How the Arabs invented the oil embargo

Oil is the key commodity of the second half of the 20th century, which created a gigantic global market, set the trajectories for the development of the world's largest economies, and determined the way of life for billions of people. Not surprisingly, it plays a critical role in international relations and the transnational financial system.

As the dependence of developed countries on oil grew, the threat of supply disruption became an increasingly tangible instrument of pressure in the hands of exporters. This was first shown in the Suez Crisis of 1956, when Saudi Arabia cut off oil shipments to France and Britain in retaliation for their invasion of Egypt.

At the turn of the 1960s and 1970s, the breakdown of the traditional structure of the oil market with stable prices and the dominance of Western oil companies was accompanied by two oil embargoes.

In 1967, Arab oil exporters decided to cut oil supplies to the United States, Great Britain and Germany, which had supported Israel in the Six Day War. The embargo lasted only a few months and did not greatly affect prices, since the organizers of the boycott did not reduce production - accordingly, there was no shortage in the market.

In 1973, a new Arab-Israeli war led to a much more successful attempt to punish Israel's Western allies. Arab members of the Organization of the Petroleum Exporting Countries (OPEC) announced an embargo against the United States, the Netherlands, Portugal and South Africa, reduced overall production by 25% and raised prices (the cost of a barrel of oil rose from $2 in 1972 to $11.6 in early 1974).

As a result, the price of gasoline in the US and Europe soared several times, car owners lined up for kilometers at gas stations and even changed to horses. Western governments had to ration the sale of motor fuel and limit the speed on the roads.

The embargo was in effect from October 1973 to March 1974, but its long-term effects are still being felt . The "oil shock" was the impetus for the development of alternative energy and "green" technologies, and at the same time set high oil prices for a long time. This launched the process of redistribution of capital from developed industrial countries, which used to consume cheap energy resources, to developing countries-suppliers.

It seemed that OPEC had become the most powerful organization in the world and would now dictate its will to everyone else. But in reality, the colossal revenues from oil exports have made cartel members dependent on importers.

Huge incomes from oil exports made cartel members dependent on importers

The elites who got rich on oil rent used the proceeds to buy securities, stocks and other assets in developed markets, that is, they invested in the economy of oil consumers. This is how the “circulation” of petrodollars arose, which ensures the economic prosperity of the recipient countries of investments and the personal financial well-being of the top of the petrocracies, tied to the stability of supplies.

After 1973, major unilateral and multilateral oil embargoes were imposed by oil importers, not oil exporters. The most characteristic examples include restrictions on Iran, Iraq, Syria and Venezuela.

Iran: oil in exchange for nuclear weapons

Energy sanctions against Iran have been in place for more than 40 years, with short breaks. The United States banned the import of Iranian oil for the first time since the Islamic Revolution and the hostage-taking at the American embassy in Tehran in 1979. In the 1990s and 2000s, the range of restrictive measures expanded to a ban on investments in the oil and gas sector, the supply of equipment, and the servicing of oil traders by American banks. The EU and other US allies have joined the sanctions.

The oil embargo was intended to limit Iran's financial ability to support terrorist groups in the Middle East and develop weapons of mass destruction.

In 2016, Iran signed a "nuclear deal": it agreed to control its nuclear program in exchange for the lifting of all sanctions. But already in 2018, the United States withdrew from the agreement, accusing the Iranians of non-compliance with the agreements.

Did the embargo work? The Iranian economy has been struggling all these years with double-digit inflation, devaluation of the national currency, shortage of imported components and high unemployment. The effect of sanctions (not just oil ones) is measured at 44% of GDP per capita. In other words, Iranians are now almost half as poor as they could be.

But the political stability of the ayatollah regime, despite periodic mass unrest, is not in danger. Iran's nuclear program is progressing well - according to Israeli estimates , Tehran is six months from producing the required amount of weapons-grade fissile materials for a nuclear bomb.

Because of sanctions, Iranians are now almost half as poor as they could be.

Pro-Iranian military-political movements are successfully operating in Lebanon, Syria, Iraq and Yemen. Iran is a key external player in military conflicts that shape the security architecture in the Middle East and the main threat to the interests of the United States and its allies in the region.

