IEEJ：January ©IEEJ 2023
A Japanese Perspective on the International Energy Landscape (620)January 20, 2023

What the World Should Learn from the Oil Crisis 50 Years Ago? (2): MarketResponseKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanMy previous report “A Japanese Perspective on the International Energy Landscape (619)”
reviewed the half century since the first oil crisis and discussed lessons for the international energy
market from historical and panoramic viewpoints. This report discusses details of the international oil
market’s response to the oil crisis, considering what to learn from the short to long-time viewpoint.
As noted in the previous report, the first oil crisis was triggered by the fourth Middle EastWar, called the Yom-Kippur War, as a grave geopolitical security factor and was greatly influenced by
the Arab oil embargo invoked in the course of the war. Apart from the geopolitical event, however, weshould not overlook the tightening supply-demand balance in the international oil market before thecrisis. From the 1960s to the early 1970s, global oil demand expanded rapidly, leading the world’ssurplus oil supply capacity to decline and concentrate in the Middle East. The United States, which
had had great oil supply capacity and been viewed as the last resort of supply for the international oilmarket, became a net oil importer in the 1960s, with domestic oil production growth failing to catch
up with domestic demand growth. For oil supply, the world then depended heavily on the Middle East,on the Organization of the Petroleum Exporting Countries and on Arab oil-producing countries.a
In such situation, the international oil supply-demand balance was tightening, pushing up
crude oil prices. As the oil market became a seller’s market, the balance of power in the market tilted
from oil-consuming countries to oil-producing countries. On the supply side, the balance of power
tilted from the Seven Sisters oil majors to governments of oil-producing countries. This was thebackground factor behind the OPEC offensive in the early 1970s. Under the first oil crisis that a camein such situation, oil-consuming countries had nothing to do in response to the crisis over a short term.
They had no choice but to be bombarded with oil-producing countries’ strategies. While it wasindispensable to develop crisis response capacity, oil-consuming countries just began to stockpile oilin view of the 1956 Suez crisis. Hit by the oil crisis then, major Western oil-consuming countries
pushed each other out of the way to secure oil supply. Such exclusionary procurement practice wasseen not only at the country or company level but also at the consumer level. Long lines of cars formedin front of gas stations, leading gasoline to be sold out at many stations. Plagued with a sense of crisis,consumers, companies and governments went on to hoard petroleum products, inflating oil demand
substantially and thus pushing up prices. Exclusionary procurement, hoarding and panic buying
dramatically worsened the market chaos caused by supply interruptions.
As a matter of course, what we should learn from the consequence is that it is extremely
important to avoid or suppress exclusionary procurement, hoarding or panic buying in response to any
crisis. As noted in the previous report, the International Energy Agency was created to reconstruct oilconsuming countries’ cooperation destroyed through the first oil crisis and enhance their crisis
response capacity. It is important to enhance international collaboration and cooperation frameworks
anew in line with international energy market realities. Remembering that exclusionary procurement
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and hoarding destabilize the international energy market, thereby exerting great negative impacts onenergy-consuming countries and citizens and on the entire global economy, we should reaffirm that
responsible governments are required to behave coolly and suppressively in consideration of globalinterests. It is important to develop specific measures to secure international cooperation andcollaboration in line with current issues and energy market realities.
From the medium to long-term viewpoint, I would like to note that it is important to expand
supply capacity, secure surplus supply capacity and diversify supply sources. Crude oil price spikes
through the oil crisis and dependence on the Middle East or OPEC behind the crisis turned around theawareness of energy policy and industry stakeholders throughout the world. As a result, industrial
countries took leadership in advancing energy-saving policies to suppress oil consumption and inpromoting nuclear, natural gas, liquefied natural gas, new and renewable energy and othersubstitutions for oil. In addition, the promotion of non-OPEC oil development made great progress in
the international oil market. As major countries were required to develop non-OPEC oil resources
outside the Middle East, international oil majors, which lost assets due to the nationalization ofresources in the Middle East, expanded investment in oil development, supported by high oil prices.
Symbolic achievements of such investment included the successful oil development and rapid oilproduction expansion in the British and Norwegian North Sea and the development of the giant
Prudhoe Bay Oil Field in Alaska.
As a matter of course, such new oil development and production took some time, failing toachieve any oil supply expansion right after the first oil crisis. Projects that use new technologies fordeveloping giant oil fields in frontier regions take a longer lead time before full-fledged production.
North Sea and Alaskan oil production expanded in the 1980s. However, such achievements became akey factor to help reverse a rise in oil-consuming countries’ dependence on the Middle East and OPEC
over the medium to long term. The rate of the world’s dependence on OPEC oil supply continued
rising until the early 1970s, hitting a peak of 50% in 1973. The rate then peaked out and fell to 41%
in 1980. As non-OPEC oil production expansion was combined with energy conservation and thepromotion of substitutions for oil to dramatically ease the supply-demand balance in the internationaloil market, OPEC cut production to defend crude oil prices, leading the rate of dependence on OPEC
to plunge to 27% in 1985. Saudi Arabia, which took leadership in cutting OPEC production as a swing
producer, failed to tolerate a decline in its oil market share and increased production to raise its market
share, resulting in a heavy fall in crude oil prices in 1986.
In this way, the international oil market experienced dramatic changes from the tightening
supply-demand balance to the easing balance and from price spikes to plunges in 10-plus years fromthe first oil crisis. The experience has led oil market stakeholders to share the perception that “the mosteffective cure for high prices is high prices.” It has been understood that the biggest driver of suchdramatic changes is investment. Investment in energy conservation, substitutions for oil and largescale non-OPEC oil development has altered the supply-demand balance in the international oil market
over the medium to long term. Investment remains an important influencer for the international energy
market. In responding to the current energy crisis, investment is important for market stabilization
measures in various areas from the medium to long-term viewpoint. Particularly, investment inexpanding supply capacity and diversifying supply sources is important. It is questioned how topromote appropriate, indispensable investment to stabilize the entire international energy market
including fossil fuels, consistently with the new important challenge of decarbonization, which had
not existed at the time of the oil crisis.
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Another important viewpoint is the stabilization of the Middle East, which has the largest
surplus oil supply capacity. Since the oil crisis, the stabilization of the Middle East has been the mostimportant challenge for the entire international energy market. Since then, the United States has
maintained and enhanced its engagement with the Middle East, deepening its special relationship withSaudi Arabia. In 1979, Washington announced the Carter Doctrine, which clarified the United States’
engagement with the stability of the Middle East. In the current situation, including the Ukraine crisis,
the division of the world, decarbonization trends and the flagging relationship between the UnitedStates and Saudi Arabia, initiatives to stabilize the Middle East are required to be reconstructed orenhanced.

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