— Ch. 1 · Background And Precursors —
1973 oil crisis.
~16 min read · Ch. 1 of 6
In 1948, the Israeli Declaration of Independence sparked decades of conflict between Arabs and Israelis. The Suez Crisis of 1956 saw Egypt block Israel's southern port of Eilat and nationalize the Suez Canal. This war closed the canal for several months from 1956 to 1957. By 1967, the Six-Day War resulted in an Israeli invasion of the Egyptian Sinai Peninsula. Egypt then closed the Suez Canal again for eight years following that conflict. In October 1973, Egypt and Syria launched a surprise attack on Israel during the Yom Kippur War. This attempt to recover lost territories ultimately failed but set the stage for economic warfare. American oil production peaked by 1969 and could not keep pace with rising demand from vehicles. The United States imported millions of barrels per year mostly from Venezuela and Canada. Transportation costs and tariffs meant it never purchased much oil from the Middle East until later. By 1973, US production had declined to just 16% of global output. Eisenhower imposed quotas on foreign oil that stayed in place between 1959 and 1973. Critics called this policy "drain America first" because it contributed to declining domestic production. Cheap oil compared to coal led to the decline of the coal industry. In 1951, 51% of US energy came from coal while only 19% remained coal-based by 1973. When Richard Nixon became president in 1969 he assigned George Shultz to review the quota program. Shultz recommended abolishing quotas but Nixon kept them due to political opposition. Nixon imposed a price ceiling on oil in August 1971 as demand increased and production declined. This decision increased dependence on imports since consumption was bolstered by low prices. Between 1970 and 1973 US crude oil imports nearly doubled reaching 6.2 million barrels daily by 1973. Until then abundant supply kept market prices lower than posted prices. In 1970 American oil production peaked and began importing more as imports rose 52% between 1969 and 1972. By 1972, 83% of American oil imports came from the Middle East. Throughout the 1960s the price per barrel stayed at $1.80 meaning real terms got progressively cheaper despite inflation. Americans paid less for oil in 1969 than they had in 1959 even after prices rose to $2.00 in 1971 adjusted for inflation. The extremely low price served as the basis for what historians call the "long summer" of prosperity beginning in 1945.