1980s oil glut


1980s oil glut

The 1980s oil glut was a surplus of crude oil caused by falling demand following the 1973 and 1979 energy crises. The world price of oil, which had peaked in 1979 at over US$35 per barrel, collapsed in 1986 from $27 to below $10. [cite news
title=Worrying Anew Over Oil Imports
publisher=The New York Times
date=1989-12-30
author=ROBERT D. HERSHEY JR.
url=http://query.nytimes.com/gst/fullpage.html?res=950DE6DA1E31F933A05751C1A96F948260
] The glut began in the early 1980s as a result of slowed economic activity in industrial countries (due to the 1973 and 1979 energy crises) and the energy conservation spurred by high fuel prices [cite news
title=Oil Glut, Price Cuts: How Long Will They Last?
publisher=U.S. News & World Report
date= 1980-08-18
volume=Volume: 89 Issue: 7 Page: 44
] . 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. [ [http://cta.ornl.gov/data/tedb26/Spreadsheets/Table10_03.xls Oak Ridge National Lab data] ]

In June 1981, "The New York Times" stated an "Oil glut! ... is here" [cite news
title=How the oil glut is changing business
publisher= New York Times
date= 1981-06-21
url=http://select.nytimes.com/gst/abstract.html?res=F40D1EFA3B5C0C728EDDAF0894D9484D81
author=Robert D Hershey Jr.
] and "Time Magazine" stated: "the world temporarily floats in a glut of oil," [cite news |title= Problems for Oil Producers
publisher= Time Magazine
date= 1981-06-22
url=http://www.time.com/time/printout/0,8816,950550,00.html
author= Christopher Byron
] though the next week a New York Times article warned that the word "glut" was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-energy crisis levels. [cite news
title=The Energy Outlook; LULLED TO SLEEP BY THE OIL GLUT MIRAGE
publisher= New York Times
date= 1981-06-28
volume= Section 3; Page 2, Column 3
author=DANIEL YERGIN
] 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, due to "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. [cite journal
publisher= Oil & Gas Journal
date=November 9, 1981
title=The oil glut in perspective
author=C. C. Garvin Jr.
volume=Annual API Issue; Pg. 151
]

After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.

nominal, not real, price of oil.

Background

The 1973 energy crisis and the 1979 energy crisis increased public awareness that oil is a limited resource, and that it would eventually run out as an economically viable energy source. During the 1973 energy crisis, the price of oil quadrupled. cite web|url=http://www.cbc.ca/news/background/oil/|title=The price of oil - in context|accessdate=2007-05-29] Oil never returned to pre-1973 levels, either in real or nominal terms, even during the 1980s glut.

The nominal price continued its slow increase after the crisis ended. Six years later, the price more than doubled during the 1979 energy crisis. OPEC and Saudi Arabia artificially raised the price of oil several times in 1979 and 1980. Also during this time, several OPEC members significantly lowered their production levels, the Iran hostage crisis occurred, and the Iran–Iraq War began.

There was fear that the world's oil market supply was tenuous [cite news |title=Yes, There Is An Energy Crisis
publisher= Time Magazine
date= 1977-10-10
url=http://www.time.com/time/printout/0,8816,915580,00.html
author= Christopher Byron
] , causing the price of oil to escalate [cite news |title= Guessing What's There
publisher= Time Magazine
date= 1977-05-02
url=http://www.time.com/time/printout/0,8816,947929,00.html
] and that OPEC would dictate very high prices in a shortage.Fact|date=April 2008

Production

[
[http://www.eia.doe.gov/emeu/international/contents.html EIA - International Energy Data and Analysis ] ] ]

Non-OPEC

During the 1980s, non-OPEC production increased worldwide.

