in 1967, the Kingdom of Saudi Arabia had for the first time ever produced over 3 Million barrels of oil a day and was exporting nearly all of it. OPEC had been officially formed in 1960 but up until this point it had been mostly ignored by the world because it had not done anything substantial. On June 5, 1967 open war broke out against Israel with Jordon, Egypt and Syria all uniting in their attacks, and all three being soundly defeated with great loss of territory in just six days.
1967 Oil EmbargoWest Germany, the United Kingdom and the USA all expressed support for Israel in the war and to say the least the OPEC countries were outraged. OPEC declared an oil embargo against sales to the three named nations as retaliation for their support of Israel but within a few weeks it became clear that all this had done was cause oil shipments to change routes. Oil that would have been sold by OPEC to these three countries was instead sold to Japan, or South Africa, or Australia and the oil that these countries would have bought from Mexico or China were simply re-routed to be sold in the USA/UK/West Germany.
The King of Saudi Arabia realized the problem when he got word back from his ambassador in Washington D.C. that people in the USA were quietly laughing at OPEC for being so foolish for not realizing what would happen. Certainly the price of oil in the USA had gone up a small amount because imports now had to come from different sources further away in some cases. However the change in price was not even remarkable enough to be a news item in the American press, a change of a penny or two for a gallon of $0.31/gallon gasoline to $0.33 was trivial to almost everyone.
Therefor the King called an emergency meeting of OPEC on Sunday, July 23, 1967, and convinced the other member states of OPEC which were Venezuela, Kuwait, Saudi Arabia, Iraq and Iran plus the newer members Qatar, Indonesia, Libya, and the newest member having just joined a few weeks earlier the United Arab Emirates to all be present. At the meeting the Saudi representative laid out the case in excruciating detail, the world was not taking OPEC seriously and they were not going to pay attention until the organization did something that actually had an impact on oil prices. The whole concept of Embargo was ineffective because oil was traded on a world market using massive tanker ships to spread sales to every corner of the globe.
Thus were born the OPEC Price rules. Instead of a complex system of quotas set up so each OPEC nation got its fair share of the market while controlling price through export limits the King proposed a different system. Each nation in OPEC would agree to sell its exports for the OPEC price of $4.00 a barrel from now on, with an annual meeting the third Sunday of July every year to set the international export price for the next twelve months. If something drastic happened any member nation could call an emergency meeting which would be held as soon as possible to respond to whatever caused the emergency. To prevent cheating all oil contracts with OPEC members would have to go through the OPEC organization itself and any member caught cheating with outside contracts would be expelled from OPEC for a period of not less than a year.
Furthermore the World oil price in 1966 had been $3.10 a barrel and the new OPEC price was $4.00 so all new contracts sold at the higher price would immediately deliver $3.10 per barrel to the country making the export sale and the remaining $0.90 per barrel would go into an OPEC account held in escrow until the July 1968 meeting at which time the funds would be shared out between the members in a mutually agreed fashion.
When the new OPEC agreement was announced the following day, Monday, July 24, 1967, the western world scoffed. If OPEC wanted to sell oil then by God they would sell it at the price the West was willing to pay, and not a penny more! Over the next few days however the Western powers came to realize that not only was OPEC deadly earnest and steadfast in their refusal to sell for less than the agreed upon $4.00 a barrel, the world did not have the spare export capacity to replace the 14 Million barrels a day of oil being exported by OPEC. Japan and France caved in an agreed to buy at $4.00/barrel on Wednesday and they were quickly followed by most other western nations. The USA refused to buy from OPEC at $4.00/ barrel but quickly discovered that Mexico and Canada were both inclined to not form any more contracts to sell at less than the OPEC price because they could easily export their oil to Europe for that price instead of selling to the USA for a lower price.
