Chairman and CEO
The Institute of Energy Economics, Japan
-50 years after the First Oil Crisis: Lessons to remember today-
Message for February 2023
This year marks the 50th anniversary of the First Oil Crisis that took place in 1973. As we are again in the middle of a global energy crisis, it is important to look back to 1973 and draw lessons that can be incorporated into our response to the current crisis.
1. What happened in 1973?
On October 6, 1973, the Yom Kippur War began as Egypt and Syria suddenly attacked Israel. The Arab oil embargo followed soon after, causing the First Oil Crisis. With the Arab nations cutting oil exports to “unfriendly countries”, oil consuming countries fell into panic-mode. I am old enough to recall that Japanese consumers were panicking and were quickly buying consumer goods, such as toilet paper.
The oil consuming countries scrambled to secure as much oil as possible and from wherever they could. The panic buying by the oil consuming countries aggravated the actual shortage of supply originally caused by the embargo and, as can be expected, this resulted in a four-fold increase in crude oil prices. The oil price hike soon led to high inflation globally, which in turn forced the central banks to substantially raise interest rates. The result was global stagflation.
2. The response to the 1973-1974 Oil Crisis
In order to reduce their dependence on oil, the oil consuming nations strengthened their efforts to enhance energy efficiency and develop alternative energies including nuclear power, LNG and coal. They also engaged in the development of non-Middle East oil reserves, including from the North Sea and Alaska. The scramble and competition to obtain oil resulted in a much more serious price hike than the impact of the actual shortage of oil should have caused. With this painful lesson, IEA was created in 1974 by countries member of the Organization for Economic Co-operation and Development (OECD) to share information and to coordinate their activities better. As such, a coordination mechanism led by IEA was developed and strategic oil reserves were substantially strengthened.
3. The energy crisis of 2022-2023
Russia’s invasion into Ukraine on February 24, 2022, took place when the global energy markets were already tight due to years of underinvestment on the supply side and a growing demand owing to the recovery of activities following the COVID-19 pandemic. The world was at that time heavily dependent on Russian energies, especially natural gas.
As part of the resulting economic sanctions, the Western countries tried to cut the revenue sources of Russia and reduce its capacity to export energy. That caused energy prices to increase rapidly, just like in 1973-74. Facing the price hike in the oil market, many emerging and developing countries are seeking access to ‘discounted Russian oil’, against the wishes of the Western countries. On the other hand, by cutting imports of Russian oil, the Western countries are finding that their dependence on Middle East oil is rapidly increasing. In the case of Japan, the current oil dependence on the Middle East is higher than it was before the First Oil Crisis. Years of underinvestment by Western companies due to pressures against further development in fossil fuels, citing concerns about the global climate, have not helped from a supply perspective.
The situation for natural gas and LNG is much more serious. With the prospect of cutting Russian supply of natural gas, European countries rushed to procure natural gas and LNG from wherever they can. As a result, natural gas and LNG prices have soared. While the European countries could afford to buy LNG at higher price as the “premium buyer”, many other countries which have considered LNG as the main pillar of their strategy to reduce CO2 emission, are being hit badly, making the transition from coal to gas very expensive. The burden is very serious among the emerging and developing countries, especially in Asia. Many of them are forced to return to coal to meet their energy demand, which is clearly against the global agenda to combat climate change.
To make matters worse, there are still considerable pressures against investing and financing for fossil fuels making the expansion of supply capacity for fossil fuels, including natural gas and LNG, constrained. Competition to procure natural gas and LNG is currently taking place in a “zero sum game”.
4. What should be remembered today from 1973?
In response to the First Oil Crisis, the oil consuming countries strengthened their efforts to enhance energy efficiency and develop alternative energies, including nuclear power. For the current energy crisis, the promotion of energy efficiency should continue and renewable energies should be further developed. We must, however, also face the reality that oil and gas will be indispensable for decades to come. Their role may be reduced over time, but it will still remain significant.
Just like the oil consuming countries expanded development of non-Middle East oil 50 years ago, there is a need today to develop non-Russian oil. We also need to alleviate our heavy dependence on Middle East oil, which is significantly raising its share in the global oil market. This will require investment.
Compared with oil, for which a number of sharing mechanisms have been developed after the Oil Crisis, natural gas and LNG lack comparable mechanisms. As we face a natural gas and LNG energy crisis today, we urgently need to strengthen their energy security.
There must be a comprehensive sharing of information among the natural gas and LNG consuming countries and better cooperation/coordination mechanisms to avoid scrambling and competing against each other to obtain natural gas and LNG which make the shortage much worse.
More investment to expand the supply capacity for non-Russian natural gas and LNG is required and vital to overcome the “zero sum game”. In order to ensure and facilitate the investment, restrictions against financing for these projects by the governments, multilateral development banks and the private financial sectors must be reviewed and relaxed.
As it is not realistic and extremely costly to store LNG, the establishment of mechanisms such as the Strategic Petroleum Reserve are very difficult to introduce. However, the absence of any defense mechanism would expose the LNG consuming countries to shocks. We must be creative in this regard.
Japan has recently introduced a system that would help companies secure Strategic Excess Stock of LNG in case of supply disruptions. It is to ensure that excess LNG supply is kept to alleviate contingencies.
Flexibility of LNG contracts would also be very important to allow the supply of LNG to go where it is most needed. The development of a liquid LNG market would also help us respond to contingencies. In this regard, expanding the LNG market in Asia through broader participation of countries would be valuable.
5. Ensuring consistency with 2050
Just looking back to 1973 is not enough; we must consider the future as well. We have to ensure consistency between today’s actions and our goal to achieve carbon neutrality by 2050. Investing today in fossil fuels to enhance our current energy security must also be consistent with the long-term goal.
So how can we ensure the consistency? The answer is through “the decarbonization of fossil fuels”. For example, we can produce clean hydrogen from the newly invested natural gas. The CO2 emitted by the process to convert fossil fuels into hydrogen can be captured, used and/or stored using CCUS technologies.
But to turn this into reality, further innovation, diffusion of technologies, substantial cost reduction, global accounting of CO2 emission, criteria for clean hydrogen, development of supply chains and massive investment are all necessary. Global cooperation is absolutely required.
6. The challenges for 2023
In response to the First Oil Crisis in 1973, the world developed alternative energy sources and various mechanisms to enhance energy security, especially for oil. As we face another energy crisis today, we must again enhance our energy security, especially for natural gas and LNG this time.
The origin of the G7 Summit meeting goes back to the response to the aftermath of the First Oil Crisis. It started as G6 in 1975 and was expanded to G7 the following year.
This year, Japan will host the G7 Summit Meeting in Hiroshima in May. In light of the history of the G7 Summit meetings, I believe that it would be one of the missions of this year’s G7 Summit Meeting to enhance energy security, in particular for natural gas and LNG. To realize this mission, we need to learn from the lessons of the First Oil Crisis as well as to ensure consistency with the future. Investment, cooperation, coordination and flexibility are all necessary.