In some ways our current oil price bust reminds us of what happened 30 years ago. In other ways, our economy is better prepared for it. The following is an excerpt from an article by Russell Gold:
During the last big supply-driven oil bust, demand had been muted for several years, in part because of conservation measures Americans embraced after the Arab oil embargo in the 1970s. The country adopted energy-efficiency standards for cars, while using oil to generate electricity fell out of favor.
Meanwhile, oil output outside OPEC grew rapidly. Production in the North Sea surged, as did output from China and Oman. Mexico began shipping more than one million barrels a day in 1981 from its Cantarell complex. Even the American oil industry had started pumping more oil from its high-cost oil fields.
And so a glut developed. At first, as oil prices began retreating, Saudi Arabia tried to bolster prices by cutting its production, which fell from 10 million barrels a day in the early years of the decade to 2.3 million in August 1985, according to the U.S. Energy Information Administration. Late that year, tired of losing market share to rising oil exporters, the Saudis threw in the towel and began pumping again—and so did the rest of OPEC.
Global oil prices went into free fall, declining from over $30 a barrel in November 1985 to nearly $10 by July 1986. The U.S. oil industry basically shut down. In late 1985, there were nearly 2,300 rigs drilling wells; a year later, there were barely 1,000.
Prices spiked upward a few years later, prompted by Iraq’s invasion of Kuwait in 1990. But that didn’t last long, ending in 1991 once Operation Desert Storm pushed Iraq out of Kuwait and the fires set by retreating forces were put out. Afterward, prices remained low, bouncing between $15 and $25 until the end of the decade.
It wasn’t until about 2000 that supply began to struggle to keep up with rising demand. Global economic growth, especially in Asia, pushed demand for crude as the Chinese middle class began driving cars. Chinese oil imports, virtually nonexistent in 1985, have risen steadily ever since. On Tuesday, Chinese data hit a record of about seven million barrels a day.
Prices spiked in the summer of 2008, then plunged when the economy crashed and went into recession. But the price drop was brief and prices rebounded quickly. Today, demand for crude is growing, albeit slowly, around the world. The health of the global economy and Chinese appetite for fuel will have a significant impact on global and U.S. crude prices. An outside event—warfare or civil strife in a major crude-producing country—could raise prices again.
As in the past, Saudi Arabia is betting that low prices will force other producers to cut back. Falling prices will hurt U.S. output, but perhaps less than OPEC expected. The cost of producing oil from shale—especially in the new U.S. oil fields responsible for a huge upsurge in output—has been falling.
ConocoPhillips, a major U.S. oil producer, says it can make a profit on its U.S. shale wells as long as oil trades for more than $40 a barrel, a figure that has been falling in recent years. A Conoco spokesman said improved efficiency, better technology and a better understanding of the rocks helped the company reduce costs.
Via WSJ.com
image credit The Toronto Star Zuma Press
