The 40th anniversary of the Arab Oil Embargo offers a unique opportunity to reflect on four decades of developments in the energy sector in the United States and around the world. In many ways, the shock of the embargo helped reshape the world energy sector, yet four decades later many of the same problems faced in 1973 persist, especially in the United States.
To a large extent, fossil fuels continue to power global economic growth and energy security, and the competition for these resources remains a significant concern for governments around the world. Just as in 1973, the Organization of the Petroleum Exporting Countries (OPEC) and the oil that its member states produce continue to be an undeniable force in global geopolitics. OPEC’s hold over 81 percent of the world’s proven crude reserves gives it a largely unchecked control over international oil prices, which it achieves by setting OPEC-wide production targets.
Although OPEC has played a key role on the production side of the international oil market over the past four decades, the consumer landscape has changed dramatically since 1973. Significant economic growth in the developing world has led to increasing competition for energy resources. Oil demand in developing countries topped demand in the industrialized nations of the OECD for the first time ever in April 2013, a drastic change from just a decade ago when all developing countries combined consumed only two-thirds of the oil used in OECD member states (by volume).
Led principally by rapid growth in China, who now rivals the United States as Saudi Arabia’s largest client for oil exports, these developments have significantly altered international oil markets. In spite of rapidly growing global demand in emerging markets, OPEC’s oil production remains at 30 million barrels per day, the same volume produced in 1973, contributing to prices per barrel that are 5.5 times higher than at the time of the embargo.
Despite the challenge of moving beyond fossil fuel dependence, the necessary technologies now exist at a commercially deployable scale and cost to ensure that the development pathways of the past do not need to be repeated. Renewable energy technologies are no longer “alternative” energy options; rather, they are mainstream energy sources that are increasingly meeting the energy needs of populations around the world. Likewise, around the world, natural gas is increasingly edging out dirtier burning fuels such as oil and coal.
For renewables, the cost barriers that existed 40 years ago are a thing of the past. The cost of solar pholtovoltaics (PV), for example, has decreased 99 percent since the late 1970s, falling from US$76.67 per watt in 1977 to US$0.74 per watt today. Cost reductions in solar PV and other renewable technologies have been met with notable increases in capacity. Modern renewables, including hydropower, now account for 9.7 percent of global final energy consumption and 21.7 percent of global electricity production. Non-hydro renewables now account for 5.2 percent of global electricity generation, up from less than half a percent at the end of the 1970s.
Even major fossil fuel exporters are beginning to recognize the benefits of renewables. Gulf States such as Qatar, Saudi Arabia, and the United Arab Emirates have all set targets to develop new renewable energy capacity. Yet although renewables such as solar and wind can be critical tools in transitioning the global electricity sector away from oil, this is only one part of the larger challenge.
The U.S. experience over the past four decades shows the difficulty in completely transitioning away from petroleum fuels and achieving the politically important “energy independence” that has been espoused by all presidents since Richard Nixon. In certain ways, development within the country has come full circle. The United States was the world’s largest oil producer in 1973 and, as of this month, it outpaced both Russia and Saudi Arabia to become the world’s top oil and gas producer. Although oil from the Persian Gulf now accounts for only 9.6 percent of U.S. consumption, this is nearly 5 percent greater than at the time of the embargo. And despite growth in domestic production, the United States still remains dependent on fuel imports to satisfy over a third of its oil demand, the same share as in 1973.
Coal, natural gas, nuclear, hydropower, and to a lesser but growing degree other renewable technologies now provide 99 percent of U.S. electricity. Oil, however, continues to be used extensively in the transportation sector, where petroleum fuels account for 97 percent of the fuel mix. Because transportation is the country’s second largest energy-consuming sector, this is quite significant.
Despite efforts to maximize the efficiency of fuel use in U.S. transportation, little emphasis has been placed on fuel switching, thus preserving oil’s prevalence as a crucial component of the energy mix. Unfortunately, simply maximizing the efficiency of oil use in the transportation sector has not reduced U.S. price vulnerability. Although the United States has been successful at reducing demand for oil imports over the past decade, over the same time period the value of crude has increased fourfold, leading to a doubling of U.S. foreign oil expenditures.
Of course, 40 years removed from the Oil Embargo there are many reasons beyond energy security concerns to transition away from fossil fuels. The past 40 years of oil dependence in the energy sector have had an extremely detrimental impact on the global environment and is the major driver of climate change. With the impacts of climate change already being felt, it is clear that we don’t have another four decades for a shift away from oil to occur.