OPEC's deal is 1986 revisited

The recent fall in oil prices has not been viewed as a crisis, unlike in 1986. This lack of panic must to some extent be attributable to déjà vu. Organization of Petroleum Exporting Countries ministers met last month, as in 1986, to set production cuts (OGJ, June 29, 1998, p. 28). Out of curiosity, I trawled through OGJ archives, and the degree of similarity was spooky. In early December 1985, OGJ reported that Brent crude oil was trading at $30.50/bbl, but by August 1986, it had

July 6, 1998

3 min read

David Knott
London
[email protected]

The recent fall in oil prices has not been viewed as a crisis, unlike in 1986. This lack of panic must to some extent be attributable to déjà vu.

Organization of Petroleum Exporting Countries ministers met last month, as in 1986, to set production cuts (OGJ, June 29, 1998, p. 28). Out of curiosity, I trawled through OGJ archives, and the degree of similarity was spooky.

In early December 1985, OGJ reported that Brent crude oil was trading at $30.50/bbl, but by August 1986, it had plunged to $9.60/bbl, as supply outstretched demand.

OPEC met and agreed to cut combined output by 2 million b/d. Yet prices initially stayed put. OGJ reported, "The oil market was unimpressed by the package of voluntary production cuts."

Maybe producers can draw hope now from events in 1986. Two weeks after that, Brent had recovered to $15/bbl, with growing evidence that OPEC members were cutting as promised.

Recovery

By late August 1986, evidence of market confidence showed through in U.S. exploration and development statistics. The U.S. rig count rose by 75 units in a week to 810, and all major oil producing states showed an increase in drilling permits.

By early October 1986, when OPEC was again due to meet, Brent crude oil was trading just below $14/bbl, and the price was steady. But there were fears about OPEC members' adherence to quotas.

OGJ reported, "Some top OPEC officials believe a few countries not hurt badly enough by low oil prices will cheat on quotas, drawing the wrath of full production by Saudi Arabia, Kuwait, and Abu Dhabi. Oil prices could again dip below $10/bbl."

That OPEC meeting's wishy-washy resolution to restrain output more permanently left markets uncertain, and Brent crude fell to $13/ bbl.

Following the meeting, Saudi Arabia changed its strategy from chasing market share to setting a target price, and OPEC policy gained new focus.

Second deal

In 1986, as in 1998, OPEC forged a second production-cutting deal. That December, OPEC reduced total quotas from 16.8 million b/d to 15.8 million b/d.

This boosted Brent crude prices to $17.50/bbl. OPEC said further cuts would be made to support a target price of $18/bbl. This time, despite more claims of quota cheating, the price held, and the oil industry got back to work.

Here are a few quotes from the last OGJ editorial of 1986: "It took a year of economic pain and destruction, but OPEC seems ready to do what it must. However tentative, however long it took, 1986 bore some good news after all.

"Demand fell, supply grew, and even with the surplus building, exporters tried to raise prices. Something had to give. But economic forces take time to exert themselves, and the longer they take, the greater the exertion.

"The oil market's collapse was swift and devastating. And despite production shut-in and capital destroyed as a result, the surplus remains. The question is whether OPEC learned, through events of 1986, what to do with it."

All this proves the adage that there is nothing new under the sun. And it does nothing to disprove the theory that journalists could sometimes run old stories, with just a few dates and names changed, and nobody would notice.