Whether it’s the Wall Street Journal, the Financial Post or Wood Mackenzie’s March 7 recent oil price report, people seem bent on making comparisons between the 1986 oil price collapse and today’s crisis.
But Roger Herrera - Petroleum News’ favorite oil price guru because of his accurate predictions - sees the comparisons as superficial; a nonsensical basis for predicting what will happen to oil markets in the months and years ahead.
Nonetheless, Wood Mackenzie’s prediction of an oil price recovery starting in 2017 is possible, Herrera said, but not because of the reasoning used in the consultancy’s March report.
The title of the report, Oil Markets in 2016: Back to the future II, is a take on the 1986 movie, “Back to the Future.”
Various projections for life in 2015 in the film have come true - video conferencing, movie sequels, handheld tablets and wall mounted widescreen televisions. But it will be sheer chance if Wood Mac’s oil price prediction comparisons prove true, energy observer Herrera told Petroleum News.
“In 1986, Saudi Arabia had been deliberately keeping its production low while its OPEC partners and the rest of the world produced more or less all they could.
“This inevitably meant that the Saudis were quickly losing market share. They therefore deliberately induced the price collapse by very rapidly increasing their production volume - which at that time they alone could do - and thereby lowering the price of crude by about the same percentage as it has declined today,” Herrera said.
His perception of today’s price collapse is “radically different” and “was certainly not induced by Saudi Arabia. … All the Saudis have done is to keep their production more or less stable and watched while the U.S. tight oil revolution flooded the world with excess oil,” Herrera said.
“The causes in 1986 and now are very similar, but the catalysts are completely different,” he said.
“Why are people so unwilling to recognize that the … flood of tight oil from the U.S. has been the main cause of the price collapse?” Herrera asked, clearly frustrated.
“Obviously, the politics of the Middle East and perhaps the China economy, together with Putin’s extreme need for petroleum income, have had important effects, but, fundamentally, it has been the U.S. evolution of tight oil technology, in particular, that has been the reason for the price collapse.”
Nobody, Herrera said, has read Saudi Arabia correctly.
“Everyone thought the Saudis would continue to control the price by acting as the swing producer,” he said. “Welcome to the new world!”
Googling the 1986 crisis “you will read lots of commentators who recognize many similarities between the two events (1986 and 2015 oil price collapses), but I would argue that the world is totally different today than 30 years ago and if the parallels turn out to be exact, it is luck rather than inevitability that make them so,” Herrera said.
“I have always believed that every one, everywhere, wanted to benefit from abundant energy, especially oil. I think that this is truer today than it was 30 years ago because the benefits of energy are so instantly translated into a more pleasant lifestyle and a longer and healthier life,” he said.
About half of mankind, he said, still wants such changes, so the demand for oil will only continue to increase.
Can’t rely on history repeating itself
“What I am trying to say is that it is very misleading and dangerous to forecast the world’s oil future by assuming that the 1986 price fall is a template for today.”
Despite the similarities between the 1986 and current oil price collapses, “now is not like then, so we can’t rely on history repeating itself,” Herrera said.
If the Organization of Petroleum Exporting Countries no longer functions in its traditional way, “one can argue that the price of oil will mainly be influenced by supply and demand.”
“In fact, that is perhaps exactly what is happening today - affected, of course, by politics and wars,” Herrera said.
“Without new energy breakthroughs, which could happen quickly and at any time,” he said it is “reasonable” to expect demand to outstrip supply.
“So, the price of oil will go up,” he said.
Hopefully it will happen slowly, Herrera said, and not because of revolution or war.
In January, Herrera predicted crude at a solid $40 a barrel by the end of the year, “if everything goes better than expected.”
Because low oil prices are good for the general public and businesses outside the oil industry, they eventually translate into more development, which increases the demand for oil, causing oil prices to increase.
That said, he did not see development catching up with the world’s crude supply this year, and only beginning to next year.
It is a gradual process, he said, and the current gap between development and supply is very wide - and because cheap oil isn’t yet causing an appreciable decrease in the cost of living.
“This time, they seem to be taking their own sweet time,” Herrera said about the cost of goods and services.
It’s a slow process, but “maybe - maybe - in five years we’ll see a return to $100 oil,” he said.
“What we’ve created is a situation that is quite unique. We’ve never had an excess of oil in the world to this extent. .. Development sort of kept up,” Herrera said.
Even if crude prices return to the $100 level in five years or less, he feared the world would be a much different place at that time.
“Lower oil prices could destabilize the governments of Russia and Saudi Arabia, which are heavily reliant on oil,” Herrera said in January.
