Crash of '86 Left Permanent Scars

You could almost hear the pain.

This year the petroleum industry observes the 20th anniversary of the Oil Price Collapse of 1986.

No one in the industry who went through that time will, or can, forget it.

In less than 12 months, world crude oil prices fell by more than 60 percent.

The global oil and gas business collapsed like air screaming through the neck of an over-inflated balloon.

Hundreds of thousands of oil workers were laid off.

Texas reported 366,200 jobs related to oil and gas extraction and oilfield equipment in the early 1980s, according to the Federal Reserve Bank of Dallas.

By 1987, only a year after the price collapse, 175,000 of those jobs had vanished.

Company divisions evaporated.

"There were guys with doctorates flipping burgers," is a comment you'll still hear in Houston oil firm offices.

The biggest employer of petroleum engineers after 1986 was said to be Safeway grocery stores.

Texas alone -- just Texas -- lost more than $1 billion in oil and gas severance taxes.

Australia's oil industry spent $740.4 million on petroleum exploration in 1984, according to the Australian Bureau of Statistics.

In 1987, it spent $346.4 million.

The Oil Price Collapse of 1986, coming so quickly and cutting so deeply, created a mindset in the global oil industry that persists to today.

Try to Remember ...

Larry Nation, AAPG communications director, tells this story.

In January 1986, he traveled to New York City with the then-executive director and the president of AAPG to spread a good-news story about the oil industry to the "eastern press."

"We were going to have meetings with the New York Times, Time magazine, Newsday, the Wall Street Journal," Nation recalled.

"One of the difficulties at that time, we thought, was that people believed the world in general and the United States in particular was running out of oil. They were asking, in that case, ‘Why should I invest in the oil industry?'" he added.

At Newsday, a reporter asked, "Why are you here?" Nation said.

The AAPG team delivered their message: The world and the United States still had plenty of oil and the oil industry still held plenty of opportunity.

"We went down for breakfast the next morning and there was a USA Today newspaper on our chairs," Nation recalled. "And the headline said ‘Oil Panic Hits Market, Tumbles Prices.'"

That was Jan. 20, he said. As it turned out, oil prices had barely started slipping, from over $30 a month before to a little over to $20.

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You could almost hear the pain.

This year the petroleum industry observes the 20th anniversary of the Oil Price Collapse of 1986.

No one in the industry who went through that time will, or can, forget it.

In less than 12 months, world crude oil prices fell by more than 60 percent.

The global oil and gas business collapsed like air screaming through the neck of an over-inflated balloon.

Hundreds of thousands of oil workers were laid off.

Texas reported 366,200 jobs related to oil and gas extraction and oilfield equipment in the early 1980s, according to the Federal Reserve Bank of Dallas.

By 1987, only a year after the price collapse, 175,000 of those jobs had vanished.

Company divisions evaporated.

"There were guys with doctorates flipping burgers," is a comment you'll still hear in Houston oil firm offices.

The biggest employer of petroleum engineers after 1986 was said to be Safeway grocery stores.

Texas alone -- just Texas -- lost more than $1 billion in oil and gas severance taxes.

Australia's oil industry spent $740.4 million on petroleum exploration in 1984, according to the Australian Bureau of Statistics.

In 1987, it spent $346.4 million.

The Oil Price Collapse of 1986, coming so quickly and cutting so deeply, created a mindset in the global oil industry that persists to today.

Try to Remember ...

Larry Nation, AAPG communications director, tells this story.

In January 1986, he traveled to New York City with the then-executive director and the president of AAPG to spread a good-news story about the oil industry to the "eastern press."

"We were going to have meetings with the New York Times, Time magazine, Newsday, the Wall Street Journal," Nation recalled.

"One of the difficulties at that time, we thought, was that people believed the world in general and the United States in particular was running out of oil. They were asking, in that case, ‘Why should I invest in the oil industry?'" he added.

At Newsday, a reporter asked, "Why are you here?" Nation said.