US

In April 1979, Jimmy Carter signed an executive order which was to remove market controls from petroleum products by October 1981, so that prices would be wholly determined by the free market. Ronald Reagan signed an executive order on January 28, 1981 which enacted this reform immediately,cite news | title=Executive Order 12287 -- Decontrol of Crude Oil and Refined Petroleum Products | date=January 28, 1981| url=http://www.reagan.utexas.edu/archives/speeches/1981/12881a.htm] allowing the free market to adjust oil prices in the US.cite book |quote= "By September 30, 1981, petroleum prices were to be determined by the free market. This process was accelerated by President Reagan through an Executive Order"| title= Urban Transportation Planning in the United States An Historical Overview| author= Edward Weiner | year=1999| publisher= Greenwood Publishing Group| page=p. 112| url=http://books.google.com/books?id=s9-53F2LN0UC&pg=PA112&source=gbs_search_r&cad=1_1&sig=ACfU3U2Iyb8gClimCqE5jeMoWd8iPAqehg ] This ended the withdrawal of old oil from the market and artificial scarcity, encouraging increased oil production.Fact|date=April 2008 The US Oil Windfall profits tax was lowered in August 1981 and removed in 1988, ending disincentives to US oil producers.

OPEC

From 1980 to 1986, OPEC decreased oil production several times and nearly in half 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 countriesClarifyme|date=April 2008. OPEC had seen its share of the world market drop to less than a third in 1985, from nearly half during the 1970s. In Feb 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.cite news |title=The economy: the oil glut deepens; OPEC's grip loosens; but a boom or a bomb could spur prices back up| publisher=Boston Globe| date=1982-02-28 | author=David Warsh]

OPEC's membership began to have divided opinions over what actions to take. In September 1985, Saudi Arabia, tried to gain market share by increasing production, creating a "huge surplus that angered many of their colleagues in OPEC".cite news |title= Cheap Oil!| publisher= Time Magazine | date= 1986-04-14 | url=http://www.time.com/time/printout/0,8816,961087,00.html|author= Stephen Koepp] High-cost oil production facilities became less or even not profitable.

US imports

The US imported 28 percent of its oil in 1982 and 1983, down from 46.5 percent in 1977, due to lower consumption. Reliance on Middle East sources dwindled even further as Britain, Mexico, Nigeria and Norway joined Canada in the forefront of American suppliers. [http://query.nytimes.com/gst/fullpage.html?res=950DE6DA1E31F933A05751C1A96F948260&sec=&spon=&pagewanted=print Worrying Anew Over Oil Imports - New York Times ] ]

Imported crude oil from Libya was banned in the United States on March 10, 1982. [ cite news |title= Proclamation 4907 -- Imports of Petroleum | publisher= President of the United States | date= 1982-03-10| url=http://www.reagan.utexas.edu/archives/speeches/1982/31082a.htm] Clarifyme|date=April 2008

Reduced demand

" magazinecite news
title=Ocean's of Oil
publisher=Texas Monthly
date=October, 1984
url=http://www.texasmonthly.com/1984-10-01
] ] Part of the decline in prices and economic and geopolitical power of OPEC came from the shift from oil consumption to alternate energy sourcesClarifyme|date=April 2008 . OPEC had relied on the famously limitedFact|date=April 2008 price elasticity 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 nuclear power and natural gas cite journal
title=Oil and nuclear power: Past, present, and future
author=Ferenc L. Toth, Hans-Holger Rogner,
journal=Energy Economics
volume=28
year=2006
issue=1–25
pages=pg. 3
url=http://www.iaea.org/OurWork/ST/NE/Pess/assets/oil+np_toth+rogner0106.pdf
language=English
format=PDF
] ; home heating from natural gas; and ethanol blended gasoline all reduced the demand for oil. New passenger car fuel economy rose from 17 mpg in 1978 to more than 22 mpg in 1982, an increase of more than 30 percent. [cite paper
author = Paul R. Portney, Ian W.H. Parry, Howard K. Gruenspecht, and Winston Harrington
title = The Economics of Fuel Economy Standards
publisher = Resources For The Future
date= November 2003
url = http://www.rff.org/documents/RFF-DP-03-44.pdf
]

