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"It's Different This Time?" What Happened To US Oil Drillers During The Last Price War

Tyler Durden's picture




 

History may not repeat but it rhymes so loud sometimes that Einstein would be rolling in his repetitively insane grave. As Bloomberg notes, the last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. "1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research who has covered the oil sector for 37 years, "it put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory." Think it can't happen again? Think again... consider how levered US Shale drillers are and just what Saudi has to gain from keeping their foot on the US neck... In 1986, the U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

 

As Bloomberg reports,

In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

 

So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.

 

“1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Wakefield, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”

 

...

 

“Someone has to blink,” said Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “OPEC is saying ‘Does it really have to be us?’”

Saudi Arabia wasn’t the first to blink in 1986

The kingdom had been the world’s swing producer for years, boosting output when prices rose and scaling back when they dropped. As fellow OPEC members pumped more crude, the kingdom’s production fell to 3.175 million barrels a day in 1985 from more than 9 million in 1981, according to data compiled by Bloomberg.

 

...

 

In December 1985, Saudi Arabia declared its intention to regain market share and oil prices began to decline, sinking to as low as $10.42 a barrel in March 1986 from a November 1985 peak of $31.72.

 

 

OPEC reached a new production-sharing agreement in December 1986. By then, the damage to U.S. producers had been done. Unemployment in Oklahoma rose to 8.9 percent and in Texas to 9.3 percent, compared with the 7 percent national average. Production in Oklahoma fell 8.3 percent in 1986 and 7.1 percent in Texas, according to the Energy Information Administration.

 

“There was just a flood of equipment on the market,”

 

“The U.S. oil industry is blaming the Saudis for a problem that was created here,” Emerson said. “It’s like a gold rush. Everyone is trying to get as much out of the ground as fast as possible.”

This will not end well... as we explained in detail here

Shrinking revenue will leave less cash to pour into the ground, making some companies vulnerable to a credit crunch. Much of the shale boom is sustained by borrowed money.

 

Total debt for 61 of the U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers reached $199 billion in the third quarter, up from $184 billion a year ago, according to data compiled by Bloomberg.

 

“There’s no doubt that you’ll see a lot of people who are vulnerable, especially the smaller players who don’t have deep pockets, and are already deep into other people’s pockets,” Lynch said. “Some of them are already hurting.”

*  *  *

And with this morning's US data suggesting that their economy has anything but decoupled, crude prices are tumbling fuirther...

 

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Wed, 11/26/2014 - 15:45 | 5491866 cossack55
cossack55's picture

I guess its better than having them pretend to fly planes into skyscrapers.

Wed, 11/26/2014 - 16:15 | 5491954 Publicus
Publicus's picture

Peak oil is a myth to enslave the population, we are entering the era of abundance instead. Basic income for everyone and money printing for economic activity.

Wed, 11/26/2014 - 17:33 | 5492210 economics9698
economics9698's picture

When US supply collapses the tribe rejoices because now we are dependent on Middle East oil once again.  

Wed, 11/26/2014 - 16:18 | 5491969 Ruffmuff
Ruffmuff's picture

Who the fuck gives two shits about shale miners. Or oil sands. Or saudi princes.  Let the bitch tumble.

 The boost to the economy is incredible for nearly everyone if oil falls.

Love it, let it continue. We can then buy more china shit.

Problem is this a power play against the ruskies and Iran, protecting a failing petro dollar and whatever the TPTB like to play with besides their little weeners, so may be short lived.

Wed, 11/26/2014 - 15:45 | 5491867 mattgallis
mattgallis's picture

Cheaper gas... YES

 

 

Wed, 11/26/2014 - 15:53 | 5491896 El Vaquero
El Vaquero's picture

For now.  This is going to be a head fake.  "DRILL BABY DRILL!" is going to turn into  "Pay up, bitchez!" followed by "Uhhhh, the check is in the mail, yeah, that's it..." if prices don't start going back up soon.  Once production is forced to shut down, the price will go to the moon.  This will turn into an Enron here, an Enron there, everywhere an Enron.

Wed, 11/26/2014 - 16:09 | 5491946 Headbanger
Headbanger's picture

I don't think so..

The Greater Depression we're about to implode into will last for years and perhaps a decade.

So demand for oil will remain very low

Until the next major war starts

Just like the last time way back when.

Wed, 11/26/2014 - 16:12 | 5491951 El Vaquero
El Vaquero's picture

You'd better hope you're wrong, because we won't have the oil to fight a conventional WWIII, which means, well, you know what it means.

Wed, 11/26/2014 - 16:18 | 5491975 MalteseFalcon
MalteseFalcon's picture

The oil patch and bankster oil speculators have had a long, government granted run under Obama.

Time to bend over.

Wed, 11/26/2014 - 15:46 | 5491871 KnuckleDragger-X
KnuckleDragger-X's picture

But this time we have Obama 'helping' us....

Wed, 11/26/2014 - 15:47 | 5491876 Glass Seagull
Glass Seagull's picture

 

 

Fucking Saudis.  70% of MENA instability comes from that Kingdom of thieves. 

