1980s oil glut

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The Real and Nominal price of oil from 1968 to 2006. Nominalrealoilprices1968-2006.png
The Real and Nominal price of oil from 1968 to 2006.
Detailed analysis of 1970-2007 changes in nominal oil price, unadjusted for inflation Oil price chronology-june2007.gif
Detailed analysis of 1970–2007 changes in nominal oil price, unadjusted for inflation

The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s energy crisis. The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $106 per barrel in 2008 dollars, when adjusted for inflation); it fell in 1986 from $27 to below $10 ($62 to $23 in 2008 dollars). [2] [3] The glut began in the early 1980s as a result of slowed economic activity in industrial countries due to the crises of the 1970s, especially in 1973 and 1979, and the energy conservation spurred by high fuel prices. [4] The inflation-adjusted real 2004 dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986. [5]

Petroleum naturally occurring flammable liquid

Petroleum is a naturally occurring, yellowish-black liquid found in geological formations beneath the Earth's surface. It is commonly refined into various types of fuels. Components of petroleum are separated using a technique called fractional distillation, i.e. separation of a liquid mixture into fractions differing in boiling point by means of distillation, typically using a fractionating column.

1970s energy crisis

The 1970s energy crisis was a period when the major industrial countries of the world, particularly the United States, Canada, Western Europe, Japan, Australia, and New Zealand, faced substantial petroleum shortages, real and perceived, as well as elevated prices. The two worst crises of this period were the 1973 oil crisis and the 1979 energy crisis, when the Yom Kippur War and the Iranian Revolution triggered interruptions in Middle Eastern oil exports.

Contents

In June 1981, The New York Times proclaimed that an "oil glut" had arrived [6] and Time Magazine stated that "the world temporarily floats in a glut of oil". [7] However, The New York Times warned the next week that the word "glut" was misleading, and that temporary surpluses had brought down prices somewhat, but prices were still well above pre-energy crisis levels. [8] This sentiment was echoed in November 1981, when the CEO of Exxon Corp also characterized the glut as a temporary surplus, and that the word "glut" was an example of "our American penchant for exaggerated language". He wrote that the main cause of the glut was declining consumption. In the United States, Europe, and Japan, oil consumption had fallen 13% from 1979 to 1981, "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters", continuing a trend begun during the 1973 price increases. [9]

After 1980, reduced demand and increased production produced a glut on the world market. The result was a six-year decline in the price of oil, which reduced the price by half in 1986 alone. [2]

Production

OPEC, Non-OPEC, & World oil production, 1973-2004 Int oil2.gif
OPEC, Non-OPEC, & World oil production, 1973–2004

Non-OPEC

During the 1980s, reliance on Middle East production dwindled as commercial exploration developed major non-OPEC oilfields in Siberia, Alaska, the North Sea, and the Gulf of Mexico, [11] and the Soviet Union became the world's largest producer of oil. [12] Smaller non-OPEC producers including Brazil, Egypt, India, Malaysia, and Oman doubled their output between 1979 and 1985, to a total of 3 million barrels per day. [13]

Middle East region that encompasses Western Asia and Egypt

The Middle East is a transcontinental region centered on Western Asia, Turkey, and Egypt. Saudi Arabia is geographically the largest Middle Eastern nation while Bahrain is the smallest. The corresponding adjective is Middle Eastern and the derived noun is Middle Easterner. The term has come into wider usage as a replacement of the term Near East beginning in the early 20th century.

North Sea oil

North Sea oil is a mixture of hydrocarbons, comprising liquid petroleum and natural gas, produced from petroleum reservoirs beneath the North Sea.

USA

In April 1979, Jimmy Carter signed an executive order which was to remove price controls from petroleum products by October 1981, so that prices would be wholly determined by the free market. Carter's successor, Ronald Reagan signed an executive order on 28 January 1981, which enacted this reform immediately, [14] allowing the free market to adjust oil prices in the US. [15] This ended the withdrawal of old oil from the market and artificial scarcity, encouraging increased oil production.[ citation needed ] The US Oil Windfall profits tax was lowered in August 1981 and removed in 1988, ending disincentives to US oil producers. Additionally, Trans-Alaska Pipeline System began pumping oil in 1977. The Alaskan Prudhoe Bay Oil Field entered peak production, supplying 2 million bpd of crude oil in 1988, 25 percent of all U.S. oil production. [16]

Jimmy Carter 39th president of the United States

James Earl Carter Jr. is an American politician and philanthropist who served as the 39th president of the United States from 1977 to 1981. A Democrat, he previously served as a Georgia State senator from 1963 to 1967 and as the 76th governor of Georgia from 1971 to 1975. Carter has remained active in public life during his post-presidency, and in 2002 he was awarded the Nobel Peace Prize for his work in co-founding the Carter Center.

