Al-Ahram Weekly On-line
8 - 14 October 1998
Issue No.398
Published in Cairo by AL-AHRAM established in 1875 Current issue | Previous issue | Site map

Oil in the battle

By Niveen Wahish

Before the war, the Arabs were not taking full advantage of their oil resources. Although they supplied almost 40 per cent of the world's petroleum output, they did not make substantial gains because market prices were kept artificially low by the producing companies. In the course of the October War, however, the Arabs took the double decision to cut production and impose an oil embargo against the United States and Holland. This not only served to raise oil prices, but was also one factor that helped bring the war to a rapid conclusion.

According to Mohamed Abdel-Shafie Eissa, professor of international economic relations at the National Planning Institute, Arab oil production accounted for between 38 and 40 per cent of world output in 1973 and this gave weight to the Arab decision. In fact, while the US depended on the Arabs for one third of its petroleum requirements, Europe was in an even worse situation because it depended on Arab oil for 50 per cent of its needs. Japan, meanwhile, supplied 70 per cent of its consumption from Arab sources.

With these figures in mind, it becomes clear why the decision to cut production and impose an embargo against the US was of such significance. The decision was made by the Arab oil ministers, meeting in Kuwait 11 days after the outbreak of the October War. According to Hamdi Abdel-Azim, professor of economics at the Sadat Academy, the Arabs decided to take a stand against the US because of its support of Israel. The embargo was later expanded to include Holland which had also taken up various hostile positions towards the Arabs.

On the same day, the Arab oil ministers decided to cut production by at least five per cent, and by December 1973 production was down by 25 per cent .

These decisions inflicted grave damage on the economies of Western Europe, causing the European Common Market to issue a statement on 6 November demanding Israeli withdrawal from the occupied Arab lands and supporting the rights of the Palestinian people -- an issue which the Europeans had hitherto studiously ignored.

This was the first time oil was used as a political weapon. But the Arab decision was also an economic decision, raising prices and thus greatly swelling the income of the exporting nations.

According to Hussein Abdallah, a former deputy minister of petroleum, the Arabs were exporting around 20 million barrels of oil per day just before the October War, but this had not led to any increase in their prosperity, for price cuts made by the producing companies had brought the price down as low as $1.80 per barrel during the period 1960-1970.

The price slump was the main reason behind the establishment of the Organisation of Petroleum Exporting Countries (OPEC).

But OPEC failed to make real gains for its members. And after international demand increased as a result of the drop in prices, oil exporters began pressuring the producing companies to raise prices. However, despite continuous efforts and meetings with the producing companies, OPEC only managed to raise the price to $3 per barrel.

The producing companies later offered to modify a previous agreement to allow for an eight percent annual increase in prices to make up for any drop in value as a result of inflation.

By that time, however, the war was already in full gear in favour of Egypt and this prompted the Arab negotiators to refuse the offer. The companies then doubled the offer to 15 per cent and the Arabs again turned it down, demanding a 100 per cent increase straight off. Once Egypt had won, the Arab countries felt empowered to face down the producing companies until they got what they wanted.

The companies responded that they could not take such a decision on their own and had to refer it back to the consumer countries which, as expected, refused. At that point, the Arabs rejected a request by the companies for a two-week grace period to convince the consumer countries, and instead simply put an end to the negotiations.

A month later, recounts Abdallah, on 16 October, the Gulf oil-producing countries (Saudi Arabia, Kuwait, Iraq, UAE, Qatar and Iran) held an historic meeting in Kuwait, at which they announced that they were increasing oil prices by 70 per cent. This raised the price per barrel from $3 to $5.12

On the following day the 10 members of the Organisation of Arab Petroleum Exporting Countries (OAPEC) met and decided to cut production immediately by five per cent. They held a second meeting on 4 November and decided on an additional 25 per cent cut. The non-Arab exporting countries could not make up for the drop in Arab production, which fell from around 19.9 million barrels per day to around 15.3 million barrels, causing total OPEC production to drop from around 32.6 million b/d to 28.4 million b/d.

This meant, in effect, that OPEC was setting the price of its oil single-handed. To underline this, ministers of the Gulf members of OPEC met on 22-23 December in Tehran and decided to raise prices for a second time to $11.65 per barrel starting January 1974, that is, an increase of 130 per cent over the rates set during the October meeting.

This rise in prices led to an increase in revenues for the Arab countries from around $14 billion in 1972 to around $75 billion in 1974 and later to $91 billion in 1977, reaching $213 billion in 1980 following the Iranian Revolution.

However, Egypt did not benefit financially in 1974-75 from the increase in oil prices. Its oil resources were not sufficient to cover its own needs and it had to use its limited foreign currency reserves to import $300 million worth of petroleum during those two years. It was only later, in 1976, that the nation began to benefit from the chain of events it had first set in motion.