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How the 1986 Oil Crash Was Even Worse
8/16/2016 11:21:37 AM
Today’s declining oil prices have led some people to whisper around the watercooler that it’s going to be like 1986 all over again.

While there certainly are parallels to be found between the current situation and the scenario that played out in the late ‘80s, there are also some key differences.

What Happened in 1986

Prior to the mid-eighties, Saudi Arabia periodically capped their own production in order to help keep demand - and prices - high. Before this, wars in the Middle East cut key players out of the production game which also helped keep prices at the top end of the scale.

When Saudi Arabia decided to quit holding back production, barrel prices plummeted and the oil crash of 1986 was born. Over a period of just 4 months prices nosedived, landing somewhere around $10 per barrel. This knocked the U.S. oil industry flat and set into motion a long and painful period that saw many once-viable outfits fold under the pressure.

How Bad Was It?

The 1986 crash saw the real value of oil plummet nearly 80 percent. Those who remember the eighties recall dark times for a once booming industry. What were once lavish company parties became simple backyard potlucks. Non-operational rigs gathered dust while operators sat idle.

It was so bad that people planned to turn offshore rigs into rocket launching platforms, casinos, or anything else that might generate income. While few of these ideas came to fruition, they indicate the desperation of the time. Raises, bonuses, even knowing you’d have a job to go to in the morning came into question. Nothing was certain anymore. Industry veteran Fred Ogden laments the "frozen wage scale” of the time, noting that workers took a major hit while companies tried desperately to hold on to their cash.

History Will Probably Not Repeat Itself

While things aren’t great right now, analysts tell us that it’s highly unlikely that we’ll see a repeat of 1986. First, it’s important to remember that price slumps happen. While the factors affecting oil prices are often complicated and multifaceted, it’s not an oversimplification to note that rising and falling prices are par for the course in such a cyclical industry.

The fact that there was such an excess in supply at the time makes the 1986 slump fundamentally different than today’s crisis. The crude market overhang then was 14 million barrels/day. Today it sits around 1-2 million barrels/day. The gap between supply and demand is not nearly as unfavorable for producers as it was in those days. In fact, in 2016 demand is growing and the stage is set for prices to climb.

While there are plenty of issues to contend with in today’s oil price lull, those in the industry can take heart in knowing that things probably won’t get too much worse before they get better again.
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