Publications: Notes at the Margin

Anniversary and Repeat (October 18, 2021)


This report might begin “two score and eight years ago.” At that time, October 21, 1973, specifically, The New York Times reported the following:


AMMAN, Jordan, Oct. 20—The Saudi Arabian Government has decided to stop all oil exports to the United States, the Riyadh radio announced tonight.


A broadcast monitored here in the Jordanian capital carried this statement by the Saudi Arabian Cabinet:


“In view of the increase in support for Israel, the Saudi Arabian Kingdom has decided to stop the export of oil to the United States of America for adopting such a stand.”


Arab and Western analysts here, said tonight that the short?run effects of the Saudi decision on the American economy would probably be very limited since only about 6 per cent of American oil came from the Middle East. Saudi Arabia is the largest oil producer in the Arab world.[1]


The Times editors did not view the development as terribly important. The article appeared on page 28 of the Sunday edition. It followed by a day a frontpage article in the paper, buried in the lower left-hand corner, that began this way:


Libya fired a double?barrel blast of her “oil weapon” yesterday by ordering a cutoff of all shipments of crude oil and petroleum products to the United States and almost doubling prices for other importers.


The announcements shocked an already stunned and confused oil industry.[2]


Two months later, economists at the OECD published a report that asserted “the Arab oil embargo would not seriously impair American industrial output next year because Arab sources fill only 6 per cent of American energy consumption and the nation’s use of oil for nonproductive purposes is extremely high.”[3]


The OECD report explained that the United States could cut its nonessential oil consumption by fifteen percent without affecting the nation’s economic capacity, adding


Western Europe, North America and Japan are suffering from a “psychological shock,” apparent in the “exaggerated declines on many stock exchanges,” the O.E.C.D. commented. But, it added, this ignores the scope for, and nature of, appropriate corrective action by governments in the energy pinch.


It also discussed the change in global cash flows. OECD nations would pay $15 billion more for oil imports in 1974. The money would go to the OPEC nations. As the Times’ Clyde Farnsworth noted, “but in one of the most significant points of today’s report the organization said the money would end up coming back to the O.E.C.D. area.” There it would be used to buy goods and services or invest in other financial instruments. The OECD concluded that its member nations would have smaller trade surpluses but larger capital inflows.


The OECD was wrong, as were other forecasters who foresaw no impact from the Arab embargo and the ensuing oil price increase. As Figure 1 shows, US and UK real GDP dipped in 1974. Other countries suffered, too, although data are not readily available. As Schultze and Fried noted in a table we published in the October 4 Notes, oil price increases reduced the GDP of the US and European countries by more than two percent from projected levels. Japan saw a 1.2 percent loss.[4]


Economic forecasters, in short, underestimated the effect of the 1973 embargo, which began precisely forty-eight years ago. They are making the same mistake today. In our view, the economic consequences of this energy crisis will be far worse.

[1] “Oil Flow to U.S. Halted by Saudis,” The New York Times, October 21, 1973 [].

[2] William D. Smith, “Cutoff in Oil to U.S. Ordered by Libya,” The New York Times, October 20, 1973 [].

[3] Clyde H. Farnsworth, “No Real Harm to U.S. Seen in Oil Cuts,” The New York Times, December 21, 1973 [].

[4] Edward R. Fried and Charles L. Schultze, Higher Oil Prices and the World Economy (Washington, DC: Brookings Institution, 1975). See “Turning Point,” Notes at the Margin, October 4, 2021, p. 6.



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