Today’s skyrocketing oil prices remind many of the old time oil men out there of what they like to refer to as “the good ole’ days”. The price of oil rose throughout the 1970’s, and the streets of Midland and Houston were full of Rolexes and Cadillacs. This gravy train came to an end in the early 1980’s, with both the price of oil and the industry bottoming out in 1986. There are similarities to today’s rising price of oil and the rising price of oil in the 1970’s. The streets of Houston and Midland are once again full of Rolexes and Cadillacs, but is it to last? Only time will tell.
When the industry went broke in the early 1980’s, it was not just the oil producers that were in trouble. Many oilfield service companies and banks with energy heavy portfolios went down too.
One of the causes of the collapse of the industry in the early 1980’s was the overinvestment that occurred in the 1970’s due t the high price of oil. The combination of the rising prices and shortage of oilfield equipment such as drilling rigs, mud pumps, and frac trucks led to massive amounts of money being used to build more. As more equipment became available, and the massive amounts of people that were hired, more wells were able to be drilled. The exact same thing is going on today. In the 1970’s the increased drilling activity led to higher production levels. Increases in production today are also possible due to changing economic dynamics where exploiting shale and oil sands are now profitable.
While production was rising, demand was gradually falling. Consumers started shunning the muscle cars made popular in the 60’s and early 70’s for smaller cars with better gas mileage. Today’s consumers are starting to change from gas guzzling SUV’s to smaller passenger cars, and in some cases, hybrids. When discussing the reasons for today’s rapid demand increases, the conversation is not complete unless China and India’s “unquenchable” thirst for oil is discussed. One cannot be certain that demand for these two countries will continue until they are consumer as much as the US per capita. Oil consumption was increasing in the “Asian Tigers” in the late 90’s until something known as the East Asian Currency Crisis came along. Although the investment environments of the Asian Tigers of the late 90’s and today’s China and India are different, a recession will slow down, and perhaps decrease the demand for oil.
From Economics 101, we know that when supply increases and demand decreases, price falls. This is what happened in the 1980’s, and if the circumstances are right, it could happen again. Will we go from Rolexes and Cadillacs to Timexes and Toyotas? Only time will tell.