.

In response to the oil embargo, Nixon instituted additional price controls and began rationing oil to states. On Nov. 7, 1973, he announced Project Independence, which promoted conservation and alternative energy initiatives with the goal of ending the reliance on oil imports by 1980.

That same month, Nixon increased funding for mass transit, and authorized the Trans-Alaska Pipeline by signing legislation that disposed of legal challenges from the project’s opponents. Soon after, the National Maximum Speed Law was passed, reducing the maximum speed limit nationwide to 55 miles per hour.

President Ford Has Some Success

Gerald Ford was nominated to serve as vice president under Nixon on Oct. 12, 1973, less than a week before the Arab oil embargo began, so he too was molded by the crisis that followed.

When Ford became president in August 1974 following Nixon’s resignation, he maintained energy independence as a high priority. “Our growing dependence upon foreign sources [of petroleum] has been adding to our vulnerability for years and years, and we did nothing to prepare ourselves for such an event as the embargo of 1973,” Ford said in his first State of the Union address.

President Ford proposed a number of initiatives designed to reduce growing dependence on foreign oil. He promoted expanded use of coal and nuclear power to shift electricity production away from oil, the development of synthetic fuels and oil shale resources, and tax credits to help homeowners with the cost of insulation. He set forth goals to reduce oil imports by 1 million bpd by the end of 1975 and by 2 million bpd by the end of 1977.

But Ford faced a hostile Congress that sometimes openly questioned the political legitimacy of his presidency, since he had not been elected. He therefore had a difficult time getting some of his proposals passed.

Ford did have some lasting energy policy successes. In December 1975, the Strategic Petroleum Reserve (SPR) was established when the Energy Policy and Conservation Act (EPCA) was passed by Congress. The law was designed “to reduce the impact of severe energy supply interruptions” such as the OPEC embargo. The fuel efficiency of autos improved quickly following adoption of the Corporate Average Fuel Economy (CAFE) standards in 1978. A 2002 study by the National Academy of Sciences concluded that motor vehicle fuel usage was 14 percent lower in 2002 than it would have been in the absence of fuel efficiency standards.

Oil Production Turns Upward Under President Carter

Despite these efforts, by the time Jimmy Carter took over as president in 1977, oil imports had increased by 370 percent from Nixon’s first year in office. Oil consumption was at an all-time high, and domestic production was down 14 percent from the 1970 peak.

Only three months into office, Carter delivered a major speech in which he predicted that energy security would get progressively worse through the end of the century. But Carter underestimated the potential for production increases. At the time of his speech, the world consumed 60 million bpd. Carter noted that production declines of existing fields meant that just to maintain production at 1977 levels would require “the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years.” Despite Carter’s skepticism, global oil production continued to expand and is now 50 percent higher than during his presidency.

The goal Carter set forth was that the US would never again use more foreign oil than it did in 1977. He proposed initiatives such as insulating 90% of US homes and all new buildings, establishing a six-month supply of oil in the SPR, placing import quotas on foreign oil, increasing usage of solar power, and increasing production of coal.

One of President Carter’s lasting energy legacies was the creation of the Department of Energy in 1977. Other Carter proposals were advanced with the Energy Security Act (ESA) of 1980. Included within the ESA were programs to increase the production of gasohol (gasoline/ethanol blends) via loan guarantees for biomass and alcohol fuels projects, marking the introduction of ethanol into the fuel supply.

The ESA also included the US Synthetic Fuels Corporation Act, which established the Synthetic Fuels Corporation (SFC) — a government-funded corporation with the purpose of developing a synthetic liquid fuels industry. But technical challenges and cost overruns ultimately doomed the SFC to failure, leading many critics to argue that the government should leave the energy business to the markets.

Carter was fortunate enough to be in office when the Prudhoe Bay oil field began production in 1977 upon completion of the Alaska Pipeline. Thus, an energy policy decision made by President Nixon to approve the pipeline resulted in increased oil production during the Carter administration.

