The 1973 Oil Embargo, Research Paper Example

The 1973 Oil Embargo and Its Long-Term Effects on the Israeli Economy

Overview and History

United States military aid to Israel in 1973 brought about an unprecedented response from the Organization of Arab Petroleum Exporting Countries (OAPEC). An oil embargo, or prohibition of sale of oil to the U.S., was declared and remained in force until March of 1974.

The U.S. initiative to aid Israel had been prompted by the Yom Kippur War, which had erupted in early in October. This conflict between Israel and a coalition of Arab nations led by Syria and Egypt was set off by a coalition attack on Israel during the traditional holy day, and Syrian and Egyptian armies crossed into the Israeli territories of the Sinai Peninsula and the Golan Heights, blatantly violating a ceasefire agreement. In issuing the oil embargo, OAPEC was employing a powerful counter-move to the perceived aggression of the U.S. assistance to Israel and, although the settlement would be reached only months later, the effects of this single act have had enormous and longstanding repercussions, chiefly on the economies of Israel and the U.S. More than anything, the vast influence of oil as a vital element in international economics was irrefutably reinforced.

Immediate Effects

No examination of the 1973 embargo’s impact on the Israeli economy can be successfully made without an awareness of how it also affected U.S. economic life. On the U.S. front, the OAPEC action brought about an almost immediate inflation. “America’s consumption of foreign oil was at a high in the early 1970’s, while production of oil on U.S. lands was at an all-time low” (Fehl 2). This dependence on the import aspect of this monolithic resource was felt for the first time to have widespread and economically damaging potential, and measures were immediately taken to lessen the inflationary impact. Interestingly, generations to follow would not necessarily be aware of how national policies were shaped by this one event. For example, “…in 1973 Congress established the fifty-five-mile-per-hour speed limit on the nation’s freeways as a method for promoting energy conservation” (Birkland 266). Gasoline prices had doubled and the automobile-focused life of America was shaken violently.

In Israel, a completely different set of issues were in motion, the economic links between the two nations notwithstanding. It is important to note as well how Israel’s economic situation differed radically before the Yom Kippur war and the embargo. The young nation had experienced extraordinary population growth in a very short time; from 1948 to 1973, it had nearly quadrupled. This is a highly precarious condition for a nation’s economy, and the 1973 war only served to impede progress. “Between 1973 and 1986…the Israeli economy performed very poorly and unevenly” (Marshall 48).

Prior to this, Israel had been enjoying a rise in economic prosperity almost as dramatic as that of its population. As its nationhood emerged, alliances and trade with larger and more prosperous nations showed tangible results, and the Israeli standard of living was remarkably high for a developing nation. In the early 1970’s, U.S. loans to Israel were numbering in the hundreds of millions, and a relatively very small nation can thrive with such an infusion of cash into its military,, industries, and government. There had been an Israeli recession caused by various  reasons in 1966 and 1967, but the general economic forecast had been promising.

The 1973 conflict had, naturally, different consequences for Israel than for the U.S., primarily in that Israel was the nation actively involved in a costly war. “The best estimates have it that the war cost the economy $238 million per day….The total price tag must have come to approximately $4.2 billion, which in turn compared with a GNP of $6 to $6.5 billion” (Van Creveld 168). It is difficult for those only knowing an economy such as that of the United States, where Gross National Product figures run to the hundreds of billions, to appreciate this level of upheaval.

On an immediate level, the relatively brief war nonetheless demanded a much higher proportion of the country’s resources be turned to the military, and Israel largely depend on foreign aid to accomplish this. What followed for Israel was a strange and vast economic irony; as foreign aid greatly enabled it to devote funds to manufacture of military weapons and materials, initially essential in fight the war with OAPEC, Israel quickly turned this urgent occupation into an industry and became a worldwide leader in exporting arms. This, however, did not yield immediate rewards in the next few years: “What aggravated matters is that the world economy went into a recession after 1973…Israel’s economic growth slowed down” (Geldenhuys 299). As it would turn out, the 1973 oil embargo caused by the Israeli/OAPEC war would have long-term impact on both Israel’s economy, and how it necessarily interacted with the global economy.

Long-Term Effects

In understanding how the 1973 embargo shaped Israel’s economic future, a wider view of the responses of other nations to it, and how these responses in turn affected that economy, is necessary. In particular, Egypt, important member of OAPEC and essentially half of the invading force of the Yom Kippur war, was to play a crucial role. In essence, the war prompting the embargo had to end before any nation involved could attend to its economy.

Egyptian President Anwar El Sadat was confronting national difficulties of his own in the the early 1970’s, and the assault on Israel did not enhance his country’s standing in the global community of superpowers, and Sadat was intently bent on alliances with the U.S. which would translate to economic aid. He maintained from the outset that the war had been solely begun to secure lands rightfully Egyptian, and that no other hostility was intended. Moreover, Sadat needed a speedy resolution to the war because Egypt, with no U.S. support and with the embargo effectively eliminating a vital revenue flow, simply could not afford to fight it.