Impact

[
thumb|right|OPEC_net_oil_export_revenues_for_1971_-_2007._[ [http://www.eia.doe.gov/emeu/cabs/OPEC_Revenues/Factsheet.html EIA Fact sheet] ] ] The 1986 oil price collapse benefited oil-consuming countries such as the United States, Japan, Europe, and Third World 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. [ cite news |title= Problems for Oil Producers | publisher= Time Magazine | date= 1981-06-22 | url=http://www.time.com/time/printout/0,8816,950550,00.html|author= Christopher Byron] In a handful of heavily populated impoverished countries whose economies were largely dependent on oil production — including Mexico, Nigeria, Algeria, and Libya — government and business leaders failed to prepare for a market reversal.Fact|date=April 2008

With the drop in oil prices, OPEC lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded in the 1970s, were plunged into near-bankruptcy.Fact|date=April 2008 Even Saudi Arabian economic power was significantly weakened.Fact|date=April 2008

Iraq had fought a long and costly war against Iran, and had particularly weak revenuesFact|date=April 2008 . It was upset by Kuwait contributing to the glutClarifyme|date=April 2008 [cite web
url=http://www.nmhschool.org/tthornton/mehistorydatabase/gulf_war.php
title=The Gulf Wars: Iraq Occupies Kuwait
publisher=Northfield Mount Hermon School
date=2007-01-12
author=Ted Thornton
language=English
] and allegedly pumping oil from the Rumaila field below their common bordercite web
url=http://www.cnr.vt.edu/lsg/intro/oil.pdf
title=History of OPEC
publisher=
date=
author=David L. Rousseau
language=English
format=PDF
] . Iraq invaded Kuwait territory in 1990, planning to increase reserves and revenues and cancel the debt, resulting in the first Gulf War.

The USSR had become a major oil producer before the glut. The drop of oil prices contributed to the nation's final collapse [cite web
url=http://www.russiablog.org/2006/08/kommersant_mideast_war_means_m.php
title=The Long War in the Middle East and Russian Oil
publisher=
date=
author=Charles Ganske
language=English
] .

In the US there, domestic exploration declined dramatically, and the number of active drilling rigs was nearly halved in 1982." [ [http://www.houstonhistory.com/legacy/history6t.htm Historic Houston: Oil Glut and the Economic Downturn ] ] Oil producers held back on the search for new oilfields for fear of losing on their investments [ [http://www.forbes.com/home/free_forbes/2006/0724/042.html Oil, Oil Everywhere - Forbes.com ] ] . In May 2007, companies like ExxonMobil were not making nearly the investment in finding new oil today that they did in 1981. [cite news
url=http://www.time.com/time/magazine/article/0,9171,1626994,00.html
title=No More Gushers for ExxonMobil
publisher="Time" magazine
author=Justin Fox
date=2007-05-31
language=English
]

ee also

*1973 oil crisis
*1980-1989 world oil market chronology
*1979 energy crisis
*Oil price increases since 2003
*Price of petroleum

External links

* [http://www.eia.doe.gov/emeu/cabs/AOMC/8089.html Energy Information Administration: Chronology of World Oil Market Events 1980s]
* [http://www.houstonhistory.com/legacy/history6t.htm Houston of history-Oil Glut and the Economic Downturn ]

Further reading

*"World Hydrocarbon Markets: Current Status, Projected Prospects, and Future Trends", (1983), By Miguel S. Wionczek, ISBN 0080299628
*"",(1993) , by Daniel Yergin] , Simon & Schuster, ISBN 0671799320 & ISBN 0671502484
*"The Oil Market in the 1980s: A Decade of Decline", (1992), by Siamack Shojai, Bernard S. Katz, Praeger/Greenwood, ISBN 0275933806

References


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