Deja Vu - This All Seems Very Familiar

January 6, 2015 -

This morning I noticed a comment by Saudi Arabian oil minister Ali al-Naimi, that reminded me of comments made back in 1985.  Mr. al-Naimi asked, "If I reduce [production], what happens to my market share?  The price will go up, and the Russians, the Brazilians, US shale oil producers will take my share." What the Saudi oil minister neglected to add was that his colleagues in OPEC would also take advantage of the circumstances.

The same situation occurred from around 1973 to 1985.  In 1973, OPEC had a 51% share of world oil markets. Oil prices rose tenfold from $3/B in 1973 to $36/B in 1980. However, accompanying this increase non-OPEC producers started increasing output and consumers started using oil more efficiently. Non-OPEC output increased 25% from 1973 to 1980 and demand decreased 5% from 1979-80. As a consequence, OPEC market share dropped to 41%.  Saudi Arabia took on the role of swing producer and cut their production to support falling prices ($35.69/B in 1980 and $27.53/B in 1985).  The hope was that other OPEC members would also cut output. For several years they shared the pain as production dropped from 26 million barrels per day (MMB/D) in 1980 to 17 MMB/D in 1983. Then the cooperation stopped and the Saudis were left to defend the price. Saudi Arabian market share dropped from 16% in 1980 to 6% in 1985.  Then the Saudi oil minister, Ahmed Zaki Yamani, declared that the Kingdom would no longer absorb the market hit and increased output.  The result was predictable. Oil prices collapsed to $13/B in 1986 and languished between $13 and $20 for the next 13 years.

It was a lesson that Saudi oil ministers learned well and vowed not to repeat.

Allen Mesch

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