Oil collapse of 1986 shows rebound could be years away

The last time excess supply caused a plunge in oil, it took almost five years for prices to recover.

West Texas Intermediate, the U.S. oil benchmark, tumbled 69 percent from $31.82 a barrel in November 1985 to $9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices didn’t claw back the losses until 1990. Oil has dropped 57 percent since June and OPEC members say they’re willing to let prices sink further.

Surging prices in the 1970s led to the development of the North Sea and Alaska oil fields. OPEC members also increased capacity, leaving the Saudis to trim output when demand softened.

In the 1980s, Saudi Arabia “was tired of the other members cheating and just opened the spigots,” Walter Zimmerman, the chief technical strategist for United-ICAP who predicted last year’s drop, said by phone from Jersey City, New Jersey, Tuesday. After the plunge in prices “the Saudis lost their nerve and they resumed the role of swing producer. If they hadn’t lost their nerve, we wouldn’t be seeing the shale oil boom Wednesday and North Sea production would be substantially lower because investment would have been less,” he said.

Investment in new production surged as futures averaged $95.77 a barrel in 2011 through 2013. The combination of horizontal drilling and hydraulic fracturing has unlocked supplies from shale formations, sending U.S. oil output to the highest level in three decades. Russian oil production rose to a post-Soviet record last month and Iraq exported the most oil since the 1980s in December.

“If they had allowed prices to stay lower they would have saved themselves many problems in the long run,” Zimmerman said. “Many reserves we take for granted would have never been developed.” (Bloomberg)