Carter was perhaps ahead of his time on energy issues, as many of his energy policy ideas still have a great deal of support today. He was thoroughly engaged on energy issues throughout his presidency, and he understood the growing risks from dependence on foreign oil. But Americans were frustrated with high inflation, high oil prices, and a stagnant economy, and so they voted Carter out of office in 1980.

President Reagan Changes Direction

President Ronald Reagan had very different ideas about the direction the country needed to go. As if to emphasize that point, he removed from the White House the solar panels installed by Carter. He also accelerated the phase-out of the price controls on domestic oil production, let the tax credit on solar power expire, abolished the US Synthetic Fuels Corporation, and repealed the Crude Oil Windfall Profits Tax Act that had been signed into law by Carter.

Reagan was a strong supporter of domestic drilling, pushing to open more federal land to exploration and development. He unsuccessfully advocated drilling in parts of the Arctic National Wildlife Refuge (ANWR). Reagan was also an advocate of nuclear energy, signing several industry-friendly laws. Nuclear production overtook hydropower to become the second largest provider of electricity in the US (behind coal) while Reagan was in office.

Bush I Bans Offshore Oil Developments

The Gulf War was the defining energy event of President George Bush’s administration, but there were other noteworthy developments. Due to environmental concerns, in 1990 Bush signed an executive moratorium banning offshore oil developments outside of the western Gulf of Mexico and certain parts of Alaska. The ban covered the North Atlantic, Pacific Coast, New England, Mid-Atlantic, and the eastern Gulf of Mexico, and lasted until it was overturned during George W. Bush’s second term as president.

The elder Bush also signed into law the Energy Policy Act of 1992 (EPAct), addressing energy efficiency standards for buildings and appliances, and promoting energy conservation as well as the use of alternative energy vehicles.

Clinton Promotes Hybrids

President Bill Clinton’s two terms in office corresponded with oil prices that were both lower and less volatile than those in the 1980s, and thus the goal of energy independence got pushed off the front burner.

Still, there were some significant energy initiatives during the Clinton years. The Partnership for a New Generation of Vehicles (PNGV) was founded by the Clinton administration in 1993 as a venture between the US government and major automobile makers including Chrysler, Ford, and General Motors. The purpose of the program was to develop vehicles with a fuel efficiency of up to 80 miles per gallon.

The three major domestic automakers all built hybrid concept cars capable of achieving at least 72 mpg. However, the program was cancelled following Clinton’s presidency by the George W. Bush administration. This highlights one of the biggest challenges in energy policy. Energy projects often take many years before they bear fruit, but many of them don’t survive political shifts. This is one of the biggest reasons US energy policy often seems dysfunctional.

The Clinton presidency marked the end of 12 years of Republican rule, and Clinton’s priorities on energy and the environment sharply differed in some areas from those of Reagan and Bush. For example, Reagan was a proponent of developing the oil reserves in ANWR, but Clinton vetoed a bill from the Republican-majority House that would have allowed drilling in ANWR.

Bush II and Runaway Oil Prices

The George W. Bush presidency was extremely eventful in terms of energy developments. Among the events occurring during his two terms in office were the September 11 terrorist attacks followed by a war with Afghanistan, another war in the Persian Gulf, major hurricanes that interrupted supplies and caused record gasoline price spikes, an almost uninterrupted increase in the price of oil, and passage of some major pieces of energy legislation that led to a massive expansion of biofuel production.

Bush initially talked up a hydrogen economy, and later promoted ethanol made from switchgrass as a motor fuel. Noteworthy during Bush’s two terms were the Renewable Fuel Standard (RFS) in 2005 and its expanded version, the RFS2 in 2007. These pieces of legislation dramatically increased the size of the corn ethanol industry in the US by mandating increasing volumes of ethanol in the fuel supply. But domestic oil production would decline during all eight years of the Bush presidency.

An oil production turnaround was in the works, however.

Obama Presides Over a Fracking Revolution

President Obama campaigned on familiar themes. He said that a major priority would be to end dependence on oil from the Middle East and Venezuela within ten years. The core of his energy policy would revolve around a $150 billion investment in renewable energy that he estimated would create 5 million new jobs. Domestic drilling, he said, would be a stop-gap measure.

