Just a year ago, probably nobody in the world would have believed that a military or crisis in Middle-East could have such a cataclysmic impact on the global economy. Of course, understandably, even to this day Oil remains a potent geo-political and geo-economic tool or weapon, decades after the energy crisis of the 1970s. Interestingly, both the energy and oil crises of 1973 and 1979, Iran did play a pivotal role. In 1973, even though Iran was only a non-Arab member of OPEC, it did not pro-actively participate in the crisis but under the Shah, Mohommed Reza Pahlavi, played a seminal role in massively increasing the price of oil leading to a full-blown crisis.

Oil crisis of 1970s and thereafter:

The genesis of the 1973 oil crisis was the surprise military attack on Israel by a coalition of Arab States led by Egypt and Syria on 6th October 1973, the holiest day of the Jewish calendar known as Yom Kippur. Precisely, 50 years later on 7th October, 2023, the day of Yom Kippar, Palestinian militant group, Hamas, attacked Israel leading to the still unresolved Gaza War. At that time many political thinkers and pundits thought that the global attention would, seismically, shift from Ukraine invasion by Russia to Israel-Palestine conflict. Yes, it did but yet the Ukraine conflict still continue as certain Western countries were assisting Ukraine militarily, despite completion of the fourth year of invasion on 22 February 2026. It might be ironical as well as fortuitous for any discerning geo-political observer that Oct. 7 happens to be the birthday of Valdimir Putin of Russia. The oil crisis of 1979 was of course the Iranian Revolution followed by Iran-Iraq conflict. The price of oil did surge significantly leading major economies including US to a recession.

The world witnessed oil spikes in July 2008, at the height of the economic and financial crisis precipitating the Brent Crude to reach all time high of USD 147. Then followed “Arab Springs” in 2012 as well as Iran exploiting the situation. In this context, Iran was both a “victim” of sanctions and “contributor” to the crisis with threats to close the Strait of Harmuz leading to creation of an “Iran Premium” on Oil by an additional USD 15 per barrel. This led oil to reach over USD 125 by April 2012. Then, of course, Ukraine-Russia conflict experienced oil reaching USD 120 in June 2022, when the world, mostly developing countries such as Sri Lanka, were recuperating from annihilatory COVID. Amongst others, it was of no surprise that Sri Lanka experienced one of the worst political upheavals leading to defaulting of sovereign debt. This episode of 2022 in Sri Lanka was only a “spark” of decades of dereliction and negligence of much needed political & economic reforms by successive Governments and political apparatuses. As noted Nobel Laureat in Economics, Edward Prescott, stated quote “You need a real crisis before you to have reforms” unquote.

Today, the Brent Crude and West Texas Intermediate (WTI) Oil are hovering around USD 110 and if the crisis continues, it would surge to well over USD 150 to 200. The 12 member and 11 plus member OPEC produce approximately 65 million barrels per day (bpd), according to Energy Information Administration (EIA). Even after over five decades, still oil rich or endowed nations/nation could weaponize oil, particularly, in the region of Middle East. The Straits of Hormuz is widely considered as most pivotal maritime oil chokepoint as the primary artery of around 20% of global energy.

Seminal nature of oil and gas to the global economy:

The strategic geographic location of Iran is most unique, to say the least, as it borders three continents i.e. Asia, Africa and Europe, thus reflecting the global volatility of the aforesaid conflict on a global basis. In 1970s during the oil crisis, the world used and consumed over 60% of total energy consisting of oil & gas. Today, as a percentage, it has declined to about 30%, yet the consumption quantity is approximately twice as in 1970s. For record, the total oil production is around 100 million bpd plus or minus and US consumes 20% or 21 million and China 16 million bpd, India 5.5 million bpd and followed by Japan, Saudi Arabia, Brazil, Russia and South Korea respectively. Sri Lanka, supposedly, consumes around 100,000 bpd. In simple math, USD 10 movement means a difference of USD 30 million a month or USD 360 million a year.

It is quite baffling and obfuscating to any perspicacious mind or political analyst that since energy or oil & gas is often been described as, the lubricant which makes the world move, could be effortlessly and deftly weaponized, thus making the energy reliant and depended nations, such as Sri Lanka, strangulate or suffocate not only economically but politically as well. Many developed nations wished and also executed processes to minimize the dependency on Oil and Gas in 1980s but yet the negative impingement reverberate across the world from Sydney, Stockholm to Santiago. The fact of the matter was most countries, literally and metaphorically, depended on oil and gas, primarily other than seeking other energy alternatives. If nation states extract from solar & wind, they could be economically independent as no nation or region could weaponize the Sun or Wind.

Positioning and efficacious posturing of the Government of Sri Lanka:

The Government of Sri Lanka, addressing, extending, balancing and managing the situation particularly given the sinking of a vessel of Iran and extending humanitarian assistance with great efficacy and commendation from the international community. Needless to state the US is the largest economy with 25% of global GDP and the largest export market of Sri Lanka, amongst other economic, political, diplomatic and military endowments. The Middle Eastern countries too are indispensable given over 1.2 million Sri Lankan migrants are employed, It is imperative for Sri Lanka not to align, explicitly, or make any statement other than an immediate resolution of hostilities or conduct diplomatic discussions and negotiations leading to cessation of violence, amongst others. Sri Lanka has established and earned this status since 1956 during the Suez crisis and 1962 India-China dispute, amongst others.

In conclusion, it is encouraging that the Government and Central Bank have lucidly articulated that the foreign reserves were over USD 7 billion and enunciated the length of time that the current stock of oil and gas would be sufficient for the economy and populace for the foreseeable future. These factual sentiments are central and requisite to educate and enlighten the populace of the country in the midst of an imminent crisis. As 16th US President, Abraham Lincoln stated during the height of the Civil War in 1860s, quote “I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts”. Unquote.

Writer is a former career Ambassador, Professor and Examiner of International Economics with specialization on Geo-economics and Geo-politics, Board Member, and Strategic Advisor. He earned the MBA from San Francisco State/University of California, PhD from Indian Institute of Technology (IIT) Delhi and is a Senior Fellow at Harvard. He could be reached on mendissaj24@gmail.com

By Prof. A. Saj U. Mendis