The oil boom exceeded all previous booms in size, moving vast sums of money from consumer to producer countries. The oil price boom was accompanied by a boom in the price of real estate, drilling crews, geology majors, geologists. There was a general belief that the world was entering a period to be characterized by dwindling oil stocks and ever-higher prices. Shale oil technology became a popular avenue for seeking new oil supplies. As oil price and demand dropped, shale oil became non-viable. Ghost towns appeared where previous oil shale development had been going on.
THE FUNDAMENTALS
The Federal Reserve, facing inflation, began restricting the money supply, slowing economic growth and substantially reducing demand for oil. The high oil prices had stimulated development in Mexico, Alaska, and the North sea during Second Oil Shock (SOS), and Egypt, Malaysia, Angola, and China began producing significant quantities. Others also contributed to rising oil supply. 'Slickem' increased the productivity of the Alaskan pipeline by nearly a quarter. and the lower forty-eight increased production as well. Coal and nuclear, and even to a lesser extent liquified natural gas, began to gain footholds in the energy sector. Oil went from producing 53% of world energy to 43%. Conservation practices increased efficiency of energy use. As the oil crisis eased, companies began decreasing their inventories, which they no longer felt the need for.
A massive glut emerged.
FINALLY--THE CARTEL
In 1977, OPEC produced 2/3 of world oil; by 1982 less than 1/2. Spot prices fell far below contract prices. OPEC cut production by nearly half to try to keep prices up. It had now turned itself into a cartel. Israel intervened in Lebanon while the Iran/Iraq war continued. Khalid of Saudi Arabia died was replaced by Fahd. OPEC still continued to face a glut.
OUR PRICE IS TOO HIGH . . .
To deal with the continual fall in demand for OPEC oil, unofficial discounts began to appear. Yamani was vindicated in spectacular fashion. OPEC slashed prices to $29/barrel, with the quota down to 17.5 million barrels/day. Only Saudi Arabia was exempt from quotas, performing the 'swing' function of raising or lowering production to maintain prices and quotas for all the other countries.
THE COMMODITY MARKET
Oil was increasingly bid for on the open market as the world moved toward a one barrel system. Nationalization had fractured the oil market, breaking the oil company cartel of seven or eight companies. At the end of the '70's, 10% of oil was on the spot markets, which increased drastically to over 50% by the end of '82. The oil markets became more opportunistic. To keep up with the rapidly changing nature of the markets, companies, led by BP, began to dis-integrate. Aramco loosened its links with Saudi Arabia. The US was no longer insulated by oil contracts from the effects of market prices.
FROM EGGS TO OIL
In 1983, oil futures began to be traded, serving as a risk management mechanism. Futures markets in general increased in prominence as the world's markets became more unstable in the 80's. Actual buyers and sellers are able to lock in prices and more effectively plan for the future, while speculators provide 'liquidity'. Price signals were provided and could be responded to more quickly.
NEW OIL WARS: THE SHOOTOUT AT VALUE GAP
The 'value gap', the differences between a companies asset values and the companies sticker price, could get companies taken over by speculators. Undervalued companies were quickly gobbled up by investors.
THE TRIGGER
T. Boone Pickens initiated a series of changes that altered the landscape of the world oil business. Pickens was financially astute, expert at raising the stock values of companies, but some considered him immoral for the austerity measures he imposed on the businesses.
Pickens was fiercely independent, and basically worked as a one-man oil business overhauler, specializing in hostile takeovers. He was one of the earliest men to become an expert in the futures markets. Pickens worked Saturdays. His habit of restructuring companies spread through the oil business, driving up efficiency.
THE MEXICAN WEEKEND
As oil prices fell, US exploration fell off. Companies began tightening their belts. The downturn helped show how the entire world economy was tied to oil. Mexico began to struggle to service its debt. A visit of Silva Herzog to the US in 1982 was called 'The Mexican Weekend', when Mexico leaned on the US to provide a debt 'rollover'. Mexico paid for too enthusiastically wrapping its economy around rising oil prices. The fall-out from the oil price drop resulted in the nationalization of a major us bank.
DR. DRILL
A great deal of work went into exploring Mukluk in Alaska, and speculation was wild. However, the oil was not there, and Mukluk turned out to be the most expensive dry well ever dug. Mukluk became a symbol of declining US oil finds.
FAMILY MATTERS
Some family squabbles.
THE DEATH OF A MAJOR
Pickens took over Gulf Oil, a troubled company originally a part of the Seven Sisters. Pickens, presenting himself as a man of the people, managed to sway the voters to himself and entered negotiations to take over the company. He turned it in a more profitable direction.
SHAREHOLDERS' VALUE
Thanks to the complexities of the takeover process, Pickens then proceeded to make significant profits in two failed take-overs in a row. Exxon, meanwhile, had avoided acquisition deals, which limited its range of options. Restructuring resulted in huge job losses in the industry. In return for his ability to make oil companies more profitable, Pickens became the best-paid corporate executive in America.
THE NEW SECURITY
As Reagan was ushered into power, free market approaches were enjoying heightened popularity throughout the world. Europe wanted to increase purchases of Soviet Gas to increase economic security, while Reagan wanted to ban such sales to increase military security. A compromise was reached with Europe importing a limited amount of natural gas. Oil began to depoliticize and be a smaller factor in international politics, with economic policy in other areas coming to the fore. The war in Iran and Iraq raged on, with oil production capability being destroyed, but the world had so adjusted that it was no longer a threat to the global economic order. Oil was affordable.
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