Oil Bust of 1986 Reminds U.S. Drillers of Price War Risks

[Purveyor]

By Asjylyn Loder Nov 26, 2014 12:15 PM ET

Nov. 26 (Bloomberg) -- Bloomberg’s Isaac Arnsdorf and Matt Miller examine comments from OPEC and United Arab Emirates ahead of the OPEC oil meetings in Vienna and the threat of an oil price war. They speak in "On The Markets" on "In The Loop.”

The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.

In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.

“1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”
Photographer: Hassan Ammar/AFP/Getty Images

A general view shows tanks at the Saudi Aramco oil facility in Dammam city, 450 kms... Read More

The Organization of Petroleum Exporting Countries, responsible for about 40 percent of the world’s output, pumped 31 million barrels a day in October, exceeding its official target of 30 million. Oil has tumbled more than 30 percent from a 2014 peak in June.

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http://www.bloomberg.com/news/2014-11-26/oil-bust-of-1986-reminds-u-s-drillers-of-price-war-risks.html

[louis-t]

1. I had an English teacher in high school in '74, a really wise, older lady

who promised "As soon as gas gets to $1 a gallon, you'll be able to get all you want." She was right, of course.
Her best story was about working in Chicago in the '30s and being nearby when the St. Valentine's Day Massacre took place.

[upaloopa]

3. I remember buying gas for .25

That was around 1970

[louis-t]

7. I think that was the cheapest I ever paid

during a gas war. Normal price was .32 for reg, .33 for premium when I started driving.

[upaloopa]

2. Shouldn't this analysis show tea party folks

that Obama and tree huggers are not responsible for gasoline prices?
Will it show them who controls oil prices?
Oh course not.

[House of Roberts]

4. The action the Saudis took, for whatever reason,

had the effect of greatly reducing the Soviet Union's oil revenues, at a crucial time in their Afghanistan debacle. It ultimately helped to bring down the Soviet Union.

[Ex Lurker]

5. A friend of my parents was caught up in the boom and bust cycle of the seventies and eighties

He grew up in poverty, started drilling wildcat wells, hit a few, and became a millionaire several times over. Like Jett Rink in the movie Giant, except he's as nice a person as you'll ever meet. Come the oil bust, he was flat broke and had to start all over. He's gradually built himself up again and is doing fine now, but not like in the glory days.

[Jenoch]

6. I remember a joke from 1986.

How do you make a small fortune in the oil business in Texas?

Start with a large fortune.

[Spider Jerusalem]

8. It's not 1986 anymore.

The Saudis no longer have the spare capacity to significantly flood the market to a point that will lead to substantial and longterm price collapse. The decline in the US oil industry wasn't just because of the 1980's oil glut bankrupting producers, it was because of longterm production declines in mature fields. Onshore conventional crude production peaked in 1970. Offshore drilling in the Gulf of Mexico made up the numbers; drilling for shale oil? it's a short-term thing; shale is going to peak within a decade and probably less (shale wells have a very steep decline curve), and relying on shale oil is the equivalent of an alcoholic rummaging through his trash to see if there are any cans with a few drops left in them because he's too broke to get more. The actual cause of the oil glut is more likely to the slowing of China's economy and stagnation in most of Europe; when people are suddenly using less oil, the price tends to go down.

I wouldn't be too terribly surprised if there weren't some geopolitical manoeuvring going on behind the scenes, either; one of the reasons for the 1986 oil glut? The US convinced the Saudis to pump more, because oil was a source of money for the Soviets. Consider the importance of oil to Russia's economy, and the recent Western concern over Putin's actions in the Ukraine and elsewhere. Similar diplomatic pressure as a means of economic warfare with Russia is plausible, and there's precedent.

[Gothmog]

9. I remember this oil bust well

Real estate prices in Texas crashed due to this event

[ChisolmTrailDem]

10. It aslo caused high unemployment. I was laid off during that time and searched

for a job for 2 months without success. Moved to VA and had a job in two days.

[yortsed snacilbuper]

11. George Pee. Bush, the new Texas Land Commissioner will handle it!