OPEC had found a strength the western nations had not been willing to admit was there. The USA had been the world leading oil exporting country for decades but this was no longer the case by 1967. Almost a decade earlier the USA had become a net oil importing nation even though they were producing over 8.5 Million barrels of oil a day they were burning a little over 11 million forcing them to import almost a quarter of their crude oil. In Western Europe it was much worse, the oil fields in France and Germany were never large and the United Kingdom was rich in coal, not liquid fuels. Much of the machinations of the early League of Nations mandates after World War I had been aimed at stripping the oil rich regions away from Turkey so that these territories could be dominated by the western powers with France gaining control of Syria and Iraq while the UK got control of Kuwait and Lebanon. the UK had also jointly occupied Iran with the USSR during World War II and it had retained close ties with that country in the post war period. The USA had cultivated a close relationship with the Kingdom of Saudi Arabia in the 1950's and was the major sponsor of oil development in the Arabian peninsula. In north Africa the French controlled Algeria, the Italians Libya and the UK Egypt through the early 1950's but the USSR had been gaining a great deal of influence in these former colonial holdings and by 1967 relations were at best strained. Now after decades of heavy handed carrot and stick diplomacy where the West bought off important people on the one hand and threatened military reprisals on the other if their wishes were not followed the OPEC nations were presenting a united front. Though not a military alliance like NATO they were quickly proving that making yourself dependent on imports of a crucial energy supply meant you were not as intimidating as you once were. The OPEC minister put it quite bluntly when confronted by different NATO country diplomats. They might be able to overwhelm the OPEC populations militarily, but they would never be able to hold down the populations strongly enough to keep exporting oil from those same nations. Producing and transporting oil against a Guerilla force willing to blow up pipelines and well heads just to keep the NATO countries from stealing the peoples oil was a battle NATO could not possibly hope to win. Especially when the USSR was willing to sell them the explosives and weapons to prevent NATO from carrying out any such threats.
The oil shock that swept the world in the first week of August 1967 was stunning to economists who had frankly ignored the possibility that OPEC would ever manage to stick together and enforce such a policy in the face of NATO nuclear threats. The simple fact of the matter was, with the USSR tacitly acting as a counter weight to the NATO threats the colonialist activities of the NATO countries, even the USA, had found a hard limit in practice. Sure the NATO nations could try something more direct but the threat of igniting World War III on one hand, and the futility of fighting a permanent guerilla war against anti western conquered people in the OPEC countries made such activities much less appealing than simply caving in and purchasing oil at the $4.00/barrel price demanded by OPEC.
There were of course some knock on effects in the USA and NATO countries. For one thing with the world price set at $4.00/bbl it was hard for the Texas Railroad Commission (TRRC), which set production quotas for every well in Texas, to not allow all of its members to produce at the maximum possible rate. For a generation the TRRC had used quota's to allow every well owner to get a share of the oil income generated within the state but not drive prices down by flooding the market. With import prices not almost 33% higher they could safely produce all the oil they had available and still sell it for more than they could have sold it for in 1966. Being naturally cautious they did not blanket permit full production immediately, instead they increased the quota in August, then again in September and October before finally giving 100% quota limits across the board in November as prices remained about $3.72/bbl for West Texas Intermediate even at full production. By the spring of 1968 there was a new drilling boom going on across the USA as companies sprang up like mushrooms to try and get in on the suddenly profitable business of selling oil for nearly $4.00/barrel produced in the USA. While on the one hand consumers complained bitterly that the USA was being held hostage by OPEC and Big Oil paying $0.39/gallon for fuel wasn't really painful for anyone and the sudden burst of oil field work had all but eliminated unemployment in the country. Even many of the 'Hippy' generation who had been protesting the year before discovered that with the new labor demand of the oil companies they could find reasonably well paid jobs and blend in with mainstream society as if they had never been teenage rebels. Most of the 'Hippy' generation did not get oil field jobs directly, but because so many other younger men were pulled into that industry many other jobs were left vacant which made it easy to get a decent paying job. Between the number of former protesters who were too busy now working to continue protesting full time and the general economic boom that appeared to be taking place in spring 1968 LBJ won the New Hampshire Primary race in a landslide of 79% on March 12. from then on his few challengers suffered a massive loss of financial support because everyone assumed LBJ was unbeatable in the Primaries and thus he won a second full term in November 1968 defeating Richard Nixon in his second bid for the Presidency.
