Skip to comments.Crude Oil Price Collapse of 1986
Posted on 05/21/2008 3:35:11 PM PDT by kellynla
Faced with declining world oil demand and increasing non-OPEC production, OPEC cut output significantly in the first half of the 1980s to defend its official price. Saudi Arabia, which played the role of swing producer in the cartel, bore most of the production cuts. Saudi Arabia crude oil product, which peaked at over 10 million barrels per day for the period October 1980 through August 1981, fell to just 2.3 million barrels per day by August 1985. In late 1985, Saudi Arabia abandoned its swing-producer role, increased production, and aggressively moved to increase market share. Saudi Arabia tried a netback-pricing concept, which tied crude oil prices to the value of refined petroleum products. This reversed traditional economic relationships by guaranteeing specific margins to refiners, thereby transferring risk from the crude oil purchaser to the producer.
In response, other OPEC members also increased production and offered netback-pricing arrangements to maintain market share and to offset declining revenues. These actions resulted in a glut of crude oil in world markets, and crude oil prices fell sharply in early 1986.
By July 1986, the average per-barrel free on board (F.O.B) price for OPEC crude oil had dropped from $23.29 in December 1985 to $9.85, and prices for crude oil from non-OPEC countries were following a similar path.
The collapse of crude oil prices in 1986 reversed the upward trend in U.S. production of the first half of the decade. Many high-cost wells, which became productive after the oil crisis of 1978-1980, became unprofitable in 1986 and were shut in. Domestic crude oil production began dropping in early 1986. After the world price fell more than 50 percent between January and March 1986, drilling plummeted. Since then, domestic drilling and production have gradually declined.
The net effect of the decline in domestic production beginning in 1986 was an increase in crude oil imports, which climbed from 3.2 million barrels per day in 1985 to 9.1 million barrels per day in 2000. Most of this increase was met by OPEC, whose share of total U.S. crude oil imports rose from 41 percent in 1985 to 60 percent in 1990, before dropping to 46 percent in 1995-1997. Since 1998, the share has gradually increased, reaching 51 percent in 2000.
Oil company investments began shifting to foreign oil exploration and production after the 1986 price drop.(28) Foreign fields are generally much larger than in the United States and average production costs are lower. Changes in policy in the former Soviet Union since 1991 have increased U.S. production investment there, (29) and recent moves toward foreign investments in Mexico have attracted American exploration and production companies. (30)
The sharp drop in crude oil prices pushed U.S. petroleum demand steadily higher in the second half of the decade. From 1985 to 2000, demand climbed from 15.7 million barrels per day to 19.5 million barrels per day.
Until 1986, the value of U.S. petroleum imports comprised between 15 percent and 32 percent of all imported goods. The steep decline in petroleum prices in 1986 reduced petroleum's portion of the U.S. trade deficit.
The economy expanded at a faster pace in 1987 and 1988. Low petroleum prices stimulated growth in industrial production, employment increased,(31) and travel picked up. Temporary conservation measures that had been instituted during earlier oil price escalations were discontinued. The overall energy intensity of the economy (measured by the ratio of total energy consumption to the constant dollar level of the Gross Domestic Product), a reflection of energy conservation,(32) did not increase between 1986 and 1988.
Good too ping Thackney ........:o)
It is time to beat up our Congress-critters with emails demanding they pass legislation to increase domestic production. I told my delegation today that despite their efforts, I hold them and not the oil companies responsible.
The minute the approval went out to drill the price would collapse.
I think the price will probably crash on its own sooner then later anyway when usage drops off.
You are assuming the drop off in the US. That may be true but the real increase in demand is from China and India. I saw or heard a statement the other day that at the present rate of growth in China and India, they will be using the total production of oil by 2018.
Even the dumb-asses in the electorate are eventually going to realize who it is making them pay $4.00 a gallon. It ain’t “Big Oil”. It’s liberal polar bear huggers and crustacean-worshippers.
I am a courier who fills up a mini-van every day on my own dime. I’m now spending $60.00 a day to save the earth. Independent truckers are feeling the same pain.
It’s past time for a temper tantum on the part of normal Americans, directed at elitist douchebags like the congress and our own presidential candidate.
BTW, the reason the Saudis pumped up oil production in the mid-80s was that Ronaldus Magnus asked them to. See, the Soviet economy was dependent on their one decent exportable resource, oil, providing enough income to keep trying to take over the world. Reagan’s ploy was the most unrecognized strategy of the cold war, though perhaps as significant as SDI. See the DVD “In The Face of Evil” to check out the truth on this.
It’s not 1986. You have different factors and new sources of demand for a finite amount of a monopoly good. The price of oil is going to destroy our economy.
“The price of oil is going to destroy our economy.”
You’ve got that backwards. You do that a lot.
Although I don't use this product, since people are starting to use bicycles more, people might be interested in this autoshifting bicycle.
First, the bad news about ethanol. Ethanol fires are evidently harder to control than gasoline fires.
On the brighter side concerning ethanol, there's now evidence that people might get as much, or more, bang per buck for their gas dollars with gas / ethanol mixtures.
But also note that the water used in the EFuel100 process does not take into account the water needed to grow the sugar that is used for this process.
And watch out for fines for violating biofuel regulations.
The Demons are hell bent on destroying the middle class by refusing to allow domestic drilling for oil. If only McCain would start pointing this out.
“The Demons are hell bent on destroying the middle class by refusing to allow domestic drilling for oil. If only McCain would start pointing this out.”
Unfortunately, McCain is against drilling in ANWR too!
But just like we finally opened McCain’s eyes to “securing the border”, I’m hoping we can convince him that the solution to the problem is more domestic supply from ANWR and everywhere else in America!
We're gonna get screwed by both sides of the aisle.
No, it would help but it would not collapse oil prices. And if it did collapse oil prices the E&P in the States would grind to a halt.
However, we should drill in ANWR right away but the world were to decrease oil consumption by 0.11% that would do the same for the price of oil as bring ANWR on line.
I remember going on spring break in 1986. Gas was 57.9 cents in South Carolina.
And in 1986 there was little or no oil exploration in the United States and many oil field hands were out of work.
But Baby Bush and his oil buddy cronies don’t want the price of oil to drop. They are making record profits donchankow.
My recollection is that 1986 is the only year in modern America where the national economy experienced deflation, due to the oil bust. Texas went through a depression.
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