Thirty years on
THE ARAB oil embargo started 30 years ago last month, transforming the world economy and the oil business. The political background to that event remains depressingly familiar. Israel's relations with its Arab neighbours have seldom been at a lower ebb since the events that triggered the embargo. The US and the Arab world remain deeply suspicious and ignorant of each other.
However, although the frustration in the Middle East that provoked the oil embargo may be as strong today, a repeat is unlikely - oil embargoes do not work and, as history shows, are self-defeating.
Thirty years on, the fundamentals of the world oil industry are completely different, mainly because of the catalytic effect the embargo had on encouraging oil production outside Opec and the Middle East. As a result, Opec has seen its share of the world oil market gradually squeezed, from about 70% around the time of the embargo to roughly 40% now.
The high oil prices that its policies have generally engendered (barring cyclical collapses in demand, caused by sustained high prices) and the need for governments to improve energy supply security have resulted in very rapid growth for non-Opec supplies.
Declining world influence
This has inevitably reduced Opec's influence on world oil markets.
Indeed, in the late 1990s, slippage in market share and chronic indiscipline when it came to sticking to production quotas combined to make its pronouncements seem almost irrelevant. It has since tightened up on adhering to output targets, winning back the market's respect and, by and large, keeping prices where it likes them. It continues to send out signals of its strength. In September, it ambushed oil markets with the announcement of a 0.9m barrels a day production cut, which came into force at the start of the month.
The message was that Opec is clearly still determined to protect prices, even at the expense of more market share loss.
There is no doubt about the huge oil potential of the Middle East.
The supply side doubt hangs over the ability of non-Opec production to continue to grow. However, as long as Opec pursues its present policy, the more non-Opec will be able to gnaw away at its market share. Eventually, if oil demand continues to rise and if non-Opec production dries up, influence could flood back to the Middle East.
But such circumstances are far from assured.
Predictions of an imminent exhaustion of recoverable oil outside the resource-rich Middle East continue to be confounded, as technology pushes back the boundaries of exploration and new resources are brought on stream. Other fuels, such as natural gas, continue to chip away at oil's share of primary energy supply.
And oil-rich non-Opec areas, such as Russia, the world's deep-water provinces and Canada's oil sands, continue to come into play. Last month, for example, BP's chief executive, John Browne, said TNK-BP may have seven times more oil than those included as proved reserves as part of its merger.
Technology in new areas will, over the longer term, also cause the balance of influence among oil-rich nations to be reassessed. Fuel cells and renewable sources of energy will, as technology advances, have a significant impact on energy supply.
Thirty years on, the oil weapon remains firmly in its holster. Opec still has enough ammunition to furnish its members' coffers with increased revenues, but knows that its market dominance is not sufficient to engineer geopolitical change. The danger remains, however, that Opec's price-support strategy is effectively putting a gun to the cartel's own head. With price hawks in the ascendant, Opec chiefs should be wary of pulling the trigger.