The international community is once again faced with a crisis situation in the Gulf.
With the American military involvement and the present hostility between the Iranians and the Saudis, two major oil producers, the stage appears to be set for a repeated history of the early 1970s.
Considering the fact that America is a major net importer of the Gulf oil and Iran and Saudi Arabia being the major producers of the Gulf oil the heightening of hostility in that regions is likely to give a boost to non-Gulf oil any time from now. If this happens as it did in the early 70s, price of crude oil is going to shoot up once again.
The world oil industries is more than the inter-relationship of supply sources and markets, of companies with governments, of companies with companies. The system works within the framework of the larger and even more complex system of the world‚Äôs political and economic relationship.
In the past decades, at purely political level, the inter-relationship of oil and the Middle East cauldron if instability and change had made the headlines on more than few occasions. The political stresses and tension in the area have certainly made their impact on the oil industry.
From the Middle East experience, the tension from Arab-Israeli conflict had time and time again produced their effects on the oil industry.
The initial formation of the State of Israel was immediately followed by the cutting of the pipelines which had previously taken oil from Iraq to Haifa for refining or onward transhipment to Western Europe. To this day these pipelines remain broken and unused and the Iraqi Petroleum Company was obliged, to replace the section in Israel and Jordan with Sines through Syria and the Lebanon, where new refining and export terminals have been built at Tripoli.
Israeli territory also had to be avoided which Aramco, a few year: later decided to build the trans-Arabian pipe line from its field in tin Gulf Coast of Saudi Arabia to the Mediterranean sea coast.
Considering the closeness, supply to terminal in Israel would have been the cheaper way of providing the transportation but political conditions, mac this impossible and f an extra thirty miles of nine line had to be laid around Israel’s northern boundary.
The effect of hostility in the oil industry can be seen from the perspective that right from the start of the Arab-Israel conflict in 1947, Israel has been denied Arab oil and so for- many years the Haifa refinery designed to run on Iraqi crude, stood idle. But Israeli oil problems arising from continued state of war with the Arab countries had at least been predicted and thus amenable to solution albeit at a cost of higher transport changes.
Less predictable have been the indirect effect on the oil industry of the then Israeli/Arab-tension. In times of absence of active and large scale hostilities, the oil business could continue working, provided the Arab ground rules for-biding contact with Israel were observed, but when the continuous tension has deteriorated into actual warfare that significance of the Arab-Israeli dispute for-the oil industry become universal.
In both the Sue war of 1956 and the six-day war’ of 1%7″) not only was the Suez Canal closed with consequent traumatic effect on the international movement of oil but the Arab States also tried to use their control over a large part of the world’s oil production as a weapon to assist them in their struggle.
In 1956-57, the situation, arising from the closure of the Suez/. Canal, the sabotage of some of the pipelines from producing countries to the Mediterranean and the ban of shipping, Arab oil to Britain from f ranee and certain other countries produced several other serious consequences.
This action led to the short term rationing of oil products in Western Europe. Immediately gave rise to increased prices to enable the companies cover increased costs arising from their need to buy more oil from expensive areas and from the longer tanker journey required for Middle Eastern o round the Cape Good Hope.
In 1967, oil became more important bi cause the use of ca widened and its cheaper price made it to 1 substituted for coal.
Suez was closed as a result of hostility between the Arabs and Israel from 1967-75. This closure gave advantage to Nigeria, Venezuela and Libya whose crude do not have to go through the Suez Canal to reach Europe.
It is thus in the Middle East that the inter-relationship of oil and international politics is most significant and most complex. Elsewhere their inter-relationship is usually of a bilateral character, affecting the national interest of a particular country and the USA through the ownership of the majority of the companies that operate in other parts of the world.
In 1973m, an explosion combination of politics and economics generated an embargo of oil exports to the United States and the Netherlands, a cutback in oil production and a quadrupling of oil prices, forcing the economy into an unprecedented energy crisis. This followed among others in the decision on October 1973 of the Arab countries tin the Arab-Israel war which had started on the same year. This decision led the country tries to proclaim an embargo on oil exports to the United States on October 20.
The one thing that runs through the past situation and the present is the American factor. America is always in each case playing a role. The present situation is somewhat different in that the Arab countries might be divided. Now that Iran and Saudi Arabia are at each others throat, the Arab countries might not be in a strong position to impose the kind of embargo we saw in early 70s. But certainly oil production will be disrupted if the hostility develops into full scale war. With most OPEC members experiencing serious debt burden it is not likely that the Arab members of OPEC be able to muster support to tow the line. The oil market will receive a boost, the near future as buyers are likely to increase their stock.
With the current production quota of OPEC members demand is most likely to outstrip supply and this would mean extra dollars in the price of crude oil.
The earlier the Americans reflect on the 1973 embargo and its traumatic effects on the world economics, the better. The Americans should tell President Reagan to in his forces from involving in full war with Iran.