The AAPG team delivered their message: The world and the United States still had plenty of oil and the oil industry still held plenty of opportunity.

"We went down for breakfast the next morning and there was a USA Today newspaper on our chairs," Nation recalled. "And the headline said ‘Oil Panic Hits Market, Tumbles Prices.'"

That was Jan. 20, he said. As it turned out, oil prices had barely started slipping, from over $30 a month before to a little over to $20.

"Our message became, ‘Stability of resources,'" Nation said.

No one could know what was coming.

Eight days later, during the annual "AAPG Day" (now Leadership Conference) gathering, NASA's Space Shuttle Challenger exploded, killing all the astronauts aboard. Attendees bowed in a moment of silence upon hearing the news.

Nation compared the emotionally painful reaction and linked image of that disaster to the feeling of watching the industry implode as oil prices sank lower and lower.

"After AAPG Day, there were waves and waves of layoffs throughout the spring and summer. Layoffs were in the thousands, and even in the tens of thousands, per company," he said.

The lives of every person in the industry were affected. Tens of thousands of former oil company employees left the industry permanently.

Those who survived the collapse carry a permanent scar.

AAPG membership hit its high in May 1986 with 44,757 members. Five years later, membership was 34,909.

William L. Fisher, director of the Jackson School of Geosciences at the University of Texas at Austin, served as AAPG president in 1986 and made that trip with Nation.

A survey after the price collapse found that a third of AAPG members were unemployed or seriously under-employed, he said. By definition, 25 percent unemployment is an economic depression.

"We were in a whale of a hard time (at AAPG). We had to cut staff massively. Short courses fell apart overnight. We had to make some real sharp budget cuts to survive," Fisher recalled.

Expecting 15,000 to 18,000 registrants and exhibitors, AAPG had judiciously chosen the large Georgia World Congress Center in Atlanta as the site for its 1986 annual meeting.

"We had 3,000, if that many," Fisher said. "And there we were in that big arena in Atlanta, which would hold 20,000 people."

Historical Context

To understand the full impact of the 1986 price collapse, go back to 1973. OPEC, led by Saudi Arabia, took two remarkable and historic actions.

First, in October 1973, Arab oil exporting countries decided to cut back overall production by 5 percent a month and place a total oil embargo on the United States, in retaliation for U.S. actions in the latest Arab-Israeli war.

In an already tight oil market, the embargo led to gasoline shortages in the United States and packed an emotional punch for oil consumers.

Second, in December 1973, OPEC flexed its economic muscle by unilaterally raising its asking price to $11.65 per barrel. That was more than four times the price level of mid-1973 (April 2004 EXPLORER).

People started to believe that OPEC controlled both the supply and the price of crude oil. And why would OPEC do anything but keep raising prices?

In January 1979, the Iranian revolution suspended Iran's oil exports, beginning a period of rapid oil price increases. The Iranian hostage crisis later that year sent prices to $20 a barrel.

A few months later, Saudi Arabia officially raised its marker crude price from $19 a barrel to $26.

People in the industry began to tell each other, with absolute certainty, that oil would never sell for less than $20 per barrel again.

Dick Bishop worked in exploration for Exxon Corp. in the 1980s, and later served as AAPG president.

"In 1984 and ‘85 we were really pressed to drill a lot of wells. The number of wells we were drilling went from 12 to 65," he recalled.

"I remember very well, we went into a monthly meeting where we presented the wells we were planning to drill," he said. "I remember telling management we wanted some sensitivity on the oil price forecast.

"Our doomsday forecast was $20-$25 a barrel," he said.

Everywhere in the industry, drilling projects were justified on the promise of continuing high oil prices and the prospect of future price increases.

"The industry is far more focused on the fundamentals now than it was then," Bishop said. "There was more focus on volumes then, on finding the oil, and not necessarily on making money," Bishop said.

In 1980, ongoing skirmishes between Iraq and Iran broke out in full-scale war. Saudi light crude went to $28 per barrel, then to $34.

