1980s oil glut

• 1. Introduction

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  The 1980s oil glut changed the course of nations, toppled governments, and helped end a superpower. In June 1981, The New York Times declared that an "oil glut" had arrived. Time magazine said the world "temporarily floats in a glut of oil." Yet the very next week, The New York Times itself walked that back, warning that the word "glut" was misleading. Prices had dipped from their peak, but they were still far above where they had been before the energy crises of the 1970s.

  The CEO of Exxon weighed in that November. He called the word "glut" an example of "our American penchant for exaggerated language" and said the real story was simply declining consumption. He was right that consumption was falling. But he could not yet see what was coming: a six-year price collapse, a Saudi Arabia that would eventually snap, and oil dropping to as low as $7 per barrel. The questions this story raises are stark. How did the world go from an oil shortage to a punishing glut? Who decided to flood the market? And what happened to the countries that depended on high prices to survive?

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• 2. A Decade of New Oil

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  Phillips Petroleum discovered oil at Ekofisk, in Norwegian waters in the central North Sea, in the Chalk Group formation. That find was the beginning of an exponential wave. New fields spread across the North Sea continental shelf throughout the 1970s and 1980s, remaking the geography of global supply.

  In the United States, the Trans-Alaska Pipeline System began pumping oil in 1977. The Alaskan Prudhoe Bay Oil Field eventually reached peak production, contributing 2 million barrels per day of crude oil in 1988. That single field supplied 25 percent of all U.S. oil production at its height.

  In April 1979, President Jimmy Carter signed an executive order to remove price controls from petroleum products, with a deadline of October 1981. Carter's successor, Ronald Reagan, moved faster. On the 28th of January 1981, Reagan signed his own executive order enacting the reform immediately. Ending price controls terminated the artificial scarcity that had kept old oil off the market and encouraged fresh production to flow.

  Elsewhere, smaller non-OPEC producers including Brazil, Egypt, India, Malaysia, and Oman collectively doubled their output between 1979 and 1985, reaching a combined total of 3 million barrels per day. The Soviet Union, meanwhile, had expanded its production in Siberia so aggressively that it became the world's largest oil producer. The world price of oil had peaked in 1980 at over $35 per barrel. By 1986, it would fall from $27 to below $10 in a single year.

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• 3. The Demand That Didn't Return

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  Oil consumption in the United States, Europe, and Japan fell 13 percent between 1979 and 1981. The Exxon CEO identified this in his November 1981 remarks, attributing it "in part, in reaction to the very large increases in oil prices by the Organization of Petroleum Exporting Countries and other oil exporters." The trend had begun even earlier, with the 1973 price increases.

  American car fuel economy tells the story plainly. New passenger car fuel economy rose from 14 miles per gallon in 1975 to 22 miles per gallon in 1982, a jump of more than 50 percent in seven years. The United States imported 46.5 percent of its oil in 1977. By 1982 and 1983, that figure had dropped to 28 percent.

  France pursued a more structural solution. After the 1973 oil price shock exposed France's dependence on imported petroleum for electricity production, the government launched the Messmer Plan under Prime Minister Pierre Messmer. That program called for a massive expansion of nuclear power using license-built pressurized water reactors, replacing the older French UNGG reactors. Coal, nuclear power, natural gas for electricity and home heating, and ethanol-blended gasoline all carved into oil's share of the energy market. OPEC had built its strategy on the assumption that demand for oil was largely inelastic. The actual response from consumers and governments proved that assumption wrong.

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• 4. OPEC Fractures

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  From 1980 to 1986, OPEC cut production multiple times trying to hold prices high. The effort failed. By 1981, non-OPEC countries had already surpassed OPEC's total output. By 1985, OPEC's share of the world market had collapsed to less than a third, down from roughly half during the 1970s. A February 1982 report in the Boston Globe noted that OPEC's production, which had peaked in 1977, had fallen to its lowest level since 1969.

  The cartel's internal discipline was unraveling. Members were supposed to observe production quotas to stabilize prices. Instead, many countries inflated their reported reserves to justify higher quotas, quietly exceeded those quotas, or refused to comply at all. Saudi Arabia bore the consequences. In 1981, Saudi daily output was around 10 million barrels per day. By 1985, it had dropped to around 3.5 million as the Saudis tried to prop up prices by absorbing cuts that other members would not make.

  In September 1985, Saudi Arabia decided it had had enough. The kingdom abandoned its role as swing producer and began pumping at full capacity. The resulting surplus was described as a "huge surplus that angered many of their colleagues in OPEC." Oil prices, already under pressure, fell further. The inflation-adjusted real 2004 dollar value of oil dropped from an average of $78.2 in 1981 to an average of $26.8 per barrel in 1986. At the lowest point, prices hit $7 per barrel.

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• 5. Nations Under Pressure

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  Mexico faced an economic and debt crisis in 1982, directly tied to the collapse in oil revenue. Venezuela's economy contracted and consumer price inflation climbed, staying between 6 and 12 percent from 1982 to 1986. That pressure eventually produced the 1989 Caracazo protests. Even Saudi Arabian economic power was significantly weakened by the crash it had helped trigger.

  Algeria's trajectory was especially consequential. The glut pushed Algeria into recession and eroded the authority of Chadli Bendjedid's authoritarian regime. Facing economic pressure, Bendjedid had to make concessions to Islamic opposition as early as 1984 and began dismantling socialist economic policies in 1987. After the October Riots of 1988, he reformed the constitution twice and opened political space. When his party lost the first multi-party elections to Islamists, the military removed him from office. That sequence fed directly into the Algerian Civil War.

  In the United States, the domestic industry contracted sharply. In late 1985, nearly 2,300 rigs were drilling wells. A year later, barely 1,000 remained active. The number of U.S. petroleum producers fell from 11,370 in 1985 to 5,231 in 1989, according to data from the Independent Petroleum Association of America. Canada's response had come earlier: the National Energy Program, launched in 1980 in reaction to high 1970s prices, ran until 1985. As late as May 2007, companies like ExxonMobil were still not investing in new oil exploration at the levels seen in 1981.

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• 6. War and Collapse

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  Iraq entered the glut period already weakened. It had fought a long and costly war against Iran, leaving revenues thin and debt high. Baghdad grew furious at Kuwait, which it accused of contributing to the oil surplus and of pumping oil from the Rumaila field that straddled their common border. In 1990, Iraq invaded Kuwait, calculating that seizing Kuwaiti oil reserves would increase its own revenues and allow it to cancel its debt. That invasion triggered the first Gulf War.

  The Soviet Union's story ended even more dramatically. The USSR had become a major oil producer before the glut, and revenue from oil exports had become central to its economy. When prices collapsed, that revenue stream dried up. The drop in oil prices contributed to the nation's final collapse. The glut that began as a story about American mpg standards and Norwegian offshore drilling had reached into the heart of the Cold War's most powerful adversary.

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