Oct 29 (edited) • 📊 Industry Analysis
Oil Prices during the 1973 Yom Kippur war
The solid line in the attached figure shows crude oil prices in US dollar per barrel. These are nominal prices from 1973-1975 - the actual dollar amounts paid at that time, not adjusted for inflation. By the way , If these prices were adjusted to 2025 dollars, they would be much higher. For example, the ~$12 per barrel price in 1974 would be equivalent to roughly $75-80 per barrel in 2025 dollars after accounting for inflation over the past 50+ years.
The chart shows the dramatic price shock in its historical context - oil going from $4-5 to $15.50 per barrel was a massive jump at the time, even though those numbers seem relatively small by today's standards.
The chart illustrates the 1973 oil crisis triggered by the Yom Kippur War. The Yom Kippur War began on October 6, 1973, when Egypt and Syria launched a coordinated surprise attack on Israel during Yom Kippur, catching Israeli forces off guard and making territorial gains. However, Israel with the help of the USA eventually made a successful counteroffensive, pushing back Syrian forces and crossing the Suez Canal into Egypt.
In response to American aid to Israel, OAPEC (Organization of Arab Petroleum Exporting Countries) imposed an oil embargo on the US and other Western supporters of Israel, while simultaneously cutting oil production. This oil embargo was announced in mid-October 1973, and continued until March 1974 (about 5 months total).
The United Nations managed to achieve a ceasefire which ended the war after about 3 weeks. So the war duration was between October 6-25, 1973 (about 20 days).
Oil prices roughly tripled in just a few months:
a) Pre-war (October 1973): ~$4-5 per barrel
b) Post-embargo (January 1974): ~$15.50 per barrel
Prices increased sharply between October 1973 and January 1974.
They then declined in steps to around $13, then $12.
Prices stabilized at roughly $11-12 per barrel through late 1975
However: prices never returned to pre-war levels!
So, while the war itself was brief (about 20 days), the economic impact was prolonged.
The OAPEC embargo and production cuts kept prices elevated for years, fundamentally changing the global oil market.
This ~200% price increase contributed to severe economic disruption in oil-importing countries, including recession and inflation in the US and Europe.
This crisis revealed that oil-producing nations could successfully coordinate to control prices, and they had no incentive to lower them back. Oil demand is highly inelastic in the short term—countries must have oil to function, so they'll pay elevated prices.
Even after lifting the embargo, OPEC maintained lower production levels to sustain high prices. This was deliberate cartel behavior to maximize revenue.
Countries couldn't rapidly switch away from oil dependence, so consuming nations had to accept the new reality. The chart shows this change. The $12 per barrel level became the "new normal" rather than a temporary spike.
In essence, the crisis permanently reset global oil markets. OPEC learned it could extract much higher prices, and the world economy had no choice but to adapt.
in economic terms, OPEC functions as a cartel, though it doesn't officially use that label.
A cartel is a group of independent producers who coordinate to control supply and prices rather than competing freely. OPEC (Organization of the Petroleum Exporting Countries) does exactly this: member nations meet regularly to set production quotas with the explicit goal of managing oil prices.
When OPEC wants to raise prices, members agree to reduce production (limiting supply). When prices fall too low, they may cut production further to prop them up. And OPEC is considered legal because unlike private business cartels (which are illegal in most countries), OPEC is an intergovernmental organization composed of sovereign nations, so it operates outside typical antitrust laws.
Its effectiveness varies: OPEC's power depends on member compliance and market share. Members sometimes cheat on quotas to maximize their own revenue, and non-OPEC producers (like the US with shale oil) can undermine the cartel's control.
The 1973 crisis was OPEC's most dramatic demonstration of cartel power—coordinating an embargo and production cuts to achieve both political and economic objectives, successfully quadrupling prices.
Figure: See the solid line which shows the oil price. Ignore the dashed line.
Source: An article from Financial Times summarised by Dr S Giannelos
Link for the article: https://www.ft.com/content/c618a4c0-740e-4dbf-bbde-192b8b754223
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Oil Prices during the 1973 Yom Kippur war
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