It is too early to determine which of Obama’s initiatives will have a lasting impact, but the “stop-gap measure” has been spurred on by high oil prices and has thus far had a greater impact on displacing Middle East oil imports than any program in President Obama’s agenda.

The fracking revolution actually began to bear fruit during the Bush Administration, and domestic production declines began to slow. By the first year of President Barack Obama’s administration, domestic production had begun to increase, and has now increased during every year of his term. That has not happened since Lyndon B. Johnson was president. If the trend continues, energy security may once more fade as a national priority.

Learning from the Past

But it is important not to forget the lessons of history. OPEC has lost some power, but the organization still supplies more than half of the world’s crude oil imports. So even though OPEC’s contribution to US oil supplies is declining, the cartel hasn’t lost its short-term ability to influence global prices.

That’s why we must continue to enact programs that bring America’s oil supply and demand into balance, despite the occasional boondoggle and Washington’s infatuation with wish-based energy policies. US energy policy should take note of what has worked, and what hasn’t worked, so we don’t repeat mistakes of the past as we forge the energy policies of the future.

Link to Original Article: The Lasting Impact of the 1973 Oil Embargo

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By HopelessAboutChange on October 25, 2013 at 10:20 am

    ” If the trend continues, energy security may once more fade as a national priority.”

    Sigh…This was good article until the author put in that foolish line. As long as our society is dependent on limited resources like gas and oil energy security will always be a problem.

    If energy security “fades” as a national priory, it’s only because the American public has the attention span of a ferret on a double espresso.

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    • By Robert Rapier on October 25, 2013 at 11:02 am

      It’s not a foolish line at all. The public and the politicians will lose interest because the issue doesn’t seem as pressing as it did; thus it will fade as a national priority. That doesn’t take away from the notion that there is still a problem.

      We saw this when Clinton was in office. Was there still a problem? Sure. Did it fade as a priority? Yes.

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      • By HopelessAboutChange on October 25, 2013 at 11:11 am

        Then it takes us to my second sentence.

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        • By Sam Geckler on October 25, 2013 at 12:36 pm

          I think we have a misunderstanding here. A “National Priority” can be defined as something “everyone” currently believes is important and that our government is actively working to resolve. In the absence of short term price signals from weak supply, we have seen many times people just don’t focus on energy policy which means their representatives won’t either. That doesn’t change the fact that it is/was always important, which Robert clearly believes.

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    • By Tom G. on October 25, 2013 at 1:02 pm

      I guess this makes this author foolish as well.

      http://breakingenergy.com/2013/10/24/energy-quote-of-the-day-hitting-snooze-on-energy-efficiency/

      I recommend you try to be just a little more constructive with your
      comments. For example; what are your proposed solutions or
      recommendations to the perceived problem of our fading interest in
      energy security? Or do you believe the current level of actions are
      adequate? Is it solar, wind, bio-fuels, other renewable sources, the
      current urgency of government actions enough or do we need more focus on
      conservation, energy efficiency, or changes in the behavior of society;
      what? There is much to be discussed without taking shots at published
      authors like Robert who at least puts in writing their thoughts and
      solutions.

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      • By HopelessAboutChange on October 25, 2013 at 1:42 pm

        Not many people want to hear my solutions because they involve tearing down the corporate, consumer lifestyle to which all of us (including myself) have become accustomed.

        Our current level of action to create an energy sustainable society is so woefully inadequate that when the current system collapses we will abruptly find ourselves in a 19th century lifestyle with no clue as to how to survive. We need to concentrate on all the aspects you mention, conservation, energy efficiency, and changes in the behavior of society.

        Of all these things, changes in the behavior of society will be the most difficult. Our success at keeping the fossil fuel age going will be our downfall because the changes we need need to make have a 20 to 30 timeline to implement. Human nature is not to look 20 years or more into the future. As Robert very accurately pointed out, Jimmy Carter was right about the energy future, but human nature is to believe the person who tells you what you want to hear, not necessarily the facts.

