IEEJ：January ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (619)January 12, 2023

What the World Should Learn from the Oil Crisis 50 Years Ago? (1): Overview
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe year 2023 marks the 50th anniversary of the first oil crisis. Coincidently, the world faces
the first energy crisis in a half century as the Ukraine crisis since early last year has led to energy pricespikes and market destabilization. It may be extremely significant to review and learn lessons fromthe first international oil market crisis in history, which rattled throughout the world 50 years ago.
On October 6, 1973, the fourth Middle East war broke out as Egypt and Syria launched asurprise attack on Israel. As the breakout day fell on Israel’s national holiday of Yom-Kippur, it wascalled the Yom-Kippur war. While Israel launched counterstrikes, Arab oil-producing countries
adopted a strategy to use oil as a weapon. They imposed the so-called Arab oil embargo. Under the oilembargo, Arab oil-exporting countries divided oil-consuming countries into three groups – friendly
countries for continuous oil supply, unfriendly countries for supply suspension and neutral countries
for a 5% cut in oil supply every month. As the world depended heavily on Arab oil, the Arab oilexporting countries adopted the Divide and Rule strategy to divide cooperation between oil-consumingcountries. Crude oil prices were then rising on the tightening supply-demand balance from the early
1970s and the OPEC offensive, where oil market control was shifting from the “Seven Sisters” oilmajors to the Organization of the Petroleum Exporting Countries. As the fourth Middle East war
breakout and the Arab oil embargo rattled the international oil market, crude oil prices shot up. The
average price for the benchmark Middle Eastern crude oil known as Arabian Light quadrupled from
$3.29 per barrel in 1973 to $11.58/bbl in 1974.
Adding fuel to the price spikes and market chaos was a desperate oil import competition
between oil companies from Western industrial countries that were major oil consumers then. Globally
famed energy economist Daniel Yergin indicated the competition as panic buying. The Arab oilembargo collapsed cooperation among oil-consuming countries and destroyed international oil market
order and stability. For instance, Arab oil-producing countries exerted pressure on Japan and European
countries classified as neutral to reform their pro-Israel Middle East policies. For Japan, which
depended heavily on cheap Middle Eastern oil to support high economic growth in the 1960s, the oil
supply reduction was a direct threat to the economy. On November 22, 1973, then Chief Cabinet
Secretary Susumu Nikaido issued a statement offering to revise Japan’s Middle East policy. Althoughthen U.S. Secretary of State Henry Kissinger diplomatically urged Japan and European countries tocounter Arab oil-producing countries’ pressure to secure cooperation among oil-consuming countries,
Japan offered to revise its Middle East policy to secure oil supply. As a result, Japan was reclassified
as friendly but lost its diplomatic freedom to the disadvantage of cooperation among oil-consuming
countries.
Crude oil price spikes accelerated inflation, plunging Japan into a wild price spiral. Amidchaos including the so-called toilet-paper panic in Japan, how to secure energy supply became a top1

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priority challenge for governments, enterprises and citizens around the world. As inflation deteriorated
throughout the 1970s, major countries raised interest rates to calm down inflation. However, the highinterest rate policy led to a global recession and a Latin American debt crisis in the first half of the1980s.
As energy security became a top energy policy priority, major industrial countries strongly
promoted energy security policies. To phase out dependence on the Middle East and OPEC, they
stepped up oil development in the North Sea, Alaska and other regions. They also toughened auto fuelefficiency standards and promoted energy consumption savings symbolized by industry sector
initiatives to suppress oil consumption. Nuclear energy, natural gas, liquefied natural gas and otheralternatives to oil were introduced on a full-fledged basis. As a result, oil’s share of global primary oil
supply gradually fell from the peak of 49% in 1973 to 30% in 2021. The shock of the first oil crisisbrought about the beginning of the end to the century of oil. Reflecting on the oil crisis, oil-consuming
countries promoted initiatives to reconstruct their cooperation and maintain international energy order.
In a symbolic development, the International Energy Agency was launched at the initiative of U.S.
Secretary of State Kissinger. Net oil importers among IEA members were required to stockpile oil tomaintain their cooperation, stabilize the international oil market and prepare for any crisis. The IEA
representing oil-consuming countries and the OPEC group of oil-producing countries began to pursue
international oil market stability as their common interest and understand the significance of theirdialogue while experiencing their conflicts of interest.
The above is an extensive review of the international chaos triggered by the first oil crisis
50 years ago. The world turned around through the first oil crisis. The above review indicates various
common points and similarities between the first oil crisis and the current energy crisis. They include
pre-crisis energy price spikes, dependence on some specific energy sources, concern over potential
energy procurement difficulties or physical shortage, the fundamental enhancement of energy security
measures, growing inflationary pressure and a switch to high interest rate policies, the destabilizationof international energy order and cooperation among energy-consuming countries, and the division of
the world.
Meanwhile, the current crisis is far different from the crisis 50 years ago in some points.
First, climate change was not any kind of major issue at the time of the first oil crisis. While publichazards, air pollution and other environmental issues existed, there was not any issue requiring
decarbonization as a full-fledged energy transition. Second, the energy market at the time of the firstoil crisis was basically regulated, with great constraints placed on market forces. Under the current
crisis, energy security must be balanced with decarbonization, and the basically deregulated market
must address externality issues including decarbonization. Current issues are more complicated anddifficult. Nevertheless, we can learn lessons from the crisis 50 years ago in considering how to address
the current energy crisis. This is because history sometimes repeats itself.
As the Ukraine crisis grows serious, calls for phasing out dependence on Russia are working
to increase the significance of other fossil fuel suppliers. Particularly, the United States has attracted
attention regarding LNG supply. However, the significance of the Middle East has been emphasized
regarding oil and energy sources in general. Global attention has been paid to Saudi Arabia with theworld’s greatest surplus oil production capacity and Qatar as the world’s most competitive LNG
supplier. Under initiatives to phase out dependence on Russia, Japan’s dependence on Middle Easterncrude oil reached 98% in July 2022 and has hovered around 95% since then. Japan’s dependence onthe Middle East is far higher than it was before the first oil crisis. Though being overshadowed by the2

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Ukraine crisis, flagging U.S.-Saudi Arabia relations, rebel demonstrations in Iran and otherdestabilization developments are seen in the Middle East. The stabilization of the Middle East still
remains a significant, difficult challenge even after 50 years from the first oil crisis. In this respect,what lessons we should learn from experiences 50 years ago in the face of the new situation isquestioned.

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