Posted on 11/26/2014 6:08:24 AM PST by artichokegrower
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.
(Excerpt) Read more at gcaptain.com ...
Were it not for the “oil industry”, we would be still living in the bronze age and there would be no whales left either.
It ended worse for the Russians.
That 1986 “price war” had more to do with undermining the USSR than with Saudi market share. The Sauds did benefit and the World also benefited immensely.
Do the Saudi’s still have the capacity to do it again?
I thought their capacity was declining, as they haven’t been investing in new wells and/or their reserves are drying up.
I have no problem with “let’s see what happens this time.”
Can someone tell me what’s wrong with $10 oil?
Not that much but some.
as they haven’t been investing in new wells
Not true, but they are not the cheap oil wells of the past.
Saudi Aramco starts production at mammoth field
http://www.freerepublic.com/focus/news/3008027/posts
For oil consumers, it's great.
For oil producers, it's a big problem. The shale oil revolution will end, as it costs much more than that to recover it.
Shale oil recovery has played a big part in the otherwise feeble economic recovery: a large percentage of the new jobs created in the past 6 years are related to shale oil drilling.
Strategically, it would put the US back into a dependency on foreign oil.
Droves of people unemployed in Oklahoma, Tx. Riots. Fire. Fear. Zombies.
Seriously. OK and Tx would be in deep deep kemshie.
Nobody wins a price war.
If you have no feelings for the oil companies consider the huge numbers of people who work in the industry. In 1986 and 1998 there were hundreds of thousands of people silently laid off. The numbers were huge by any measure.
When you stick the nozzle in your fuel tank you might give some consideration to all the people who have worked every Thanksgiving and Christmas for years and years so you can buy cheap gasoline.
Nobody wins a price war. Controlling market forces only prolongs the inevitable and makes it worse when it happens.
I have mixed feelings on this. Oil is as much of a national security issue as it is an economic one. We’ve given up a lot of blood and treasure to ensure our oil supplies from the Muslim world. We need Energy Independence. Now if that can be accomplished through the free-market, great. But we need to get out of that God-forsaken part of the globe.
It would take more than OPEC to drop prices down to $10 oil.
They don’t have that large of spare capacity, some, but not that much.
A significant portion of the price of oil today versus 1986 is the lower purchasing power of the dollar.
To get down today to a sustained $10 today would require a horrible global economy that would cost many jobs in the US.
I would rather have $3 gasoline and a job than $1 gasoline and no job.
Where is world oil demand now? I was able to find a projection of 92.7 million barrels per day in 2014.
If that's correct, the Saudi's only have enough excess capacity to meet about 2% of demand. How does that compare to 1986? Is it enough to crash the price?
http://www.freerepublic.com/focus/f-news/3214945/posts
National security needs to trump lower prices on this one
I remember 1986, Houston had no traffic problem like it does now. :)
It’s a far different oil world than it was in 1986. No single country has the excess capacity today to cause that kind of severe drop in oil. The demand is so much larger and the production is so much more diverse. In 1986 OPEC was a much more functioning body with a lot of excess capacity and a much stronger ability to affect markets. I imagine the foreign oil producers would like to get the price down to where they can hurt American development and stem the tide of new American/Canadian oil. The pundits are constantly talking about a price below which Americans companies would no longer be profitable and stop new drilling and development but what they are forgetting is that these producers, explorers, drillers, etc are dynamic companies. Just because their current operations may only be profitable at $70/b doesn’t mean that if it were 65 they couldn’t adjust their operations to be profitable there. We have been running in fat/happy times. Companies in fat happy times tends to focus on growth and investment at the expense of efficiency. If efficiency were needed American producers would be the first in the worldwide market to be able to produce profitably at lower prices. So I say bring it on Saudis.
Thanks for taking the time to present the facts. Most people don’t understand them though or don’t want to or don’t need to.
I figure we will be in trouble for up to three years, a year like 1999 at the least. Some companies have learned lessons about people after that panic led slaughter.
I told my folks to mark their calendars back in about October of 1982 when the first trial trades of oil on NYMEX were done. There was a one page article in the OGJ about Maine potatoes and why NYMEX needed something else to trade. I wrote in a memo attached to a copy of that article that this event would be game changing and marked the point from which the oil industry became price takers instead of price makers unless they could control production and the data. They did neither and it has been a roller coaster ever since.
We are now farmers on a commodity price roller coaster. I suggested once that our trading floor would be best populated by Agricultural Economics graduates who specialized in commodity futures trading. I got laughed down. That was in 1989 or so.
Consider two things the price of oil adjusted for currency exchange (the dollar has devalued since 1986) and inflation. What is that $10 in today’s terms?
Consider also, there is no such thing as independence from foreign oil. Oil is a fungible commodity. We may not have to physically move the oil from there to here but the value or price of oil is roughly the same all over the world. So if the ME blows up our prices skyrocket no matter were our oil comes from. If you do not want higher oil prices you are stuck with assuring that the ME producers can move their oil even if it isn’t to us.
The Saudis have a whole lot more fixed costs these days. They’d have to dip into financial reserves if they wanted to maintain a price war.
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