        First thing would be to stop having the corporate media cast doubt about the coming end of the fossil fuel age. Secondly, reduce the birth rate, world wide, to less than replacement rate. If we don’t do that, famine will take care of it for us. Finally redirect our remaining energy resources to creating a sustainable system. I’m talking about a complete restructuring of the way humanity, particularity Americans, live.

        What most people don’t understand is that hyper-complex systems like 21th century society are only “stable” to a point and when that point is exceeded things fail very quickly.

        That standard response to my ideas is that “it isn’t possible given the political climate” or “that’s contrary to our market based system”. Therefore, change will hit us the same way it hit our ancestors who abandoned huge cities throughout the Americas and in southeast Asia.

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        • By Tom G. on October 25, 2013 at 2:33 pm

          Now that is a significantly better response. The best point in your response at least from my perspective is how society must “change”. However, having been part of team of individuals dedicated to implementing a corporate change; change is not something that very many people enjoy. We have a very broad spectrum of individuals in our society. Some individuals with have doctoral degrees and others will be high school dropouts. Each will most likely require a different implementation strategy.

          And hence changes like planetary birth control, carbon levels, changing from a growth based capitalist system to one of maintaining our current society will be challenging but certainly not impossible. It will however take a resurgence of something I currently think is in short supply and that is leadership.

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  2. By JavelinaTex on October 25, 2013 at 1:41 pm

    I would say if anything you greatly under emphasized the very poor economic policy decision to keep price controls (Nixon put wage price controls on the entire economy in 1971 that lasted into 1973 but until Reagan’s inauguration on OIl and Refined Products) on domestic crude oil and refined products.

    This effectively subsidized importation of oil as the US economy was receiving a significant reduced price (maybe 60% to 70% of world oil prices). It also kept oil production lower than it otherwise would have been, Although overtime, higher prices were allowed for EOR projects. The Kern County California Steam floods and the Permain Basin CO2 floods conceived and implementation started in this period.

    Similar price controls remained on Natural Gas, although their implementation came from a Supreme Court decision in 1954. They were somewhat “relaxed” by the 1978 NGPA. Allowing deregulated prices on deep gas resulted in massive developments of the “Deep Anadarko” play in Western Oklahoma which was hugely prodigous… probably only overshadowed by the magnitude

    This era also reflected Nixon’s (and Carter’s) statist impulses as the ideas of the synthetic fuels corporation (making methane out of coal) and the Shale “Oil” projects out in Colorado. Really bad ideas that Nixon wanted to spend $100 Billion on (call it a Trillion today)… Carter actually got some of these implemented and in the case of the Syngas plant we wound up owning it (it only produced gas at a full cost about).

    Ultimately what did make sense (in the bizarre politics that existed) was the Fuel Use Act which forced utilities to use Coal or Nuke in new base load plants this assured the vast reduction in use of Residual Fuel Oil and Natural Gas in power production. The latter freed up a falling to flat gas supply for higher valued uses. The former combined with refiners modifying refineries to convert heavy residual oil into gasoline & diesel (and a bit of Pet Coke). Basically, Oil predominately got limited to transportation use only in our economy. (note: I haven’t even mentioned PURPA).

    Finally, although many will dislike these, Ethanol got traction (as Gasohol) and the CAFE standards forced Detroit to modernize their vehicle and drive train designs to be far more efficient. While economists hate CAFE, decontrol of oil and energy prices was not politically feasible until 1979-80 (When Carter signed an executive order that would remove them nearly a year AFTER he thought he’d be re-elected; to take effect Sept 1, 1981. Reagan eliminated Oil price controls as his first act as President.

    In conclusion, I think one really has to consider the far reaching negative consequences of Nixon’s Price Control policy as a major cause of the gas lines and poor policy response for much of the 1970′s. We can also blame Nixon for his policies that led to the embargo and his subsequent elevation of fear that THe BOOGEY MAN of the day would get control of the Middle East. All manner of bad policy choices emanated from the actions of the Nixon White House.

