[The] oil crisis has given way to the oil glut. This perception is reinforced by an almost daily litany of price reductions on the world market. Yet, the word ''glut'' is misleading, for it suggests that the days of easy availability have returned. This is a dangerous and potentially costly illusion, based on a misinterpretation of what is going on. What we have is a breathing space, not deliverance.
But memories are short when it comes to energy. To quote from a newspaper article, ''There is a great deal of OPEC oil around-perhaps two million barrels a day-that cannot find a market without discounting that undermines the price structure that the organization was designed to defend."
That snippet above was a quote from an article in The New York Times by Daniel Yergin, author of great books on the history of oil such as The Prize and The Quest. In the rest of this article, he goes on and talks about all the pressures forcing the price of oil downward, such as increasing energy efficiency, overall consumption reductions in the developed world, and a slew of non-OPEC sources coming online in recent years to offset the control that OPEC has on the market.
Here's the crazy part: That article was written in June 1981. Go ahead and check it out. I'll wait for you to get back.
Sounds awfully familiar, right?
History never truly repeats itself, but at the same time, the saying, "this time it's different" never seems to really work either, especially in commodities like oil and gas. So let's put on our acid-wash jeans and look back at some of the parallels between the oil markets of the 1980s and what's happening today. Then we'll explore how the market responded during that time, and how the following 30 years after that price collapse could give some clues into how to invest in the oil sector for the next 30.
1981: The year that gave us MS-DOS, MTV, and oil gluts
The year 1981 produced something that many people hadn't seen in a long time -- an actual surplus of oil. To understand how it came to be at that point, though, we need to wind the clock back an extra couple of years. Much of the 1970s was a period marked with oil crisis after oil crisis. In 1979, another one of these crises arose as the Iranian Revolution was underway, and there was a short supply of oil.
This shortage, in conjunction with the 1973 oil shortage, started a wave of unprecedented exploration programs in other parts of the world. Between 1977 and 1982, Alaska's Prudhoe Bay, five major discoveries in the North Sea, and Mexico's supergiant Canatrell field -- all 35 billion barrels of oil -- were brought online to produce their first barrels of oil.
To add even more fuel to the fire, in 1979, much of the developed world was in a period of economic recession. Between 1979 and 1983, consumption of oil in developed nations -- we'll use the Organization for Economic Co-operation and Development members, or OECD, as our metric -- declined by close to 17%.
What finally broke the back of oil prices? As those new streams of oil came online and demand waned, the cartel couldn't get its act together enough to respond with appropriate price cuts. Then again, it was much harder for them to control prices because its share of global production had been cut from close to half to less than one-third by 1985.
Sizing up 1981 and 2014
Let's draw some parallels between this period in the 1980s and today. Is there an increase in production from non-OPEC sources? You bet... just look at the U.S. production numbers during the past five years.
What about a decline in consumption from the developed world? Yup. Since 2005, we've seen OECD demand decline by 4.5 million barrels per day. Part of that is from the economic collapse in 2008, but it's also from increasing vehicle efficiency and the use of alternative fuel, such as ethanol.
Finally, what about OPEC not able to get its act together? Based on the daily media coverage, it sure looks like it. Lately, OPEC seems like it's trying to herd a bunch of cats. Iran is squabbling with the Gulf states and Venezuela is crying uncle while Saudi Arabia holds serve with its production quotas.
What happened after the '80s oil glut?
Well, a lot of things. There were multiple conflicts in major producing nations, the collapse of the Soviet Union, several economic recessions, and a boatload of panics ranging from oil oversupplies to the fear that global oil production would go nowhere but down thanks to peak oil. All of these events were followed by the question, "Is this the new normal?"
Looking at the big picture, though, the most important thing to take away from the past 30 years of global oil markets has been an increase in demand of 27 million barrels per day. And 95% of that demand has been driven by the economic advancement of the developing world.
Source: BP Statistical Review of Energy, authors calculations.
There have been plenty of price peaks and plunges along the way, but overall increasing demand has kept oil companies in business. Yeah, there were fears that major oil companies would struggle. For 18 months between 1981 and the middle of 1982, ExxonMobil (XOM 0.02%) saw shares drop more than 40%.
XOM Total Return Price data by YCharts.
However, since then, Exxonmobil has done pretty well for shareholders who were willing to stick with the company.
XOM Total Return Price data by YCharts.
I don't care what kind of investor you are; that sort of performance will impress anyone.
What a Fool believes
There's no way I can say with any certainty that the next 30 years will play out just like they did from the early '80s until today, and I won't touch the idea that ExxonMobil's performance during that time frame will be replicated.
There's one thing that will likely continue to remain constant during the next 30 years, and that's the economic progress of the developing world. Too many of us think of developing world progress as just China, but 28 of the 50 fastest-growing economies in the world are in Africa and the Middle East, and 43 African and Middle Eastern nations sport the highest population growth rates.
The growth of these nations is very likely to result in increasing oil demand. According to ExxonMobil, that should equate to around another 21 million barrels per day of new demand by 2040.
Source: ExxonMobil Energy Outlook 2014.
Eventually, oil companies around the world will need to step up to the plate to meet those demands. It might sound crazy to invest in oil right now with prices hitting five-year lows, but I can bet that if you had a chance to call to the 1980s version of you, you would probably say: 1) Ditch the hairspray and the glam-rock outfits, and 2) Invest in big, stable oil companies.
So ask yourself... if you received a call from 2040, would you suggest investing in oil companies now?