The oil embargo itself, judging by indirect signs, is observed very conditionally: oil is secretly pumped onto tankers of neutral countries, and swap deals with countries that have not joined the sanctions, various barter schemes and tricks with customs clearance are also used.

Iraq: oil for food

Iraq came under international sanctions after the armed takeover of Kuwait in 1990. The UN Security Council resolution provided for a complete trade embargo, including on oil, the main source of foreign exchange earnings for Saddam Hussein's regime.

Following the defeat of the Iraqi forces during Operation Desert Storm, Iraq lost the ability to independently export oil and purchase the necessary imported goods.

In 1995, the Oil-for-Food program was adopted for Iraq. It provided that export proceeds from the sale of oil went to special accounts under international control, and the approval of UN officials was required to use it to purchase imported goods. Part of the income immediately went to pay reparations to Kuwait.

During the program, Iraq has become one of the poorest countries in the world. By the early 2000s, about a third of Iraqi children suffered from varying degrees of malnutrition, the well-being of citizens decreased several times, and the central authorities were unable to maintain the work of schools and hospitals at the proper level.

The economic catastrophe did not affect the stability of the position of dictator Saddam Hussein. In addition, the comparatively more educated Iraqis, those who could generate demand for democratic change, have suffered the most from the dramatic drop in living standards. Instead, they massively went abroad or engaged in banal survival. In 2002, in a referendum to extend his term, Hussein received 100% of the vote with a 100% turnout.

The economic catastrophe did not affect the stability of the position of dictator Saddam Hussein

The oil-for-food program itself has become a symbol of flagrant corruption. Saddam Hussein and his associates bribed foreign politicians and functionaries of international organizations and received kickbacks, earning, according to various estimates , several billion dollars. Among the likely recipients of bribes were the leader of the LDPR party Vladimir Zhirinovsky and the Russian Orthodox Church.

It took a US military intervention in 2003 to change the regime in Iraq. In the same year, the Oil-for-Food program was terminated. But the government of post-Saddam Iraq returned full control over oil revenue only in 2010. And Iraq paid reparations in the amount of $52 billion for the invasion of Kuwait only in December 2021.

Syria: oil in exchange for ending the war

The US and European Union announced an oil embargo against Syria in 2011, at the height of the civil war between President Bashar al-Assad's forces and the armed opposition.

Up to this point, about 90% of the crude oil from Syria, worth more than $4.5 billion a year, was supplied to Europe. Syrian oil production was rapidly falling until 2011 due to the depletion of explored fields, but just a year later the country turned into a net importer of oil and oil products. A rather painful blow for official Damascus was mitigated by Iran and Russia, which established supplies of oil and fuel.

During the fighting, the infrastructure of the oil industry was badly damaged, and oil fields regularly changed hands. In the fight for them, Assad's soldiers, Kurds, militants of various jihadist movements and Russian mercenaries associated with businessman Yevgeny Prigozhin, close to the Kremlin, were noted.

Roughly 90% of Syria's oil and 50% of gas reserves are now controlled by the Syrian Democratic Forces, a motley coalition of US-backed opposition groups against Assad. Therefore, back in 2013, the Europeans lifted the embargo on the import of Syrian oil.

Ultimately, the Western oil embargo has more likely contributed to the spread of Iranian and Russian influence in Syria, as well as the flourishing of Syrian oil smuggling along the Turkish, Syrian and Iraqi borders, than to significantly hurt President Assad.

Venezuela: oil in exchange for a change of power

The Trump administration imposed an embargo on oil from Venezuela in 2019 as part of a coordinated campaign. Its goal was to achieve the transfer of power from the unfriendly regime of Nicolas Maduro to the opposition leader Juan Guaidó, who proclaimed himself the legitimate president of the country.

Oil production in Venezuela has been declining for many years in a row due to a chronic domestic political and economic crisis, including that caused by earlier US sanctions. But in 2020, it hit a historic low of 300,000 barrels per day (the coronavirus pandemic also played a role). For comparison: in 2018, the country produced about 1.5 million barrels per day.

