Businessman holding a drop of oil on the background of the growing graphics and a barrel of oil. Rise in oil prices. Raising rates. Stock market. Extraction of oil.

Lessons Learned Through Two Oil Busts

“How does this bust differ from the bust in the ’80s?”

I get asked that question quite often, partly because I’m growing old and it shows on my face, and partly because I’ve been in the oil and gas industry since 1979, and people assume — rightly or wrongly — that I know some stuff because of that. I did live through that bust in the ’80s, and it wasn’t fun. I got laid off from a job in 1985 and was out of work for a few months — the only time I’ve been unemployed since I was 16 years old — and that caused me and my wife great financial hardship.

So I do remember those days all too well. To understand why that bust happened, you first have to go back to the oil shocks of the 1970s, when the Saudis and other OPEC nations implemented oil embargoes, first in 1973 and then again in 1979.

Two memories from that period of time stick with me to this day. The first is of filling my mother’s 1972 Pontiac Grand Ville up with gasoline on the day in 1974 when the price of gas at the local Circle K in Beeville, Texas, reached the then unheard of sum of 50 cents per gallon. That was the first time I had ever had to come up with 10 bucks (the aircraft carrier-size Grand Ville had a 26-gallon tank) to fill up a car with gas. I knew I was going to have to start working overtime or get another job if I was going to keep putting gas in that car. The second memory is of sitting at a long-disappeared Texaco station at the corner of Richmond Avenue and Buffalo Speedway in Houston during the summer of 1979, having to wait in a very long line of cars on an odd-numbered day to pay over $1 per gallon for my allotment of gas to fill up my Chevy Caprice. Another 26-gallon tank that was even more costly to fill.

Memories like that stick with you and tend to make you want to do something to stop the madness. Those two oil embargoes had two effects in the United States: 1) Americans began to drive fewer miles and look for cars that used less gas, and 2) the U.S. government started implementing energy-saving policies, including requirements that automakers increase the miles per gallon their cars could attain. Those changes in behavior and policy in turn led to a lowering of demand for oil in the U.S. and other developed nations in the early 1980s, during a time when OPEC nations were flooding the market with oil and the U.S. industry was steadily increasing oil production.

When a global recession hit in late 1980, the pace of destruction of demand for crude oil increased. OPEC nations woke up in 1982 and started to implement cuts to their own production in an effort to maintain a higher oil price, but those measures proved to be too little, too late. By 1984, the result of all of this demand destruction was the creation of a gigantic surplus of crude oil on the global market, a glut that at one point reached as high as 7 million barrels of oil per day (BOPD).

It didn’t take very long for the price of crude to collapse, going from about $40 per barrel in 1983 to as low as $9 in 1985. As one might imagine, the impacts of such a collapse on the Texas economy were extremely severe. A state economy that had been the envy of the other 49 states fell into a deep recession, even as the national economy began to boom. Thousands of rigs (the rig count in the U.S. had topped 4,000 during the boom of the early ’80s) went idle and remained idle for years.

The numbers of employees laid off during the bust were in the high hundreds of thousands during the mid-’80s, with more layoffs continuing well into the 1990s. College students stopped going into the fields of geology and petroleum engineering based on the belief that oil and gas was a dying industry that would never recover. This reluctance of incoming college students to major in energy-related disciplines lingered into the 2000s and played a big role in creating the industry’s infamous 15-year gap in its employee base.

Recovery from that bust of the 1980s was slow and difficult. In fact, the price of crude didn’t top the $40 mark again until 2004, more than 20 years after it began. By then, the industry had completely changed, companies had become leaner and more efficient, and the shale revolution that ultimately played a role in creating our most recent price collapse was just underway. What benefits us today can end up causing hardship tomorrow.

We are now more than two and a half years into our current price bust, and the light at the end of the tunnel seems to be nearing. At least for now. The price has recovered somewhat, thanks largely to the deal to curtail exports between OPEC and Russia. Rigs are being reactivated and companies in the U.S. are starting to hire again.

But here is the reality we all must face: The price of crude oil today is roughly half of what it was before the current bust began, and the days of $100 oil won’t be coming back anytime soon, if ever. The oil and gas industry in the U.S. has become even leaner and more efficient over the last two years, not least because companies basically had no choice in the matter if they wanted to survive. Service companies like Halliburton and Schlumberger have created outstanding advances in fracing and well-completion technologies, and expected recoveries from shale wells have increased dramatically.

While a recovery has begun — the Permian Basin is, in fact, in a full boom status — what all of this increased efficiency, technology and per-well recovery means is that the U.S. industry is capable of significant advances in overall production while drilling far fewer wells than before. If that production ramps up too quickly and the OPEC/Russia deal begins to fall apart, then we could be right back down to $40 per barrel of oil in a hurry. We should all be prepared for the oil price to fluctuate between $40 and $60 for years to come due to these market dynamics.

So, although the causes of the current bust differ from that of the bust of the ’80s, and the overall glut of the last few years never exceeded about 2.5 million BOPD, we have the potential for the same sort of lingering lower price situation going on for years to come. In fact, it will take a lot of discipline on the part of OPEC countries and Russia to prevent a fall back to lower prices later this year.

These countries are not known for their self-discipline where oil exports are concerned. Bottom line, those expecting a quick return to high oil prices are most likely going to be highly disappointed. Hope for the best, but prepare for the worst.

 

About the author: David Blackmon is Associate Editor for Oil and Gas for SHALE Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles, and the last 22 years engaged in public policy issues at the state and national levels. Contact David Blackmon at david.blackmon@shalemag.com.

 

Photo source: Gearstd/bigstock.com

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