Hormuz shock echoes 1973 embargo lessons
LONDON: While oil and gas are once again flowing through the Strait of Hormuz, the closure of the vital waterway for over 100 days could
LONDON: While oil and gas are once again flowing through the Strait of Hormuz, the closure of the vital waterway for over 100 days could prove to be a turning point in global energy markets. The Arab oil embargo of 1973, a similarly disruptive supply shock, offers clues about where we might be headed. The latest Middle East crisis tested the limits of the modern energy system, which has evolved over recent decades into a highly interconnected global market held together by thousands of tankers, trading houses and complex pricing systems. This system proved remarkably adaptable during the U.S.-Israeli war with Iranthat began on February 28. Rapid shifts in supply flows and demand patterns mitigated the impact of what had previously been considered a "doomsday" scenario: the effective closure of the Strait of Hormuz, the narrow waterway through which nearly a fifth of the world's oil and liquefied natural gas supplies typically pass. Yet this shock was far from painless, particularly in Asia, which depends on the Middle East for 60% of its oil and gas imports. The market adaptations during the crisis - including the rundown of energy stockpiles and China's reduced imports - were not sustainable.Also read | JD Vance, Rubio strike different tone on Iran and IsraelGlobal energy markets were buying time. They could have reached a tipping point if the strait had not reopened when it did, as global inventories were nearing dangerously low levels. That calamity was averted, but the Hormuz crisis has pushed nations to rethink their energy strategies. Does that mean we should expect a dramatic reduction in fossil fuel use? Comparing today's crisis to the Arab oil embargo suggests that the path forward will be more complicated than that, but the crisis could ultimately mark the beginning of the end of the oil era.BLACK GOLDThe modern age of oil began with the drilling of the world's first commercial well in Pennsylvania in 1859 and the founding of Standard Oil by John D.
Rockefeller in 1870. The mass adoption of the automobile in the early 20th century lifted oil consumption from close to nothing in 1900 to over 100 million barrels per day by the 2020s, making it the world's biggest and most important commodity. As global consumption expanded throughout the century and new oil frontiers were developed, particularly in the Middle East, control of this "black gold" became a source of friction between Western powers and producing nations, fuelling countless wars and coups. A defining moment came when Arab members of the Organization of the Petroleum Exporting Countries imposed an oil embargo on the U.S. and other Western countries supporting Israel after the 1973 Yom Kippur war. This quadrupled oil prices almost overnight, triggering a global inflation shock.GREAT RESHUFFLINGThe embargo had wide-reaching implications. First, it drove governments and businesses to curb fuel consumption. U.S. drivers shifted to smaller, more efficient Japanese cars as Washington imposed fuel economy standards. European automakers pushed diesel engines, and heavy industry moved away from fuel oil toward coal and gas. More broadly, Western countries accelerated the development of domestic oil and gas resources, particularly in offshore basins. This reduced import dependence while also cutting the energy intensity of their economies. The crisis also prompted the formation of the International Energy Agency in 1974 to coordinate global responses to major oil disruptions, including the management of newly created national strategic petroleum reserves.Also read | India's GLP-1 boom slows amid price war, weak retentionOverall, it did not cause economies to abandon fossil fuels, but rather to use them more carefully.NEW ENERGY STRATEGY: DIVERSIFY, BUY LOCAL Fast forward to 2026, and a similar adjustment appears to be underway. But unlike the 1970s, there are now readily available, cost-competitive alternatives to fossil fuels that could erode oil and gas consumption. Asia, the region most exposed to the loss of Gulf supplies, initially responded to the Hormuz closure with dramatic measures, including four-day weeks, mandatory work-from-home policies and restrictions on air and car travel.
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