You won't enter the same river twice

The Infotech magazine published an author's column by Alexey Belogoryev, Research and Development Director at the Institute for Energy and Finance, on why the "oil shock" of the 1970s will not happen again.

Can the 1973 scenario be repeated in general?

There can be three answers: the first is in terms of view of geopolitics and macroeconomics, the second is Arab–Israeli relations as a subjective crisis substrate, and the third is the energy markets themselves. In all three cases, the prerequisites for 1973 and 2023, let's say at once, are strikingly different.

Geopolitics and macroeconomics

The oil crisis of the 1970s, despite the deeply subjective circumstances of its occurrence, had fundamental objective reasons that went far beyond even the actual oil market. In one form or another, the crisis simply could not help but break out.

With all the flaws in the modern global economy (including in the commodity markets), it is difficult to find equally fundamental imbalances that could be eliminated with the help of conditional "adjustment" of the oil and gas markets.

Arab-Israeli relations

The second fundamental difference between the events under consideration is related to the participants (subjects) of the Middle East crisis itself. At the time of the Yom Kippur War, the State of Israel was only 25 years old. Despite the three wars it had won before (1947-1949, 1956 and 1967), many in the Arab world at that time still seriously believed that Israel could be destroyed militarily. As you know, the 1973 war was probably the last such attempt involving the leading Arab states ("perhaps", since the main task was still the de-occupation of the territories of Egypt and Syria captured by Israel in 1967). All subsequent clashes, including the current conflict, concerned either the Palestinian Arabs themselves (the 1973 war with them, strictly speaking, was generally indirectly connected, they were not fought for), or Lebanon.

Today, we are faced with a local, almost intra-State conflict provoked by the Hamas movement, which many Arab countries, including Saudi Arabia and Egypt, treat very negatively. In 1973, the scale of events was incomparably greater, and the intensity of passions and geopolitical stakes were much higher.

Energy markets

Finally, the probability of any action depends, although not always directly, on its intended effectiveness. And here we must admit that the global energy sector has also changed decisively. If in 1973 the USA, Canada, Great Britain, the EU-27 countries and Japan accounted for almost 71% of global oil consumption, then in 2022 – only 38% (their share in international trade is even slightly less), and their consumption itself decreased by 6.5% to 36.9 million barrels/day. At the same time, the share of China increased from a barely noticeable 1.9% to 14.7%, India – from 0.8% to 5.3%, and other developing countries of the Asia–Pacific region - from 4.4% to 21.1%. Thus, any embargo that inevitably leads to higher prices will hit not only Western countries, but also developing countries, including China and India, with which economic ties are becoming an increasingly important priority for most Gulf countries. No embargo on the oil, petroleum products and LNG markets is possible in the modern world without looking at Beijing and other Asian capitals, which was an insignificant factor in the 1970s.

The prospects

There have been and probably always will be bottlenecks in international energy trade that can be hit by politically motivated attacks. However, in recent years, this mechanism has been used almost exclusively by conditional "importers": whether it is the United States, restricting trade with Venezuela and Iran, whether it is European countries and the United States, imposing an embargo against Russian oil cargoes. After the crisis of the 1970s, "exporters" found a more "civilized" mechanism for promoting their interests in the oil market in the form of quotas for OPEC production, and since 2017 – OPEC+. But behind these quotas, economic, not political interests are visible (the latter are very different among OPEC+ countries).

The situation with the sharp reduction of Russian pipeline supplies to the European gas market in 2022, which looked like a "counter movement" of importers and their leading exporter, was complex and controversial. However, this crisis is notable for its short duration: it undoubtedly had a devastating effect on long–term gas demand in the EU and led to an impressive increase in consumer costs. But in terms of price growth and the balance of supply and demand, it was managed to be stopped relatively quickly, despite the fact that the state of the global LNG market (the main source of alternative supplies to the EU and the UK) was and remains tense. In our opinion, this is primarily due to three factors: the growing diversification of the energy balance, increasing the overall flexibility of energy supply and the priority of market pricing. All the things that the global energy industry lacked in the 1970s. The combination of these factors makes, in our opinion, it is almost impossible for the world energy industry to repeat events on the scale of half a century ago.