 

 

Wed, 11/26/2014 - 15:49 | 5491881 One And Only
One And Only's picture

There's oil everywhere just stick a fuckin straw in the ground. Hollywood became the epicenter of entertainment because it used to be a giant oil spigot and the workers from the oil industry needed entertainment. If you look at old old pictures of Hollywood there were oil derricks as far as the eye could see. It's yuppy liberals and government sponsored control freaks that make it inaccessible.

Wed, 11/26/2014 - 18:40 | 5492340 Joenobody12
Joenobody12's picture

NO NO NO .

Hollywood become the epicenter of enetertainment because of the moron Thomas Edison wanted to corner the movie making industry with his patents on "movie". Producers moved to the west coast to continue to make movies the way they wanted it, not the way dictated by this Edison asshole.  They settled in LA because they figured they could quickly escape to Mexico if Edison were to send in the cops to enforce his patent. 

Wed, 11/26/2014 - 15:50 | 5491885 SheepDog-One
SheepDog-One's picture

Don't worry, Kerry is about to get on this!

Wed, 11/26/2014 - 15:54 | 5491899 Winston Churchill
Winston Churchill's picture

He canter.

I've put down better looking horses.

Wed, 11/26/2014 - 15:51 | 5491892 richiebaby
richiebaby's picture

Cheap Gas - Cheap Booze   Got my vote

Wed, 11/26/2014 - 16:20 | 5491982 Ruffmuff
Ruffmuff's picture

Cheap booze?? You had me goin there.

Wed, 11/26/2014 - 15:54 | 5491897 ZippyBananaPants
ZippyBananaPants's picture

We drilled some folks

Wed, 11/26/2014 - 16:23 | 5491993 Salah
Salah's picture

US crude production could surpass KSA by 2015

http://nextbigfuture.com/2014/11/usa-crude-oil-production-could-surpass....

[Neptune in Pisces, bitchez!)


Wed, 11/26/2014 - 15:57 | 5491907 WTFUD
WTFUD's picture

I've heard he's hit the bottle hard again but the only cunt who can save us is Bubba Bush 'cause the fat house of sodomy king loves his tongue down his throat. sluuurrrrpy

Wed, 11/26/2014 - 15:56 | 5491908 Jonathan Equine...
Jonathan Equine Phallus's picture

If the US foreign policy wasn't hijacked by a transparent cabal - we'd be buying  oil from Russia, Iran, and Venezuela [in bigger amounts] and telling Saudi Arabia to go fuck itself.

Neither Saudi Arabia, nor Israel are allies to the United States - only to those who have hijacked its military and finances and media.

What if tomorrow we simply stopped buying Saudi oil - for realsies?

Why the fuck should we fuck ourselves over Eastern Ukraine?

 

- Because its global domination baby!  It's Risk, and FRN fit gives us [well, TPTB] lots of extra cards

Wed, 11/26/2014 - 15:58 | 5491913 duncangraper
duncangraper's picture

http://www.sama.gov.sa/sites/samaen/ReportsStatistics/ReportsStatisticsL...

Chart 25

Until exchange rate of dollar vs me currencies is allowed to float--things move onward into the monetary surreal

US will not initiate this--

When does Arabia? That is the key.

Wed, 11/26/2014 - 16:01 | 5491916 KnuckleDragger-X
KnuckleDragger-X's picture

$5 a barrel tariff on imported oil should piss the Saudi's off......

Wed, 11/26/2014 - 16:25 | 5491999 FieldingMellish
FieldingMellish's picture

It will only piss off the Canadians since they export 3 times as much to the US as Saudi does.

Wed, 11/26/2014 - 17:16 | 5492168 KnuckleDragger-X
KnuckleDragger-X's picture

The Canucks fall under NAFTA, besides it'll hurt uncle Warrens choo-choo's more.

Wed, 11/26/2014 - 16:02 | 5491919 JustObserving
JustObserving's picture

The 1986 collapse in oil prices caused collapse of the USSR.  Putin will not stand for another collapse.  Michael Reagan confirms that Saudis collapsed oil prices in 1986 at behest of USA to hurt USSR. History repeats:

Ronald Reagan's son says his father got the Saudis to pump more oil to undercut USSR

http://www.politifact.com/punditfact/statements/2014/mar/13/michael-reag...

Wed, 11/26/2014 - 16:02 | 5491925 jacship
jacship's picture

It's called Monopoly

Wed, 11/26/2014 - 16:18 | 5491976 SelfGov
SelfGov's picture

So the peak and subsequent decline in US oil production is the fault of the Saudi's?

 

Try geology.

Wed, 11/26/2014 - 16:23 | 5491988 Bunga Bunga
Bunga Bunga's picture

$10, it goes back to 1999.

Wed, 11/26/2014 - 16:27 | 5492001 FieldingMellish
FieldingMellish's picture

Perhaps its time Saudi Arabia rethinks the petrodollar.

