The Oil Weapon Comes Into Play

Is history doomed to repeat itself?

I imagine more than a few of you have been pondering this question today after hearing about Iran’s call for a complete and immediate oil embargo on Israel. 

The veteran members of our investment community may be getting flashbacks to the 1973–1974 oil embargo during the Arab-Israeli war, when OPEC oil was first wielded as a weapon. 

It was considered the first true “oil shock” in history that lasted for about six months and changed the shape of global politics from there on out. 

The significance of the October 7, 2023, attacks by Hamas in relation to the 50th anniversary of the Yom Kippur War shouldn’t be lost on anyone. 

In October 1973, an Arab coalition that was led primarily by Egypt and Syria launched a surprise attack on Israel that led to intense fighting over the next few weeks, and although it was well before my time, there are some eerie similarities between that oil crisis and the chaos taking place right now. 

Back then, the Soviet Union was supporting the Arab coalition by supplying it with arms and munitions, not unlike the billions of dollars of financial backing that Iran has given Hamas. 

On the flip side, the U.S. gave full-scale support of military equipment to Israel. Yesterday morning, President Biden not only gave his full-throated support to Israel in his speech but also gave a stark warning to Iran to be careful. 

In October 1973, OPEC imposed its oil embargo on any countries that supported Israel. This not only included the United States but also Canada, Japan, the Netherlands, and the United Kingdom. 

So it shouldn’t be much of a shock that oil would once again be used as a weapon.

Except I have to ask…

Is this time different?

The First Oil Weapon

When the 1973 oil embargo was in place, it led to a surge in crude oil prices. The cost for a barrel of oil back then soared 300% from $3 to $12. It was a natural weapon for the Saudis to take advantage of at the time, and it put a tremendous strain on the U.S. economy. 

And it’s the same playbook that Iran is trying to use today. Yesterday, Iran’s minister of foreign affairs called for a complete embargo against Israel.

However, things are a little different this time around. 

Not only does Iran not have the support for an oil embargo within OPEC but the simple truth today is that this oil weapon wouldn’t be nearly as useful. To put any power behind this strategy, it would absolutely need Saudi Arabia's support — something it currently doesn’t have. 

But this isn’t 1973, and there’s an even bigger reason why an oil embargo today would be impotent. 

They’re forgetting that the United States’ oil industry is in a wholly different position than it was 50 years ago. Back then, our production had just begun to enter into a long, seemingly irreversible decline. 

As you can see below, our oil exports have reached record highs in 2023:

And while Europe has been our largest buyer of oil this year, those tankers would be rerouted in a heartbeat. More importantly, a direct embargo on the U.S. would be just as powerless. 

Remember, one of the direct impacts from the rapid increase in U.S. oil output has been the huge decline in OPEC imports. In 2007, we were addicted to OPEC oil to the tune of over 6 million barrels per day; today, that number has fallen to roughly 1.4 million barrels per day. 

Unshackling ourselves from that dependence on the Middle East for crude oil was the biggest benefit of the shale boom. 

Unfortunately, that doesn’t mean we’re completely free and clear of price shocks.

You see, OPEC knows that it doesn’t have to impose an oil embargo to put us in a tight spot — we’re doing that to ourselves already. 

It’s hard not to be bullish on oil prices right now. Demand is strong, despite what the headlines report; crude inventories are declining during a period when they should be building. 

Most important of all is that we’ve lost the tools we’ve had — such as our strategic reserves — to help ease prices during a price shock. 

And it’s opening up a huge window of opportunity elsewhere.

Stay tuned.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.

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