Price controls are governmental restrictions on the prices that can be charged for goods and services in a market. The intent behind implementing such controls can stem from the desire to maintain affordability of goods even during shortages, and to slow inflation, or, alternatively, to ensure a minimum income for providers of certain goods or a minimum wage. There are two primary forms of price control, a price ceiling, the maximum price that can be charged, and a price floor, the minimum price that can be charged.

Ronald Reagan 40th president of the United States

Ronald Wilson Reagan was an American politician who served as the 40th president of the United States from 1981 to 1989. Prior to his presidency, he was a Hollywood actor and union leader before serving as the 33rd governor of California from 1967 to 1975.

North Sea

Phillips Petroleum discovered oil in the Chalk Group at Ekofisk, in Norwegian waters in the central North Sea. [17] Discoveries increased exponentially in the 1970s and 1980s, and new fields were developed throughout the continental shelf. [18]

OPEC

From 1980 to 1986, OPEC decreased oil production several times and nearly in half, in an attempt to maintain oil's high prices. However, it failed to hold on to its preeminent position, and by 1981, its production was surpassed by non-OPEC countries[ clarification needed ]. OPEC had seen its share of the world market drop to less than a third in 1985, from about half during the 1970s. [2] In February 1982, the Boston Globe reported that OPEC's production, which had previously peaked in 1977, was at its lowest level since 1969. Non-OPEC nations were at that time supplying most of the West's imports. [19]

OPEC's membership began to have divided opinions over what actions to take. In September 1985, Saudi Arabia became fed up with de facto propping up prices by lowering its own production in the face of high output from elsewhere in OPEC. [20] In 1985, daily output was around 3.5 million bpd, down from around 10 million in 1981. [20] During this period, OPEC members were supposed to meet production quotas in order to maintain price stability; however, many countries inflated their reserves to achieve higher quotas, cheated, or outright refused to accord with the quotas. [20] In 1985, the Saudis tired of this behavior and decided to punish the undisciplined OPEC countries. [20] The Saudis abandoned their role as swing producer and began producing at full capacity, creating a "huge surplus that angered many of their colleagues in OPEC". [21] High-cost oil production facilities became less or even not profitable. Oil prices as a result fell to as low as $7 per barrel. [20]

Reduced demand

World energy consumption, 1965-2013, showing oil demand falling significantly in the early 1980s World energy consumption.svg
World energy consumption, 1965–2013, showing oil demand falling significantly in the early 1980s

OPEC had relied on the price inelasticity of demand of oil to maintain high consumption, but underestimated the extent to which other sources of supply would become profitable as prices increased. Electricity generation from coal, nuclear power and natural gas; [22] home heating from natural gas; and ethanol blended gasoline all reduced the demand for oil.

USA

New passenger car fuel economy in the US rose from 17 miles per US gallon (14 L/100 km) in 1978 to more than 22 miles per US gallon (11 L/100 km) in 1982, an increase of more than 30 percent. [23]

The United States imported 28 percent of its oil in 1982 and 1983, down from 46.5 percent in 1977, due to lower consumption. [2]

Brazil

Impact

Fluctuations of OPEC net oil export revenues since 1972 Opecrev.gif
Fluctuations of OPEC net oil export revenues since 1972

The 1986 oil price collapse benefited oil-consuming countries such as the United States, Japan, Europe, and developing nations, but represented a serious loss in revenue for oil-producing countries in northern Europe, the Soviet Union, and OPEC.

In 1981, before the brunt of the glut, Time Magazine wrote that in general, "A glut of crude causes tighter development budgets" in some oil-exporting nations. [7] Mexico had an economic and debt crisis in 1982. [26] The Venezuelan economy contracted and inflation levels (consumer price inflation) rose, remaining between 6 and 12% from 1982 to 1986. [27] [28] Even Saudi Arabian economic power was significantly weakened.[ citation needed ]

Iraq had fought a long and costly war against Iran, and had particularly weak revenues. It was upset by Kuwait contributing to the glut [29] and allegedly pumping oil from the Rumaila field below their common border. [30] Iraq invaded Kuwait in 1990, planning to increase reserves and revenues and cancel the debt, resulting in the first Gulf War. [30]

The Soviet Union had become a major oil producer before the glut. The drop of oil prices contributed to the nation's final collapse. [31] [32]

In the U.S., domestic exploration and the number of active drilling rigs were cut dramatically. In late 1985, there were nearly 2,300 rigs drilling wells in the USA; a year later, there were barely 1,000. [33] The number of petroleum producers in United States decreased from 11,370 in 1985 to 5,231 in 1989, according to data from the Independent Petroleum Association of America. [34] Oil producers held back on the search for new oilfields for fear of losing on their investments. [35] In May 2007, companies like ExxonMobil were not making nearly the investment in finding new oil that they did in 1981. [36]

Canada responded to high energy prices in the 1970s with the National Energy Program (NEP) in 1980. This program was in place until 1985.

See also

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Further reading