The oil shocks of 1973/74 and 1979/80 are now mainly remembered for the disruption and hardship they caused in the major oil-consuming countries.
But they marked a lasting inflection point in the development of the oil market and almost all the changes were adverse to OPEC in the long run.
Following the oil shocks, global oil consumption grew more slowly while non-OPEC production rose more rapidly.
Members of the Organization of the Petroleum Exporting Countries initially benefited from a gusher of windfall revenues, but in the long term the oil shocks were disastrous.
OPEC’s market share fell and its members were left with excess production capacity that remained a problem until the 2000s.
OPEC’s responsibility for the shocks remains debatable: the market was on an unsustainable trajectory before 1973 as low prices boosted consumption without encouraging a similar increase in non-OPEC output.
But the events of the 1970s and 1980s demonstrate clearly why oil cannot be employed as a weapon without doing long-lasting damage to the interests of the producer countries.
OPEC members have never again resorted to the oil weapon – not out of goodwill to consumers but because it did not work and did long-term harm to their own economies.
More generally, the oil shocks demonstrate why very high prices are damaging to the interests of OPEC countries, a lesson that was painfully re-learned when prices collapsed in 2014.
OPEC members were the biggest losers from the oil shocks of the 1970s as surging prices accelerated the development of alternative sources of supply.
In real terms, oil prices quintupled from $11 per barrel in 1970 to $58 in 1974 and then almost doubled again to $110 in 1980 (“Statistical review of world energy”, BP, 2018).
In nominal terms, OPEC members’ export revenues jumped from $14 billion in 1970 to $116 billion in 1974 and $265 billion in 1980 (“Annual statistical bulletin”, OPEC, 2018).
But revenues fell to just $72 billion in 1985 and did not pass their previous peak until 2004, even in nominal terms.
Surging prices accelerated the development of alternative, higher-cost supplies, cutting into OPEC’s market share and contributing to the price collapse of the 1980s.
Between 1970 and 1985, non-OPEC production increased substantially in the Soviet Union (+5 million barrels per day), China (+2 million bpd), the United Kingdom (+2.6 million bpd), Norway (+0.8 million) and Alaska (+1.5 million bpd).
OPEC’s own share of production, which had been increasing and peaked at 52 percent in 1973, fell to just 28 percent by 1985.
Rising non-OPEC output was compounded by a large and permanent loss of market share for the entire oil industry in the residential and commercial heating sector as well as in power generation.
In the United States, residential use of petroleum liquids, mostly for heating, declined from a peak of 1.5 million bpd in 1972 to just 0.7 million bpd in 1985 (“Monthly Energy Review”, EIA, Sept. 2018).
Commercial use of petroleum liquids, excluding gasoline, again mostly for heating, declined from a peak of 0.7 million bpd in 1973 to less than 0.5 million bpd in 1985.
Residential and commercial use had grown strongly in the 25 years before 1973/74 as a result of a long period of low real oil prices throughout the 1950s and 1960s.
But following the oil shocks, households, businesses, schools and retailers switched their heating systems from increasingly expensive oil to cheaper natural gas and electricity.
The same switch away from expensive oil to cheaper alternatives, mostly coal and nuclear, occurred in the power generation sector.
U.S. power generation from petroleum liquids had climbed from 48 billion kilowatt hours (kWh) (6 percent of the total) in 1960 to 314 billion kWh (17 percent of the total) in 1973.
But the oil shocks accelerated the construction of coal-fired and nuclear power plants during the 1970s and the 1980s.
Power generation from petroleum liquids had declined to just 100 billion kWh (4 percent of the total) in 1985 and was just 21 billion kWh (0.5 percent of the total) in 2017.
Following the oil shocks, petroleum liquids were increasingly restricted to a role as a transport fuel, where their high energy density and ease of handling made them harder to replace than in heating and power production.
Even in the transport sector, gasoline consumption grew more slowly after the shocks as motorists switched to smaller and more fuel-efficient vehicles (sometimes as a result of government mandates).
The same trends towards substitution, conservation and increased efficiency were evident across all the advanced economies, leading to a sharp slowdown in global oil consumption growth after 1973/74.
France and Japan launched major nuclear power programs to reduce their reliance on expensive and unreliable imported oil, and all OECD countries focused on fuel conservation and efficiency.
OECD oil consumption, which had been growingly rapidly before the 1973, fell in 1974 and 1975, and then again throughout 1980-84, and it has never grown as strongly since.
Petroleum’s dominance as a primary energy source has gradually challenged since the oil shocks by other fuels, notably in recent years by natural gas.
Petroleum had gradually increased its share of total global energy consumption from 1.5 percent in 1900 to 19 percent in 1950 and a peak of 44 percent in 1973 (“Our world in data”, University of Oxford, 2018).
Following the oil shocks, however, oil’s share of global energy consumption flat-lined and then fell to just 37 percent in 1985 and as low as 34 percent in 2016.
The oil shocks of the 1970s created long-term problems for OPEC, which is one reason why there has been little appetite to try using the oil weapon again.
Source: ReutersPrevious Next
Huge Opportunities For Investment in Maritime Sector: Nitin Gadkari
India Shipping and Offshore Summit