Wed, 11/26/2014 - 16:59 | 5492119 blahzay
blahzay's picture

Mostly, you are all not on point.

The Saudis are not purposefully lowering price of oil; they simply cannot sell it on the open market at the price they wish due to lack of demand in emerging markets.

It is decreasing demand that is causing the oil price to drop, not machinations;  unless of course you are not a socialist and, if you were, open market pricing is itself a machination.

Look around the world for support for this position.  Generally commodity prices are in decline, mills and mines are slowing - even laying off people or putting them on extended holidays.

This is a sign of a much sicker economy than most wish to admin.  The seekers of better days ahead live in denial and denial will be more damaging than the dump when it comes.

Wed, 11/26/2014 - 17:04 | 5492137 Billy Shears
Billy Shears's picture

The beatings will continue until morale improves.

Wed, 11/26/2014 - 17:12 | 5492156 emersonreturn
emersonreturn's picture

 possibly the KSC is one of ISIS's clients.  perhaps it was one of the reasons KSA joined Zioreal to encourage the US to train and set up ISIS.  it allows KSA to middle man iraqie oil while leaving their own in the ground.  which in turn would allow the saudis to last much longer than expected. 

Wed, 11/26/2014 - 17:40 | 5492223 pitz
pitz's picture

This time around, there isn't huge overcapacity that can simply be turned on.  That's the difference.  OPEC might be able to ramp everything they possibly have available, and increase production, at best, a million barrels per day.  Unlike in the 1980s where there literally millions of barrels per day of shut-in capacity that was capable of being brought online. 

Wed, 11/26/2014 - 18:12 | 5492289 malek
malek's picture

It's a bit amusing how MSM is working hard to ignore another possibility:
that the US oligarchs are happy to wait idly watching crude prices collapse, as then they will soon be able to buy bancrupt shale oil companies for pennies on the dollar, before they let crude prices rise again.

Wed, 11/26/2014 - 21:34 | 5492848 wrs1
wrs1's picture

When the Saudis opened the spigots they went from 4 million barrels per day to 8.5 million barrels per day and ultimately to as high as 10.5m barrels per day.  They are at 9.5m barrels per day and haven't done 10m per day in a long time, not likely they can pump anymore than they are.  It's the US that is opening the spigots and the real scare for the Saudis is that US oil imports are down 6.5% yoy.  In five years the US won't need to import oil if the price stays over $80.

Thu, 11/27/2014 - 01:20 | 5493316 pitz
pitz's picture

Doubtful that the US oil production could grow that much.  We're talking a deficiency of still 8-10 million barrels per day.  The low hanging fruit in the shales has been picked, and depletion rates are very high in the existing wells. 

Thu, 11/27/2014 - 04:17 | 5493462 wrs1
wrs1's picture

Depletion rates being high doesn't mean much if the initial production of the average well is over 1000 barrels per day.  What is the low hanging fruit to which you are referring?  Do you know anything about any of the major plays in Texas?  Can you even name them?  Have you done any comparisons of conventional production rates and horizontal production rates?  It seems to me that you are just repeating things you have read without any facts to back them up or if you have them, they aren't apparent in your commentary.  The US is only importing about 7 million barrels per day now, closing that gap won't be too difficult.

What is going to happen with the low price of oil is that the stripper wells that have been operating for years are going to become unprofitable and those areas will revert back to the original minerals owners if there is no shale below.  If there is shale below then the deeper rights may need to be exploited or lost.  I have a section in West Texas where XOM holds the deep rights and hasn't developed them because they are HBP by some shallow stripper wells being produced by small indpendents.   Those wells are not going to be profitable below $50/bbl because they produce so little oil.  When those wells stop, XOM is going to have to start drilling within 30 days in order to avoid paying us $1.5m for a lease bonus and a new lease with a 25% royalty instead of a 1/8 royalty that my foolish ancestors signed in 1950.  XTO/XOM has already told us they intend to drill 8 wells to 9200 feet on that 640 acre section with 4000 foot laterals.  Those wells will probably IP at around 700-1000 bbl/day and a year later they will be producing 400bbl/day.  This is the way shale works.  Now I am sure they won't drill all 8 wells at once but they will do them one or two per year in order to hold the minerals, otherwise they lose them and they are very, very, valuable.

If someone doesn't produce my oil, it will cost the next guy more to do it.  The oil is going to get produced, the technology is very well understood now.  Watch and see how wrong the shale doubters and shale hating luddites are.

Wed, 11/26/2014 - 23:06 | 5493063 jonjon831983
jonjon831983's picture

Increasing production from various sources and decreasing consumption.  I think... it isn't entirely Saudis forcing a "price war".  Saudis are likely saying it, but only to save face and make it seem like they still have some control.

 

Thu, 11/27/2014 - 07:27 | 5493549 LostandFound
LostandFound's picture

Isnt this simple, the financial economy cannot handle low oil prices without imploding, while the real economy thrives on low oil prices.

This is the first physical commodity to unwind from the financial market, next up will be the others commodity / assets....but which way, up or down....

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