It wasn’t that long ago, 19 years to be precise, when the average oil price was $11.91 per barrel (WTI). Are world conditions such that we could see that price again? Everyone said that oil prices would never fall into the $20 range, but 14 months ago oil prices hit a 14-year low of $26.21 per barrel on February 11, 2016. Are we, or better yet, can we really be looking at the same world conditions that drove those 1998 oil prices down to record lows that almost equaled the 158-year average annual oil price of $11.22 per barrel (WTI)?
The answer is "it depends". I’m not saying we could survive today at that level for any extended length of time, but conditions are ripe for low prices and long recovery times, unless oil exporting countries learn some valuable lessons from their not-so-distant past, including the past couple of years.
Let’s look at some similarities from 1998 and 2016.
• 1998 - $11.91 per barrel reflected a 58 percent drop in one year from 1996 through 1998
• 2016 - $43.80 per barrel reflected a 51 percent drop in one year from 2014 through 2016
• 1998/2016 - Unusual historical sustained lows in daily prices and slow recovery times
• 1998/2016 – Over-production destroyed the balance of supply and demand basic fundamentals.
• 1998/2016 - This crisis caused much concern to both governments and companies engaged in the upstream sector of the industry.
• 1998/2016 - Oil inventories have been built up to high levels.
• 1998/2016 – Unrest and lack of cooperation between Middle East countries and surrounding countries has caused uneasiness.
• 1998/2016 - Oil exporting countries have moved slowly in expressing concern about falling oil prices and in some cases not at all.
• 1998/2016 - Oil-exporting countries and private oil companies have gone on a ‘production binge’ in recent years.
• 1998/2016 - Many recent bankruptcies have occurred due extreme price reductions.
• 1998/2016 - OPEC does not seem capable of preventing price crises, but is only able to respond to them with varying degrees of success when they emerge by agreeing to cut daily production by some number for a short period without any concrete long term solutions.
• 1998/2016 - Uncoordinated production creates a heavy toll in terms of revenues for governments and of cash flows for companies with interests in the upstream sector.
• 1998/2016 - Saudi Arabia is playing a key or lead role as a fixed-volume supplier.
• 1998/2016 - Other oil producing countries (Iran) are looking to expand their production plans.
• 1998/2016 - Saudi Arabia feeling threatened and their initial reactions were not advertised before increasing production levels, thus lowering prices.
• 1998/2016 – There is a need for the restoration of credibility to the OPEC quota system, which lost its validity.
1998/2016 - A dramatic increase in daily oil production has occurred.
Oil exporting countries, and more generally, the oil and gas industry has much to learn from our past when it comes to world oil developments over the past couple. Lessons can be derived from an analysis of the causes of falling oil prices and the building-up of inventories, or producers’ reactions and the ways in which world oil diplomacy works or does not and has not worked, and of the market response to producers’ policy initiatives and decisions.
As in 1998, an opportunity today has now arisen for oil-exporting countries, both from within and outside OPEC, including the United States, to re-think the framework and substance of their co-operative policies. Their current approach to the problem of weaker prices has certainly not proven to be very effective.
Furthermore, the current oil price crisis may prove deeper than initially thought and may be unable to manage a quick and stable recovery or a positive response to the remedy which OPEC and other oil-exporting countries are trying to apply today, unless some serious cooperation comes about.
The internet is full of articles that claim the world can turn on $60 to $70 oil and there are ways to help insure that. If prices would stabilize at that level it would support thriving stock values again and thousands of lost jobs could be reinstated, while at the same time creating thousands of new ones, thus stimulating the economy again.
There are solutions to this issue, but they do not make sense for politicians when it comes to re-election time. It seems politicians are more interested in keeping their jobs than helping those who lost theirs due to the lack of preventive measures being implemented.
The scales of justice have now become the scales of common sense however. Countries like Saudi Arabia, who rushed in to make a point in the past couple of years, have only hurt themselves in the long run it seems. We should be looking hard at our situation here in the United States.
With that being said though, there’s always good and bad in everything. Let’s take a look at the upside comparisons:
• Oil prices and production outputs started rebounding and stabilizing 1-year later from 1998 in 1999.
• Oil prices started rebounding 1-year later from 2016 to 2017.
• Oil prices doubled within two years, from 1998 to 2000.
• Oil prices doubled from mid $20’s to mid $40’s in one year from mid 2016 to mid 2017.
• Oil prices rose to amounts equal to 4 times that of 1997 to $91 in 10 years (2008).
• There are predictions that oil markets could see stable oil prices in excess of $80 per barrel within the next 5 years (2017 to 2023 - World Bank Oil Price Forecast).
Something else good that has come about in the past two years is that smart investors are taking advantage of lower drilling and completion costs, which equates to lower breakeven price points that positions them in a much better position to realize significant profits in the future.
I am an optimist at heart and firmly believe much of what I read about the upside of the future of oil and gas pricing and all of the predictions. I also believe that we can and will learn from the past, hopefully sooner rather than later. It may be painful for a while but I believe the good guys in white hats, with cooperation and common sense on their side, will prevail.
By David Melton for Oilprice.com