The 1968 OPEC meeting in July lead to quite a tumultuous sparring between the member nations over where to set the 1968 OPEC prices. Some of the smaller nation members wanted another dollar increase with all of the increase going to the individual selling state instead of into escrow while others argued that raising prices too far at a step would result in falling world demand. They argued that OPEC had gotten away with a 33% increase because it was easily seen prices had been kept artificially low for years by the influence of the USA. Now there was a drilling boom going on in the USA once again and the higher the OPEC price the more incentive the USA would have to increase drilling and production. Saudi Arabia finally convinced the other OPEC nations to settle for a new price of $4.13/bbl and to share out the escrow account with a formula based on total reserves so the poorest member states got the highest percentage of the escrow moneys from the prior year. This worked well for Qatar and Libya which had meagre resources but not well for Saudi Arabia and Kuwait which had a very high volume of resources compared to their population. For Iran and Iraq with moderate resources and moderate population density it was basically a neutral situation.
In 1969 the USA was setting new records for oil production month after month but it seemed no matter how much they drilled there was always a need to import oil from Mexico or OPEC to make up some of the demand. In response to this continued excess demand President Johnson asked for and got a tariff on imported petroleum products to encourage even more domestic production by artificially raising the price of imported oil even further. This did not have an impact on OPEC because by this time the USA was able to import all its needs from Mexico and Canada because the import gap had narrowed so much already. All sorts of schemes to make the USA "energy independent" were put forth in 1969 and when Apollo 12 successfully landed on the moon in September 1969 the cry was taken up as "if we can land men on the moon surely we can produce all our own energy". One of these schemes was a small pilot plant in Rulison, Colorado that took in natural gas liberated by the nuclear fracking test of the same name and put it through the Fischer-Tropsch chemical process to produce slightly radioactive military jet fuel for the Air Force. The natural gas produced by the fracking test in Rulison was apparently abundant, but the mild radioactivity made it unsuited for use in civilian homes for cooking or heating where the radioactivity would gradually accumulate inside the home. By converting the gas into jet fuel however it was possible for the USAF to designate the synthetic jet fuel for use in Aerial refueling usage only. In this manner it would be used for refueling military aircraft that were already flying at high altitude and the vast majority of any released radiation would be dispersed at high altitude where it would dissipate harmlessly. Whatever synthetic fuel remained in the tanks when the aircraft landed would be moved into a central tank or tanks on the aircraft and the fresh fuel in the other tanks would be used for the next take off and climb to altitude cycle. Unlike most automobiles military aircraft have a whole series of tanks and can shift fuel from one to another relatively easily to help keep an airplane balanced in flight. Even the biggest civilian aircraft like the Boeing 747 had this capability and the Concorde SST under development used it as a vital part of flight control to keep the aircraft stable at high speed flight as the fuel was consumed shifting the remainder around to maintain near perfect balance. The additional fuel was not a huge quantity compared to the amount the USAF routinely burned every day, but with the addition the air force was able to buy slightly less commercially produced fuel.
In 1969 the FAA also issued a crucial new rule for civilian aircraft requiring that any travel exceeding Mach 1 take place at an altitude of 40,000 feet (12,200 meters) or higher as it was determined from testing that at this distance the sonic boom was trivial on the ground. LBJ as a big proponent of the SST actually views the program along with NASA as a kind of high technology jobs program. He also loves the idea of an Air Force version of the 2707 to be his new Air Force One as soon as they get the aircraft flying to replace the 707 he has been using since he became President in 1963. Because of his unremitting support both the 2707 program and the Apollo program remain funded as planned in the early 1960's Apollo 13 safely makes its flight in December 1969 after being fully funded in the 1968 budget and the Apollo 14-20 flights take place the following year holding to the alternating Pad A/Pad B launch schedule with a flight every eight weeks. The only serious failure was the Apollo 11 abort when the fuel indicator mistakenly reported fuel depletion a full minute too early and Neil Armstrong was ordered to abort landing. there had been some additional confusion during the Apollo 11 landing attempt because the docking radar system was accidentally switched on which had in turn caused a series of computer alarms and heightened tension both on the spacecraft and in Houston control center. When the low fuel warning added to the confusion the Houston controller ordered an abort, believing it was accurate and that the crew had taken too long to select a landing site when the programed flight had been over ridden after picking a boulder field to set down in. The tentative landing of Apollo 12 in September was made definitive and the Apollo 13 was confirmed for December to ensure at least one flight would land before the end of the year.