Consequently, one long-term result of the ’73 embargo was that attempts to secure a lasting peace between Egypt and Israel were seriously pursued by all parties in the ensuing years. In 1977, Sadat visited Jerusalem and conferred with Israeli Prime Minister Menachim Begin in a demonstrative effort to make peace. In March of 1979, the Egyptian-Israeli Peace Treaty was signed at Camp David, and both Sadat and Begin received Nobel Peace Prizes for the achievement.

These efforts notwithstanding, Israel underwent a ten-year period of deep economic trouble due to the 1973 war and embargo. Inflation consistently rose, growth was stagnant at best, and government expenditures reached all-time highs. “The Israeli government was getting deeper into debt…with foreign payments helping to support the export drive of U.S.-based military contractors” (Wright 91). The war, lasting less than six months, had set into motion forces which would stall the Israeli economy for years. Moreover, that shifting of funding into defense and military operations created an imbalance in the Israeli economy which would remain in effect until the early 1980’s. In the Israeli economy of the later 1970’s, military and banking interests would remain the core expansions in an otherwise troubled national financial scenario.

However, this circumstance led to a complete reinvention of the Israeli economy, and one that holds today. Three distinct business models emerged and gradually became the focal points of the economy as a whole: the manufacturing, banking, and the more diversified, family-owned sectors. A large number of firms were contained within each model, and these were owned by holding companies which in turn were owned by parent companies. This was a complex, vertical network taking shape out of necessity and taking advantage of the opportunity allowed by the virtual elimination of the previous economy. Moreover, as the process took shape, a parallel between American economic structuring became evident: “The government…gradually started to loosen its central role in the economy, moving from direct economic involvement to policies of indirect support and subsidization” (Colpan, Hikino, and Lincoln 468). It was clear that Israel, radically attempting to readjust and successfully come out of the damages of the 1973 experience, was using the United States as an economic template.

By the mid-1980’s, ten years after the embargo of 1973, Israel’s economy was largely in the hands of large parent companies which held control over most of the industries in operation. It was a pyramid economy, and it was working. Most significantly, the lessening of government-owned businesses was having a massive impact. By 1993, government ownership of business would drop to below ten percent. Added to this was the enormous impact of the Economic Stabilization Act, for this effort, initiated to curb inflation, called for dramatic cuts in funding for in the military budget.

Viewed from the perspective of difference, there is a logic evident in Israel’s economic trajectory following the war of 1973. When war erupts in any nation, the economy must swing in a direction whereby government is empowered to hold the reins. The very existence of the nation is in the balance and the business sectors typically relinquish fiscal authority to the government during such times, whether that authority is mandated or not. Wars, however, end, and an economy such as Israel’s must reinvent itself in order to provide the societal foundation an economy essentially is.

One other component emerged in the aftermath to the 1973 embargo as vitally impacting upon Israel’s economy: the great surge in immigration largely set in motion by the break-up of the Soviet Union. Obviously, there is no direct link between the embargo and the dissolution of the Soviet Union. Nonetheless, at that time, the USSR was funding arms for Syria and Egypt as the U.S. was supplying Israel, and the changes in oil import policies following the war would have a severe impact on the reserves of the Soviet Union. It is argued that a main cause of its break-up, in fact, was due to a chain reaction: The U.S. encouraged Saudi Arabia to lower its prices to such an extent that the Soviet Union could no longer realize profits from selling that oil, and this is clearly a result of the oil industry which emerged following the embargo.

Most importantly, this tide of Soviet immigration in the late 1980’s added immeasurably to Israel’s economy, in that it was characterized by educated and skilled individuals. It would prove to be the final component in completing the structure of a new, multifaceted economy for Israel, introducing a population capable of enhancing, rather than depleting, the economy.

Conclusion

The oil embargo of 1973 serves as a lesson in how a sudden invasion in a small and developing nation has effects on the economy both immediate and long-term. Initially following the route of an intense concentration of resources into defense, Israel crippled its economy for survival purposes. In the aftermath, however, the need for a stable, peace-time economy  manifested itself and, in a sense, grew from the ashes of the war.

Works Cited

Birkland, T. An Introduction to the Policy Process: Theories, Concepts, and Models of Public Policy Making. Armonk, NY: M. E. Sharpe, Inc., 2010. Print.

Colpan, A. M., Hikino, T., and Lincoln, J.R. The Oxford Handbook of Business Groups. New York, NY: Oxford University Press, 2010. Print.

Fehl, P.  Energy. New York, NY: Infobase Publishing, 2010. Print.

Geldenhuys, D. Isolated States: A Comparative Analysis. New York, NY: Cambridge University Press, 1990. Print.

Marshall, E.S.  Israel: Current Conditions and Historical Background. Hauppauge, NY: Nova Science Publishers, Inc., 2002. Print.

Van Creveld, M. The Land of Blood and Honey: The Rise of Modern Israel. New York, NY: St. Martin’s Press, 2010. Print.

Wright, J.W. The Political Economy of Middle East Peace: The Impact of Competing Trade Agendas. New York, NY: Routledge, 2001.