As in the case of Saddam Hussein's Iraq, the sanctions have caused monstrous damage to Venezuela: hyperinflation, GDP decline rates of 20-30% per year, explosive growth in crime, lack of essential goods in stores, 96% of households below the poverty line, about 6 million refugees. And just as happened in Iraq, socio-economic upheavals did not lead to a change of power.

Sanctions caused monstrous damage to Venezuela, but did not lead to a change of power

After Russia's attack on Ukraine, the US administration thought about easing sanctions against Venezuela, thereby supporting the global balance of oil supply and demand in anticipation of the restriction of Russian exports. In early June, the United States allowed the export of Venezuelan oil to Europe for the first time in recent years.

But production in Venezuela was already recovering thanks to favorable pricing conditions and ingenious mechanisms to circumvent US sanctions. In particular, Venezuelan oil enters the world market with the help of intermediaries from Iran and Russia, working through a network of front companies that change the names of oil tankers, turn off navigational transponders and reload oil on the high seas.

What awaits Russia?

Russia is the world's third largest oil producer (after Saudi Arabia and the United States), the second exporter of crude oil (after Saudi Arabia) and the first exporter of oil and petroleum products.

In 2021, the EU imported €71 billion worth of oil and oil products from Russia. Since February 24, 2022, when Russian troops attacked Ukraine, Europeans have paid almost €65 billion for fossil fuels from Russia, and they spent the most on oil - € 31 billion in more than four months.

At the last meeting of EU leaders, an agreement was reached to ban the import of Russian energy resources by sea (75% of the total) with the temporary preservation of supplies via the Druzhba oil pipeline. It is planned to abandon 90% of Russian oil and oil products at the beginning of 2023.

Europe accounted for about 50% of the total volume of Russian oil exports. Redirecting flows to new markets (in fact, only the Asia-Pacific region remains) will be difficult, since sanctions also apply to oil cargo insurance, and the capacity of existing rail and pipeline routes to the east is small.

India, China and other Asian buyers have traditionally relied on Middle Eastern suppliers and will only agree to deal with risk-laden Russian oil on condition of deep discounts. They already now reach 30-40%.

Russian economists Sergei Guriev and Oleg Yitzchoki argue that a European embargo on Russian oil and gas is the most reliable way to deprive the Kremlin of financial resources and thereby stop the war in Ukraine. Russia's losses after the embargo comes into full force are estimated at between $25 billion and $60 billion a year.

Russia's losses after the embargo comes into full force are estimated at between $25 billion and $60 billion a year.

According to the current exchange rate, the losses, therefore, will amount to a value in the range from 1.5 trillion to 3.5 trillion rubles. For comparison, the total revenue of the Russian budget in 2022 is 25 trillion rubles. At the same time, the oil and gas revenues of the Russian budget are only increasing due to rising world prices: from January to May, they grew by 45% in annual terms - from 3.1 trillion to 5.6 trillion rubles.

Under these conditions, it is doubtful that in the short term the announced parameters of the EU oil embargo will help to undermine the Kremlin's ability to wage wars and destabilize the situation in the world. Apparently, this is well understood in the West, which is why they are discussing more advanced options: from protective duties on Russian oil to a forced "ceiling" of prices for it.

“The embargo does not change regimes, but it prevents war”

Oleg Itskhoki, economist, professor at the University of California at Los Angeles (USA)

It must be understood that oil embargoes do not lead to regime change. Their purpose is completely different. Russia has received $100 billion in energy exports since the start of the war, almost twice as much as in the corresponding period last year. This is due to the fact that oil and gas prices are now higher and that there has been increased demand due to European countries trying to fill storage for the future. But this income amounted to about 60% of the Russian budget, and in ordinary years, income from energy exports is slightly less than 40%. The fact is that other sources of income have declined.

There is no doubt that these revenues directly or indirectly support the country's ability to pursue an aggressive foreign policy. In this situation, the oil embargo looks more than justified, even compared to other cases. If we compare with the Iranian oil embargo, then it was introduced to limit Iran's ability to develop nuclear weapons. But how long has Iran been rhetoric about wanting to destroy Israel? And yet, no direct military actions were taken against Israel, and there was only direct financing of hostile military-political movements.

