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

gCaptain ^ | November 26, 2014 | Asjylyn Loder

[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.

[crusty old prospector]

You just remember that while you are enjoying a golden bird or Christmas with your family that there will be thousands out there in the oil patch who aren’t so fortunate. And truthfully, Big Oil ( I hate that liberal-coined term) has very little to do with the current unconventional plays in North America that the Saudis are worried about. Big Oil is bad but Big Government is good.

[The Cajun]

Big oil companies and big oil field service companies made it through the 86 crunch and beyond just fine, laid off the amount of people required to help the bottom line, they adapted.

Smaller oil companies (independents), smaller service companies and shipyards building oilfield related structures, not so much, lots went belly up.

Exploration and drilling went to crap, many leases not renewed.

Thousands of local suppliers and semi-local suppliers went out of business.

Lots of good hard working, nonunion people lost their jobs and nobody gave a crap.

Let big auto hiccup and the government can't throw enough of our money at them.

The only people, in the long run, to make out like bandits were the Saudis.

[thackney]

EIA estimates that global consumption grew by 1.3 million bbl/d in 2013, averaging 90.5 million bbl/d for the year. EIA expects global consumption to grow by 0.9 million bbl/d in 2014 and 1.1 million bbl/d in 2015. Projected global oil-consumption-weighted real gross domestic product (GDP), which increased by an estimated 2.7% in 2013, grows by 2.7% and 3.2% in 2014 and 2015, respectively. Global consumption was revised downward by 0.2 million bbl/d in 2015, based on a 0.1% reduction to forecast global oil-consumption-weighted real GDP growth. Short-term elasticities of demand with respect to income are more powerful (negatively) than the positive effects on demand from lower prices.

Consumption outside of the Organization for Economic Cooperation and Development (OECD) is projected to grow by 1.2 million bbl/d in 2014 and 1.0 million bbl/d in 2015, accounting for nearly all forecast global consumption growth during that period. China is the leading contributor to projected global consumption growth, with consumption increasing by an annual average of 0.36 million bbl/d in 2014 and 2015.

EIA expects a 0.3-million-bbl/d decline in OECD consumption in 2014. Japan and Europe are expected to account for much of the projected OECD consumption decline. EIA expects Japan’s consumption, which fell by 0.16 million bbl/d in 2013, to continue to decline by 0.14 million bbl/d in 2014 and 0.12 million bbl/d in 2015. Japan’s oil consumption is expected to fall with less oil used in the electricity sector as the country returns some nuclear power plants to service in 2015 and increases the use of natural gas and coal to generate electricity. EIA projects that OECD Europe’s consumption, which fell by 0.15 million bbl/d in 2013, will decline by 0.14 million bbl/d in 2014 and by a further 0.07 million bbl/d in 2015. U.S. consumption, which increased by 0.47 million bbl/d in 2013, is expected to decline by 0.06 million bbl/d in 2014 and then increase by 0.16 million bbl/d in 2015.

http://www.eia.gov/forecasts/steo/report/global_oil.cfm

They could lower the price, but it would take a whole lot more, in my opinion, than production capacity to reach 1986 prices. A major global crash in everyone’s economy for example, or a technology change, such as Gas-to-Liquids at $1 a gallon.

[thackney]

[Pilsner]

Thousands of local suppliers and semi-local suppliers went out of business. Lots of good hard working, nonunion people lost their jobs and nobody gave a crap. Let big auto hiccup and the government can't throw enough of our money at them.

When the price bust came a significant number of banks in Texas went under because they were over exposed in loans to oil producing companies. A significant number of New York and Chicago banks were over exposed in loans to oil producing countries, but the Feds bailed them out.

[FreedomNotSafety]

Dang, you’re good!

[CharleysPride]

Yeah, lived in the oil patch in ‘86 and everybody in the domestic market howled about Reagan “letting in” foreign oil.

I was just happy for the cheap gas.

Anybody wants to flood our markets that’s fine — I’d take their stuff over our paper money.

[Teacher317]

. 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.

With the massive caveat that the US government must cooperate, primarily by getting out of the way, and removing EPA and tax obstacles to greater efficiency. You can reduce production costs by 40% and still get nowhere if Congress simply raises taxes to make up the difference, so they can keep playing Santa Claus with OPM.

[FreedomNotSafety]

That is an amazing graph. It really shows the futility of trying to manipulate oil prices by export restriction, price controls, military action, etc..

[ModelBreaker]

“But we need to get out of that God-forsaken part of the globe.”

Nice dream. Even if we produced all energy consumed in the US here and pulled out of the middle east entirely, the price of energy in the rest of the world would still hold the world economy hostage. A depression in Europe would become at least a severe recession here.

That means that shipping lanes in the Persian Gulf would remain key strategic interests, which, after a withdrawal, would be controlled by competing groups of 7th century tribes with modern weapons. We would inevitably end up back there.

[dfwgator]

We could have enough energy to supply our friends and get them off of the Arab Teet as well.

[Georgia Girl 2]

I’m not so sure OPEC could pull it off. You still have Mexico, Venezuela, Russia, Canada etc that are not in OPEC.

[Lurkina.n.Learnin]

BFL

[Figment]

1986? Try 1982. Oil went below $10/bbl and killed drilling and exploration

[LRoggy]

http://www.opec.org/opec_web/en/about_us/25.htm

Venezuela not only is a member but the ENTIRE organization that is now OPEC was FOUNDED by a Venezuelan, Juan Pablo Alfonso Perez.

[Go Gordon]

I know it's a complex issue but it's hard to feel sorry for the oil companies.

What kind of comment is that? How would like it if an entity colluded to put your company out of business, resulting in you losing your job. You obviously didn't think before you wrote, or, you are an idiot. If not for the US oil companies, life as you know it wouldn't exist.

[Go Gordon]

Can someone tell me what’s wrong with $10 oil?

Not only is there no profit to be made, many forms of oil recovery (fracking, deep undersea, directional drilling) would result in steep losses. In other words, no company would stay in business. They would simply stop exploration and recovery.

[magna carta]

if you are in the middle of negotiating pricing per acre with an oil company...it kinda sucks.

[marron]

Thanks to the oil companies, OPEC is forced to lower their prices. Oil gets delivered to your neighborhood at ever lower prices.

[old gringo]

ain’t nothing cheap about it,and 5 bucks a gallon for kerosene.