When I wrote my article titled “Black gold and the world’s happiness” in October, the basis percentage drop of Brent crude oil from its peak in June was 23 percent. It has fallen 59 percent as of mid January. It is a serious shock for a seven-month period!
Everyone is wondering: How much more?
While seeking answers to this, looking at it from various angles, the question of “was such a sharp drop ever witnessed before?” comes to mind.
Two periods catch the eye where a similar drop was witnessed in a similar time frame, upon examination of data from the last 40 years. One was in 1986, and the other during the 2008 crisis…
Let us cast a quick glance at the world’s oil adventure, particularly the dynamics during these two periods.
The notorious oil crisis years of the 1970s had come as a major shock to the world. I think our entry for the 1980 Eurovision Song Contest called Petrol – something that is difficult to understand even today – was our reaction to this shock.
The song’s lyrics were full of economic details, ranging from our external dependency to the value of oil, to its impact on welfare, and to its being tied to the dollar index. It is one of the most interesting pieces ever, and makes one think after listening to it…
My guess is while this song of ours, which tried to be victorious by adopting a different strategy of voicing the world’s pain, failed to garner the expected success; the global trend was about to change in the next decade. The world, which had failed to cope with the oil crisis of the 1970s, had embarked on the road of adopting alternative paths to reduce dependency. Like nuclear, natural gas and renewable energy…
These developments that eased the rate of demand for oil, coupled with ample production that resulted from the quest for different resources in places such as the North Sea and Alaska, prepared the grounds for the price drop of the 1980s.
While the downward trend seen after that continued to gather pace, the sharp drop of more than 60 percent witnessed at the end of 1985 and in June 1986 in particular catches the eye. It was a steep trend similar to the one being experienced currently…
The primary reason for the drop at that time was Saudi Arabia’s decision to suddenly increase production as a result of losing market share. Saudi Arabia, as the “swing producer” in OPEC and its adoption of a balancing role, had to that point been cutting supply for years. We could say that the collapse of 1986 was due to excessive supply.
The price of oil, which had remained low after 1986, rose anew as a consequence of Iraq’s occupation of Kuwait in August 1990, added to a decrease in production due to firms that exited the game. The oil price was weakening at the end of the year though after the process began to slowly stabilize as a result of the Gulf War.
After that oil recovered displaying a slightly fluctuating price trend until the Asian Crisis of 1997-98, when it showed a noticeable downward drop. The impact though was not as severe as the one in 1986.
OPEC’s decision to limit supply was effective in the price of oil recovering after this point. Rising demand, too, supported the upward movement created right into the 2000s. Although the U.S. economy experienced a slowdown in 2001; combined with the process that triggered the Iraq war, the price of oil witnessed an unforgettable surge during that period.
Let’s come to the 2008 crisis when a sharp drop occurred for the second time…
The gains made by oil in the 2000s reached a peak in July 2008. In the seven months that followed, it experienced a 70 percent drop as the crisis impacted demand. It happened within a time frame similar to the one we are currently experiencing but at a more accelerated rate.
On the other hand, OPEC’s production cuts and increasing demand from Asian economies saw the price of oil rise as steeply as it had dropped. Tensions in the Middle East and North Africa region also aided this accelerated rise. A picture emerged where the oil price had peaked in the first half of 2011.
The oil price fluctuated after that but the long-term trend could be considered stable. In mid 2014 as a result of a low rise in demand, continued strong supply, and despite expectations that were shaped by combining these situations, a surprise collapse in the price of oil was witnessed.
The current situation is not an issue of a quick contraction in demand and its consequent impact, as it was during the 2008 crisis and when compared with the past. The current shock has more parallels with 1986 despite existing differences. Of course, it should be remembered that OPEC’s hold was weakened and the price of oil remained low for a long time in the aftermath of the 1986 collapse.
Currently OPEC can’t take any measures due to pressure from Saudi Arabia. When the situation of non-OPEC producers is added to OPEC’s production, it looks like supply will remain strong.
Undoubtedly we are experiencing one of the most significant oil adventures of all time.
What will the situation be like from now onward and how will it affect the world? I will discuss this in another article but for the price of oil to recover, it is clear that the determining factor will be buoyancy in supply and in particular OPEC’s reinvigoration of its cartel-like spirit, which seems difficult.
The tolerance threshold of non-OPEC producers is also important. For instance, during the 1986 collapse many oil firms in the United States ceased operations. Various actors currently involved in the extraction of shale oil and heavy crude face a similar risk.
Of course, an interwoven web of relations, which include various political factors that extend from Russia to Iran, also have a role to play in the current stubborn stance on supply. Regardless of whether a conspiracy exists or not, it is clear as daylight that Saudi Arabia’s rivals and opponents of the United States have been placed in a difficult position.
As a result, the collapse that has engulfed oil-based economies has the potential of inevitably affecting geopolitical balances as well.
An example from this ongoing adventure: the price collapse of 1986 was one of the bricks laid on the road leading to the USSR’s demise.
Sometimes the past comes knocking after taking a circuitous route.
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