1980s oil glut Totally Explained

Everything about The 1980s Oil Glut totally explained

The 1980s oil glut was a surplus of crude oil caused by falling demand following the 1973 and 1979 energy crises. The world price of oil, which had peaked in 1979 at over US$35 per barrel, collapsed in 1986 from $27 to below $10. The glut began in the early 1980s as a result of increased crude production over the low 1979 levels, slowed economic activity in industrial countries (due to the 1973 and 1979 energy crises) and the energy conservation spurred by high fuel prices. The inflation adjusted real 2004 dollar value of oil fell from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986.
In June 1981, The New York Times stated an "Oil glut! ... is here" and Time Magazine stated: "the world temporarily floats in a glut of oil," though the next week a New York Times article warned that the word "glut" was misleading, and that in reality, while temporary surpluses had brought down prices somewhat, prices were still well above pre-energy crisis levels. This sentiment was echoed in November 1981, when the CEO of Exxon Corp also characterized the glut as a temporary surplus, and that the word "glut" was an example of "our American penchant for exaggerated language." He wrote that the main cause of the glut was declining consumption. In the United States, Europe and Japan, oil consumption had fallen 13% from 1979 to 1981, due to "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters," continuing a trend begun during the 1973 price increases.
After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986.

Background

The 1973 energy crisis and the 1979 energy crisis increased public awareness that oil is a limited resource, and that it would eventually run out as an economically viable energy source. During the 1973 energy crisis, the price of oil quadrupled. Oil never returned to pre-1973 levels, either in real or nominal terms, even during the 1980s glut.
The nominal price continued its slow increase after the crisis ended. Six years later, the price more than doubled during the 1979 energy crisis. ]]

Non-OPEC

During the 1980s, non-OPEC production increased worldwide.
OPEC's membership began to have divided opinions over what actions to take. In September 1985, Saudi Arabia, tried to gain market share by increasing production, creating a "huge surplus that angered many of their colleagues in OPEC". High-cost oil production facilities became less or even not profitable.

US imports

The US imported 28 percent of its oil in 1982 and 1983, down from 46.5 percent in 1977, due to lower consumption. Reliance on Middle East sources dwindled even further as Britain, Mexico, Nigeria and Norway joined Canada in the forefront of American suppliers.
Imported crude oil from Libya was banned in the United States on March 10, 1982.

Reduced demand

Part of the decline in prices and economic and geopolitical power of OPEC came from the shift from oil consumption to alternate energy sources. OPEC had relied on the famously limited price elasticity of demand of oil to maintain high consumption, but underestimated the extent to which other sources of supply would become profitable as prices increased. Electricity generation from nuclear power and natural gas, home heating from natural gas and ethanol blended gasoline all reduced the demand for oil. New passenger car fuel economy rose from 17 mpg in 1978 to more than 22 mpg in 1982, an increase of more than 30 percent.

Impact

The 1986 oil price collapse benefited oil-consuming countries such as the United States, Japan, Europe, and Third World nations, but represented a serious loss in revenue for oil-producing countries in northern Europe, the Soviet Union, and OPEC.
In 1981, before the brunt of the glut, Time Magazine wrote that in general, "A glut of crude causes tighter development budgets" in some oil-exporting nations. For a handful of heavily populated impoverished countries, whose economies were largely dependent on oil production — including Mexico, Nigeria, Algeria, and Libya — government and business leaders failed to prepare for a market reversal.
With the drop in oil prices, OPEC lost its unity. Oil exporters such as Mexico, Nigeria, and Venezuela, whose economies had expanded in the 1970s, were plunged into near-bankruptcy. Even Saudi Arabian economic power was significantly weakened.
Iraq had fought a long and costly war against Iran, and had particularly weak revenues. It was upset by Kuwait contributing to the glut and allegedly pumping oil from the Rumaila field below their common border. Iraq entered Kuwaitii territory in 1990, planning to increase reserves and revenues and cancel the debt, resulting in the first Gulf War.
In the US there was a dramatic decline domestic exploration, and the number of active drilling rigs was nearly halved in 1982." Oil producers held back on the search for new oilfields for fear of losing on their investments. As of May 2007, companies like ExxonMobil are not making nearly the investment in finding new oil today that they did in 1981.

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