If Europe does not buy half of the oil and gas they bought before, this will significantly reduce Russia's income. First of all, it is important to limit the revenues of the Russian budget so that it would be impossible to finance the war in the same volumes. In this sense, sanctions work. While it is possible to circumvent them, sanctions make it much more difficult to sell in alternative markets. Russian oil is already being sold at a discount in other markets. In addition, it is difficult to find sales markets where oil can be sold in the same volumes. It has to be transported, and transportation is more expensive.

It is important to limit the revenues of the Russian budget so that it is impossible to finance the war in the same volumes

The theory of sanctions is arranged in such a way that at the very first moment in time when the war began, the maximum possible sanctions should have been adopted. What we saw - for example, the freezing of reserves - was similar to this. But European countries did not agree to restrict energy purchases. The right approach is maximum sanctions at the beginning, implying a return to the negotiating table when the war stops. That did not happen.

Export sanctions greatly affect the negotiating position of countries. In any case, the war will end in negotiations at some point, and it is extremely important with what positions the parties will approach them, how they will be ready to stop hostilities. Apparently, we are talking about several months, but this will greatly depend on what economic pressure Russia will be under.

The estimates of European experts suggest that Europe may refuse both Russian oil and gas. This may involve significant costs. We are talking about a loss of 2-3% of GDP, but it is possible. There will be some shortage of gas, but not oil - it will simply have to be bought more expensive. The next question will be how European countries can cooperate and ensure that there is no energy shortage.

It is important that Europe is ready to cut off both oil and gas, if this happens unilaterally by Russia. Another thing is that, for political reasons, they do not want to become the first party to refuse. Not buying Russian oil and gas is an active political decision that needs to be made. Therefore, we are in a stalemate. And by all appearances, the war is going on longer than it would if these sanctions had been adopted in the first week of the war.

“A revolution in Russia will happen and the embargo will play its role”

Georgy Derlugyan, historical macro sociologist, professor at New York University in Abu Dhabi (UAE)

A huge and unprecedented experiment is underway today. The oil embargo of 1973 was by manufacturers acting at random under the pressure of the highly emotional political situation of the day. No one then imagined that a momentary and, it seemed, declarative measure by some kind of OPEC would plunge the world economy into a protracted crisis.

The experience of oil embargoes that have previously been imposed on Iran, Iraq, Syria and Venezuela has not been successful. Although in the past there have been much larger embargoes - as during the Second World War against Nazi Germany and Japan. Dictatorships, obviously, do not collapse from the embargo precisely because they cruelly dictate the conditions of their lives to their subjects. However, embargoes can also dictate to the dictatorships themselves their response, sometimes suicidal. The threat of stopping the engines of tanks and aircraft was one of the main reasons why Hitler in 1942 sent the Wehrmacht not to Moscow, but to the Volga and the Caucasus. Japanese kamikaze is the same.

The extent to which an oil embargo can cause serious economic damage depends on political will. Tracking and punishment mechanisms are an achievable task for modern states.

The extent to which an oil embargo can cause serious economic damage depends on political will

There is a point of view that windfall profits from oil exports are connected in a certain way with the degree of aggressiveness of non-democratic political regimes. There is a correlation, but, as always, only partial. There is a joke in Iran that oil should be banned in Islamic states, just like alcohol. The point is not the temptation of easy wealth, but the fact that the ruling elite, in the presence of any natural rent, has no particular reason to take into account the opinion of their own subjects in matters of war. But parliamentary regimes in Western countries were once created precisely as mechanisms for balancing the hardships of wars and taxes.

The revolution in Russia will happen - from above, from below, or, as often happens, from above, and then from below. The embargo will play the role of a factor in the impoverishment of the masses and intensification of the confusion of the elites. Everything is the same as with Lenin: the lower classes do not want it, the upper classes cannot. Political emigrant Lenin, as is well known, back in January 1917 did not expect that he would live to see the next revolution in Russia. As before, so today, this moment of breaking the system is unpredictable. But objectively, it is being prepared as the course of history and political struggle.

The material was prepared jointly with Sofia Presnyakova