Oil shock of 1973: Could it happen again in 2023?

The Israel-Hamas conflict has brought back the memories of Yom Kippur War that triggered the 1973 oil crisis and had a devastating effect on the economies world over.

Arab members of the Organisation of Petroleum Exporting Countries (OPEC) had imposed an embargo against the US and a few other countries for their support to the Israeli military in the midst of the 20-day Arab-Israeli war in October 1973. 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.

The 1973 oil crisis

OPEC raised oil prices by 70% to $5.11 per barrel in October, 1973 while many of its members also began cutting production by 5% per month. Matters came to a head in December 1973, when OPEC announced it would be unilaterally raising the price of crude oil to $7 per barrel.

The oil embargo and its aftermath had disastrous consequences for India, even though the country shared friendly ties with Arab states when the Yom Kippur War had begun. India hoped for some favourable treatment, but became one of the major losers from ensuing oil shock with OPEC refusing to adopt a dual pricing system.

Yom Kippur War

Yom Kippur War started when Egypt and Syria launched a two-front attack on Israel to regain their territories lost in the 1967 Six Day War when Israel captured the Sinai Peninsula in Egypt and Syria’s Golan Heights. Egypt regained control of Sinai but Syria’s Golan Heights remains occupied by Israel. The aftermath of the war contributed to the shifting political dynamics between Arab nations and the United States.

Interestingly, the Hamas’ unprecedented attack on Israel came almost exactly 50 years after Yom Kippur War. The ongoing Israel-Hamas conflict has already claimed 3,000 lives on both sides and is expected to escalate in the coming days with Israel mulling ground operation in Gaza.

Sensex, Nifty fall

Equity benchmark indices Sensex and Nifty declined for the second straight session on Friday following selling in banking, financial and select IT shares amid a weak trend in global markets.

The 30-share BSE Sensex dropped by 125.65 points or 0.19 per cent to close at 66,282.74 as 16 of its constituents fell and 14 advanced. The broader Nifty of NSE fell by 42.95 points or 0.22 per cent to close at 19,751.05, with 27 of its components ending in the red and 23 in the green.

Indian stock markets started the week on a negative note. The equity benchmarks snapped a two-day winning streak on Monday and closed lower, as the Israel and Hamas war hit the market sentiments. The market sentiments turned positive on Tuesday, the key indices ended with significant gains amid positive global cues. The positive global cues lifted the domestic market sentiments on Wednesday. Stock market indices ended the volatile session with minor cuts on Thursday. Markets were opened gap-down on Friday, as the US Treasury yield spiked after consumer inflation and weekly jobless claims data. The market sentiments were further hit after the weak economic data released in China.

Meanwhile, gold prices too have surged to their highest level in over a week in response to the ongoing Israel-Hamas war and dovish comments from key US Federal Reserve officials, according to reports from Reuters.

For the second day in a row, both gold and silver prices have recorded a hike on the Multi Commodity Exchange (MCX) on Friday. Gold futures, maturing on December 5, 2023, stood at Rs 58,050 per 10 grams on the MCX, after recording a marginal hike of Rs 122 or 0.21 per cent. Similarly, silver futures, maturing on December 5, 2023, also witnessed a jump of Rs 393 or 0.57 per cent and were trading at Rs 69,475 per kg on the MCX.

Oil prices up

The Israel-Hamas conflict has sent oil prices soaring, extending a volatile run for energy markets spooked by violence in one of the world's biggest crude-producing regions. Brent crude futures rose more than 4% to top $89 a barrel, before paring some gains. West Texas Intermediate futures rose over 4% to more than $86 a barrel, before retreating somewhat.

Traders said the possibility that the Israel-Hamas war escalates over the weekend fueled Friday’s rise in oil prices. Israel’s military has massed troops at the southern border with Gaza, in preparation for a potential ground invasion, and signaled a broadening offensive by asking civilians to move to the southern part of the enclave.

While the prevailing situation in the conflict zone is grave, the dependence on fossil fuel is far lesser now, thanks to green energy. Yet, an oil shock, were it to recur, would hit economies worldwide.