In the midst of the 20-day Arab-Israeli war in October 1973, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the US and a few other countries for their support to the Israeli military. The embargo which included both a ban on petroleum exports to these countries as well as significant production cuts destabilised a pricing system that had already been under fractious negotiations with members of the OPEC.

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In October ‘73, OPEC raised its price by 70 percent to $5.11 per barrel while many of its members also began cutting production by 5 percent per month. Matters came to a head on 22 December, ‘73, when OPEC announced it would be unilaterally raising the price of crude oil to $7 per barrel. As prices at the pump rose for US customers, the administration was forced to look for compromise both in terms of ending the hostilities between the two parties as well as the oil embargo.

Eventually the embargo was lifted a few months into 1974 but the US also took several long- term mitigation measures including the creation of the Strategic Petroleum Reserve, imposition of speed limits for driving on U.S. highways, and eventually the imposition of fuel economy standards which paved the way for the Japanese invasion of the US auto market.

For India the oil embargo and its aftermath had disastrous consequences. When the Yom Kippur war had begun, India, which enjoyed friendly relations with Arab states, had hoped for some favourable treatment. However, with OPEC refusing to adopt a dual pricing system, India became one of the major losers from the ensuing oil shock.

With the nation completely dependent on imports of oil, the bill went up from under $500 million, accounting for 20 percent of the country’s export earnings in 1973 to about $1.3 billion by 1974, around 40 per cent of its potential export earnings, and twice the amount of its existing foreign exchange reserves. The pressure on an already over-strained balance of payments situation was enormous as food production dropped precipitously because of rising oil prices and a shortage of petroleum‐based fertilizers.

Aware of ferment in the global oil trade the government’s fifth Five‐Year Plan, which was to start in 1974, had already envisioned prices climbing to $4.75 a barrel by 1978. The plan therefore accounted for spending about $3.8‐billion on oil imports over the next five years. Instead, oil prices climbed to more than $8 a barrel which meant that the planned $3.8‐billion outlay for petroleum imports would now be exhausted in half that time.

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The government immediately hiked prices of petroleum products with the steepest rise being that of petrol while kerosene and diesel were spared. The net effect was that the growth in the demand for petroleum slipped from 7 percent to zero while imports actually dropped.

Over the next 3-4 years, inflation grew over 20 percent while unemployment rose and food riots were common. The economic impact triggered by the war with Pakistan in 1971, two successive failed monsoons in 1972 and 1973 followed by the rising oil bill, set up the situation for the Emergency of 1975.

One effect of the oil shock was that India’s coal production which had been stagnating at 75 million tons a year over the previous decade, shot up and the country took to mining its huge reserves. Not surprisingly, studies later showed that this gave rise to the persistently high carbon emissions level that we have today.

—Sundeep Khanna is a former editor and the co-author of the recently released Azim Premji: The Man Beyond the Billions. Views are personal

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First Published:Jan 3, 2022 12:58 PM IST