The 1973 Arab oil embargo has spurred international concerns that OPEC can manipulate the global oil supply – and by extension, prices – in a way that significantly harms consumer countries. Because OPEC collectively produces about 40% of the world’s oil, many fear that OPEC members can use their sway in the energy market to influence and constrain other states’ foreign policy decisions.

OPECMap of OPEC members. (Wikimedia Commons)

An Ineffective Cartel

The widespread belief that OPEC is able to dramatically impact the global oil market is unfounded. In reality, OPEC has struggled for most of its history to coordinate its policies and enforce its production quotas, thus limiting its effectiveness as a cartel.

Different objectives between OPEC members inhibit the group's ability to act as a cartel. OPEC primarily relies on its production volumes to affect oil prices: As in any market, restricting the supply of a product will push prices higher, leading to larger profit margins for producers. But there is an incentive for OPEC members – especially the smaller producers – to cheat by exceeding their agreed-upon quotas to earn extra revenue. Cheating has become an endemic problem within the organization that has undermined its ability to act as a coherent cartel. Between 1982 and 2006, the bloc overran its quotas by an average of about 10%, some 96% of the time. In a cartel containing large producers like Saudi Arabia and the United Arab Emirates, which produce 9 million and 3 million barrels per day respectively, such surpluses are not trivial.

Even if OPEC members were able to consistently stick to their quotas and limit the organization’s contribution to the world’s oil supply, other non-OPEC countries could at least partially counter the resulting price spike by either ramping up their own production or releasing oil stores to the global market. Because oil is fungible, supplies of oil from non-OPEC countries could replace OPEC exports with relative ease.

Understanding the 1973 Oil Crisis

So what really happened in the 1973 oil crisis, if OPEC doesn’t have the influence over the global energy market that it claims?

The primary goal of the 1973 Arab oil embargo was to force the United States to reduce its support for Israel, in part by taking advantage of Europe’s dependence on Arab countries’ oil and compelling the Continent to pressure the United States to alter its policies in the Middle East. After OPEC members announced a 25% reduction in production volumes and imposed an embargo against the United States, the Netherlands and Portugal, prices spiked from $3 per barrel in 1972 to $11.65 per barrel by early 1974. However, a number of factors had already begun putting upward pressure on global oil prices that had nothing to do with OPEC’s policies: global demand was rising, as was resource nationalism in many producer states; U.S. production was stagnating; producers successfully renegotiated their share of oil revenues; and the British had withdrawn from the Persian Gulf. Additionally, once prices began to rise, counterproductive policies on the part of the United States, including price controls and gas rationing, only pushed prices higher.1

Implications for National Security

Although the embargo succeeded in encouraging greater U.S. diplomatic efforts in the region, it failed to pit Europe against its American ally and to change the United States’ stance on Israel. Just as the United States’ broader security and diplomatic imperatives remained unchanged in 1973, despite OPEC’s best efforts, so too have other countries’ priority policies persisted in the face of oil-related threats throughout the years. History has shown that the oil weapon is largely ineffective, particularly when more important interests are on the line, and that energy trade is rarely high enough of a priority to trump all other concerns.

[1] Keith Crane, Andreas Goldthau, Michael Toman, Thomas Light, Stuart Johnson, Alireza Nader, Angel Rabasa & Harun Dogo, Imported Oil and U.S. National Security (Santa Monica: RAND Corporation, 2009).