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  3. By Forrest on October 25, 2013 at 6:07 pm

    Wake up call? Embargo, national security, presidential priorities and attempting to rate presidents whom made a good call upon history? This is an attempt to attribute knowledge or superior intellect to the power of central control for righting the ship. Upon reality, no commander in chief has a clue. They have ideas, notions, biases, but no superior intellect. They just luck out per their decisions and history. Don’t look to central control to direct nation as some easy shortcut to force political opponents to conform to desires. Much better to embrace capitalism as its a better compass to set direction. The national sum of investors armed with sensibilities aka money upon making bets and risking their hard earned money a better device to determine the proper future coarse. Currently were suffering from a gross negligence of understanding or appreciating this type of market dynamics. Some even afraid or suspicious of such loose decision making . These folks dream of national leadership whom have God like ability to see the future. It’s a futile attempt to believe upon fairy tale politics. History is wrought with such attempts to foolishly look to central control for answers. It’s a very poor choice. We have been misled upon conventional wisdom, public ed, politics, or media to think of rampant miscalculations of the market. These historical aberrations have been hyped and misdiagnosed or portrayed way beyond normal. Nothing mankind has invented competes with the free flow of good information and citizens placing bets with hard earned money. We need to invigorate this type of market or activity and squelch the thinking that some benevolent politician utilizing czar like power can force the country to better decisions. It started or accelerated with the Kennedy hype. Like Martin Luther not much based upon facts. Also, the Manhattan project where government was able to do something….it had little to do with collecting other peoples money and spending valuable resources per popularity of elected used car salesmen.

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  4. By Benjamin Cole on October 26, 2013 at 8:32 am

    I still say a national gasoline tax would do a lot…bring it up a couple bucks…huge rebates for CNG. LPG and PHEV vehicles…and let the price signal work….
    My guess is $100 a barrel is the new normal for along time, unless we slip a bit from there…this is way high enough to bring on new supplies for a long time, and dampen demand too…phase out ethanol…

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  5. By ben on October 27, 2013 at 1:24 am

    Regrettably, we appear on the cusp of another cycle of declining interest in alternative energy sources apart from those percolating over on the back-burner. The current whiff of lower energy prices following modest improvement in supply combining with an itch about demand destruction accompanying fiscal drag merely encourages a set of price signals bending back against more enlightened energy policies. While most politicians applaud these improvements to rising supply (many posturing as if they’ve actually had something to do with it) many instinctively lament the evils of reduced government expenditures resulting from sequestration that negatively impacts consumer/commercial demand.

    The sad fact is that the federal government in concert with the central bank officials have undertaken by design or default (depending on one’s point of view) a program of financial repression aiming to build up our capital markets, and principally through the financial sector, in the high hope of producing a soft landing from the current debt hangover that imperils global economic recovery and any prospects of growth in employment and household incomes.
    Without digressing here into a lengthy analysis of macroeconomics–whatever that may mean (tipping a hat to that sage, Russ Finley)–we have embarked on a course of
    monetary policy that promises to shave a few basis points off of the real rate of return on savings (and a fair amount more than that from after-tax calculations) for anyone capable and/or trusting enough to set aside a nest egg for retirement or a rainy day. The net effect of this policy: To orchestrate a modest but steady reduction in the debt-service burden of Uncle Sam (and debtors more generally) such that the
    management of the public debt might not prove our collective undoing. While there has been a fair amount written on this subject in recent months, most of that discussion has emerged within academic circles or among professionals in banking and finance. Unsurprisingly, it’s not an issue enjoying very much attention among
    our elected representatives or coverage by the mainstream press. This, despite the fact that few issues hold greater sway over the economic welfare of America’s families and communities.
    If we think energy development and efficiencies are near the top of the heap of our most important economic issues–and they are–than we might be well-served to pay closer attention to what is arguably the principal policy influencing the availability/allocation of capital resources directly tied to the promotion of greater economic sustainability and security in the days ahead.
    What have we learned in the last forty years? As usual, I think Rapier has got it
    about right: Not very much!
    Ben

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  6. By IGimlet on October 28, 2013 at 12:47 am

    You may want to add that the oil embargo engendered the creation of the IEA and ended up with the export controls act outlawing the export of crude from the US.

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