By the summer of 1981, oil prices were jostling toward $38 per barrel and seemed sure to go higher.

People in the industry had been afraid to whisper it aloud, but published projections now confirmed their belief: By the year 2000, oil would be selling for $100 a barrel.

The Perfect Storm

The wheels started coming off the oil price juggernaut in the early 1980s.

Penn Square Bank in Oklahoma City, with numerous bad energy loans, went bankrupt -- and almost took a number of larger banks down with it.

"The Penn Square Bank failure on the fifth of July 1982, was an unseemly punctuation on an unusual situation," said Wayne Swearingen, a Tulsa independent oilman and consultant.

In the United States, a widespread recession reached its worst point in 1982, severely dampening energy demand. By 1983, oil prices dropped below $30 a barrel.

Then, in 1984, U.S. savings and loan institutions started to fail.

A series of changes in federal and state laws had allowed S&Ls to invest outside their traditional business areas. Some became dependent on continued high energy prices.

Bailing out the failed S&L system ultimately cost American taxpayers up to $150 billion.

But in the oil and gas industry, the price party kept going on.

Swearingen recalled seeing drilling rig construction contracts changing hands for $1 million.

"If you had a contract to buy a rig, you could sell your contract for a lot of money. You could sell your place in the conga line," he said.

"Within a year, rigs were selling by the pound," he said. "A lot of those rigs didn't drill a well for 10 years, or maybe even longer than that."

By 1985, the industry had reached a consensus on oil prices.

The cost of crude, self-proclaimed experts agreed, would fluctuate downward a bit more, and then settle in around $25 a barrel before starting to rise again.

Everyone saw clear sailing ahead.

Today, we would call the 1985 oil price situation the Perfect Storm.

And the killing thunderbolt came from Saudi Arabia.

The Saudis, with their huge reserves, had been put in the place of reducing production when the world's oil supplies grew too large to maintain OPEC's target price.

It didn't work. High oil prices and new production sources led to a surge in supply, forcing Saudi Arabia to make cut after cut in its own production.

Saudi oil revenues fell by 75 percent as its market share dwindled. The country could foresee a day when its production would fall under a million barrels a day and it would have no exports.

In his Pulitzer Prize-winning history of the oil industry, The Prize, Daniel Yergin wrote:

"The Saudis sent warning after warning to the other OPEC countries and to the non-OPEC producers. It would not continue to accept the loss of market share; it would not indefinitely tolerate and underwrite quota violations by other OPEC countries and increased production by non-OPEC nations; it could not be counted on to be the swing producer.

"If need be, Saudi Arabia would flood the market."

Those warnings went unheeded by an industry intent on making as much money from as much production as possible.

Finally, Saudi Arabia decided it had to turn on the taps.

Its increased production began surging into the world's oil markets in December 1985. A few weeks later, the great Oil Price Collapse of 1986 began.

‘Hurt Like Hell'

Everything people in the industry knew about oil pricing turned out to be wrong.

In August 1986, the world oil price dropped below $9 a barrel.

"The actual low point in Oklahoma was $8.25 in 1986, for good-quality sweet crude," Swearingen said.

Some shipments of crude changed hands at less than $7 a barrel.

The upstream sector of the industry went into a tailspin.

"Nationwide, marginal wells were being plugged one every 30 minutes. In Oklahoma, it was about eight per day," Swearingen recalled.

"The idiocy, when you look back on it, was, ‘My God, why didn't more people see it coming?'" he added.

Out of the 20 biggest S&L failures, 14 were in Texas. Texas S&Ls accounted for more than half that industry's losses.

Other oilpatch states suffered equally.

In 2005, ExxonMobil Chairman Lee Raymond discussed his company's capital spending plans. He cited the Oil Price Collapse of 1986 as a cautionary example.

We saw it happen once.

It could happen again.

The collapse of 1986 occurred after a period when oil prices had been artificially high, Fisher noted.

"Nevertheless," he said, "it hurt like hell."

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