The oil price shocks of the 1970s reduced demand in the developed world, the main consumers and importers of oil. In the US and Europe, consumers began to drive smaller, more fuel-efficient vehicles. More important, utilities across the US shuttered power plants that burn crude oil and replaced this capacity with coal- and gas-fired facilities.
In the mid-1970s, US power plants routinely consumed more than 50 million barrels per month of petroleum and other refined products. A decade later, oil consumption by US electric utilities had plummeted to between 15 and 20 million barrels per month.
High oil prices in the 1970s also encouraged major oil and gas companies to ramp up spending on exploration and development, a wave of investment that spawned major new finds such as Alaska’s North Slope, Mexican giant Cantarell in the Bay of Campeche and highly productive fields in the UK and Norwegian North Sea.
On the back of this drilling boom, non-OPEC oil production (excluding output from the former Soviet Union) climbed to almost 30 million barrels per day in 1985 from less than 20 million barrels per day in 1975.
With non-OPEC production rising in the early 1980s and oil prices tumbling, Saudi Arabia slashed its output in an effort to rebalance the market and regain its status as the world’s swing producer.
Between 1980 and 1985, OPEC lowered its oil output by about 12 million barrels per day, with Saudi Arabia cutting its production by 6.7 million barrels per day to 3.175 million barrels per day.
These massive production cuts helped to put a floor under oil prices. Although inflation-adjusted crude prices still tumbled by roughly 40 percent in the first half of the 1980s, the price drop would have been more severe if OPEC had maintained its output.
However, OPEC’s production cuts ultimately backfired, with the cartel’s share of global production falling to 26 percent in 1985 from a peak of 53 percent in 1985.
In December 1985, Saudi Arabia announced plans to boost output in an effort to recapture the market share lost to non-OPEC producers and grew its crude volumes by almost 1.7 million barrels per day over the next 12 months. And over the ensuing half-decade, OPEC expanded its annual production to almost 24 million barrels per day from less than 15 million barrels per day in 1985.
The resulting supply glut sent inflation-adjusted oil prices plummeting to less than $31 per barrel in 1986 from an average of $60 per barrel in 1965. Although crude prices stabilized somewhat thereafter, the commodity didn’t top $45 per barrel again until 2004—almost two decades later.
Most US oil executives would prefer to forget the mid-1980s, when the domestic rig count plummeted to 705 in mid-1986 from 2,713 at the end of 1984. In these dark days, most energy stocks sold off precipitously and many small fry went bankrupt.
Over the 12 months ended June 30, 1986, shares of contract driller Nabors Industries (NYSE: NBR) gave up 72 percent of their value, while Apache Corp’s (NYSE: APA) stock fell 45 percent from peak to trough. Plunging oil prices also precipitated a debt crisis in Mexico and contributed to the collapse of the Soviet Union’s centrally planned economy.
But the drop in oil prices helped Saudi Arabia to regain market share. By the mid-1990s, OPEC accounted for about 40 percent of global oil production, as lower prices dented output from nations outside the cartel. And although Saudi Arabia felt the sting of rapidly declining oil prices, a near tripling of volumes between 1985 and 1990 helped to offset some of this pain.
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Elliott and Roger on Dec. 31, 2019
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