Energy Security Lessons for UE: The U.S. Oil Crisis of 1973?

Given the current debate on the EU’s energy security issue, it is worth remembering the 1973 U.S. oil crisis. What lessons can the 2013 Europe learn from those 40-year-old events?


The misunderstood story of the 1973 oil crisis

It’s 1973. One of the many conflicts in the Middle East begins. OPEC (Organization of Petroleum Exporting Countries) declares that each upcoming month oil production will be reduced by 5 per cent. Later, most of the OPEC countries announce they are going to stop the sales of oil to the U.S. Worldwide panic of the time is best illustrated by queues at petrol stations. The U.S. adopts fuel price controls and begins to regulate the access of gas stations to fuel. Energy security issue becomes particularly relevant in peacetime and, in one way or another, still influences current debates.

But, in fact, the story was a little bit different. Even before 1973, the price regulation imposed in the U.S. led to more imports and less domestic production. In 1971 oil companies were prevented from passing on the full cost of imported crude oil to petrol stations. This in turn made some oil companies stop selling oil to gas stations altogether. Already five months before the embargo and the beginning of the crisis, 1,000 petrol stations had shut down or curtailed operations.

The embargo (i. e. refusal to sell oil for the U.S.) worked only on paper. In fact oil was purchased through intermediaries and U.S. oil imports did not diminish. Later, the OPEC admitted that the embargo was a symbolic gesture and had little practical significance. “The structure of the oil market was so little understood that the embargo became the principle focus of concern. Lifting it turned almost into an obsession for the next five months. In fact, the Arab embargo was a symbolic gesture of limited practical importance”, Henry Kissinger (the Secretary of State at the time of oil crisis) said later. Generally speaking, the embargo did not diminish the oil imports to the United States in any way. However, of course, oil production cutbacks and other factors increased nominal oil prices worldwide.

But why are long gasoline lines and service stations running dry still associated with this period in people‘s minds? Because of a variety of new price control mechanisms, fuel “vouchers“  and other measures which further deteriorated the situation. There is one guaranteed way in economics to ensure the shortage of petrol – to regulate its price.

Simple energy security recipes for the 2013

This 40-year-old story illustrates a simple truth. The current political energy security discourse is not extraordinary or unprecedented (regardless of how some discussion participants envision it). In fact, every time a lot of people use some kind of good or resource, there is a natural concern about its shortage.

By the time of mineral fertilizers, countries had fought for the islands which were rich in bird manure (guano). In 1856 the U.S. Congress passed an Act which gave power to take possession of islands containing guano deposits and use military force in order to defend U.S. interests in such islands. This example is a good illustration and forecast of how our serious discourse on “strategic energy security issues” may look for future generations.

The world does not stand on the verge of a global energy crisis, and the occasional sharp increases in energy prices are just a natural part of life (especially when countries are fast in printing money to pay for the energy). All this brings to mind a number of classical principles which can be applied to current EU policy guidelines.

First of all, energy consumption is not evil. On the contrary, the more power a person can afford to use, the higher the quality of life he/she is experiencing. EU attempts to make people consume less energy by artificial means (e.g., taxes) are against the wishes and interests of people. It equals attempting to make people eat less or starve.

Secondly, it is difficult and unnecessary to decouple economic growth and energy consumption. This leads to welfare loss. The cost-effective and energy-saving technology is driven by the desire to reduce the price of energy to the consumer.

Thirdly, energy taxes are a political creation with one result – people are paying for energy more than they should. Of course, this makes room for an in-depth discussion of the negative external effects (externalities) or the funding of infrastructure. For instance, it is often claimed that fuel excise is used to finance roads. The situation is complex, but the answer to this is: excise is not the only and most effective way to finance roads.

Fourthly, energy trade between countries is a positive phenomenon. Deliberately refusing to import cost-efficient energy is irrational, impractical and unreasonable. Energy imports are not “addiction” which must be combated, but an opportunity that must be seized. The attempts to limit imports can be reasoned in different ways – from “unreliable” countries to “obligatory” import restrictions to level the playing field between energy producers in different countries. The motive does not matter. It is important that consumers of energy will be forced to pay more than they can afford.

Fifthly, local energy production may be one of the factors helping increase energy security, especially, if the local sources help to diversify energy sources, but only if the local energy sources are economically efficient. Otherwise, the force to choose high-cost local resources will cause a rise in prices, similar to the one caused, for example, by a general global increase in prices. The only difference is that it is a result of local policy decisions and consequences will be paid for by local consumers– the people and the business. At the same time, competitors in other countries or regions are paying less for energy.

Sixthly, it is also completely irrational not to operate cost-effective indigenous energy sources. No motive (ecological, political and conjunctural) justifies the economic absurdity to have and not to use it. Lecturing about the need to leave something for future generations is meaningless. If one remembers the guano islands example, the current generations thank for mineral fertilizers, rather than for the saved manure islets.

Thus, energy security recipe is a fairly simple one: more energy for a lower price. And a low price in the long term can only be ensured under market conditions, and not prohibitions or subsidies. Emotional background may change: the Cold War, Global warming/cooling, the green revolution, knowledge economy, etc. But there is no better way to achieve prosperity than by a free mind and innovation based on private initiative.