The Embargo That Was Not the Crisis

In October 1973, Arab oil producers announced an embargo on shipments to the United States and several other countries, in response to support for Israel during the war that month. Over the following months the price of oil went from around three dollars a barrel towards twelve. There were queues at American filling stations, odd and even number days, lowered speed limits, and a permanent change in how the industrialised world thought about energy.

It is the case everybody reaches for when arguing that resource embargoes work.

The economics says almost the opposite, and the reason is one word: fungible.

Oil is a commodity with a single world price. A barrel in a tanker is not addressed to anybody; it is a cargo that can be sold to whoever will pay. When producers refused to ship to the United States, cargoes already at sea were redirected to buyers who were not embargoed. Those buyers now had more oil than they had contracted for. Other cargoes, destined for them, were freed. American refiners bought those.

The trade re-formed around the obstacle within weeks. A retrospective analysis by Resources for the Future describes the embargo as largely symbolic and finds an effective rerouting of world oil flows spared the intended targets any major disruption of supply.

So where did the price shock come from?

From production decisions, which are a different instrument. Producers cut output as well as announcing the embargo, and output cuts raise the world price for everybody including the states not being embargoed. From demand, which had been rising fast in the United States for years as domestic production plateaued. And from panic buying: industrial importers, uncertain what was coming, bought aggressively into inventory, which is exactly the behaviour that turns a supply worry into a price spike. The price had already been climbing before October.

Then the queues, which are the most vivid memory and the least related to crude.

American oil prices were controlled, and the allocation of refined products was administered by federal rules that directed supply by formula rather than by price. Controlled prices meant demand did not fall as supply tightened. Administered allocation meant product arrived where last year's figures said it should rather than where this year's drivers were. The retrospective analysis attributes the shortages largely to that regime. The crude was arriving. The petrol was in the wrong places at prices that could not clear.

The embargo on the United States was lifted in March 1974, about five months after it began.

Put this beside the sanctions lesson and the two make one argument.

Economic coercion works when the target cannot substitute and the instrument cannot be routed around. Dollar clearing satisfies both: there is one system, one chokepoint, and no alternative that works at scale. An oil embargo satisfies neither: the good is fungible, the market is global, and a refused cargo frees an identical cargo somewhere else.

So the question to ask before any economic measure is not whether the target will feel pain, and not how determined the target is. It is whether the pain can be redirected, and who holds the only door. Where there is no single door, what you have is a gesture with a price shock attached, and the price shock will be felt by everybody including the people who imposed it.