In Vietnam the USSR made a deal with the USA behind closed doors to lower their level of support for Ho Chi Mihn so long as the USA reduced their forces in South Vietnam to 100,000 or less. the war was not achieving much from the Soviet point of view any longer as the OPEC actions with their tacit support had already convinced most of NATO that the status quo was much preferable to a full scale war. The USSR and Peoples Republic of China had also had a political clash that had made supplying Ho more difficult and expensive and the Politburo was eager to cut their expenses in what they now saw as a futile fight after the Viet Cong were devastated in the Tet Offensive. The world balance of power with Vietnam separated into North and South like Korea was an acceptable outcome. This back room deal also let the US Army lower its manpower requirements which rippled through the system as lower numbers of actual draftees being sent off into combat in a war nobody in the heartland of America understood.
OPEC formally adopted the plan in 1970 to escalate prices by the rate of inflation which they calculated independently to maintain their net buying power for international goods and services. For the fifteen years before they set their first export price in 1967 they had seen the world price of oil artificially held steady despite what inflation had been doing to their real purchasing power. They all knew how to love well on the $4.50/barrel they set the price at in July 1970 and turning the pricing over to the inflation study division of OPEC would mean no more having to meet and then conduct long winded explanations for the world. As they put it, each year they would impose a cost of living price increase and if the world didn't buy as much oil then they could always raise the prices far enough to compensate.
In the Middle east the closure of the Suez Canal from the six day war in 1967 had caused the concept of the super tanker to be born. These oil freighters would be so large they would not fit through any canal but could easily weather the storms on the longer route from the Persia Gulf to East Asia or around Africa to Europe. The US Navy ordered a new class of nuclear powered fleet oilers that could haul jet fuel from port to a carrier group deployed at sea quickly without wasting any of the on board fuel storage to move the ship. This would allow the USS Enterprise carrier group to be a fully nuclear powered task force with nuclear powered escort ships and submarines and nuclear powered fuel supplies for the carrier air wing to fly with. In the USSR the success of the Nuclear ship Lenin it is decided to construct a half dozen ice breaker tanker ship capable of hauling 1.7 Million barrels of oil at a time with nuclear power while in France they are building four identical 2 million barrel capacity ultra large crude carriers intended to haul oil using nuclear power around the southern tip of Africa to ports in France. To support these massive ships a special unloading system will have to be built nearly a mile off shore from the port where the ship will be able to attach to a pipeline and pump the crude ashore without actually entering the harbor. This is necessary because for stability the draft on the ships is too great for any existing port to handle the ship while it is fully loaded, they have to pump off at least half of the cargo before they are shallow enough to pull into the dock yard.
The alternative plan is for a pipeline that extends from Persian Gulf across land through Arabia, Jordon and Lebanon where it delivers oil from the gulf to the coast of the Mediterranean where regular tankers can load the oil for delivery to Europe or North America.
In November 1972 just days after losing his bid for election to the Presidency Hubert Humphrey becomes President for three months because LBJ dies of a massive coronary. President Humphrey goes down in history as one of the briefest serving Presidents holding office from November 17, 1972 until January 20, 1973 when Ronald Reagan takes the oath of office. Fearing that the incoming President Reagan might escalate the Vietnam War President Humphrey hastily arranges a cease fire modeled on the one that has kept the peace in Korea for thirty years.