Five years ago, as oil prices flirted with $100 per barrel, the Malthusian notion that the world would run out of oil held strong.
While popularity of the search term “peak oil” reached its peak in 2005, by 2011 the term was still front and center in oil price debates. But the 60% slide in oil prices that soon followed, starting in late 2014, shifted the debate to oil’s nadir. How low would prices go?
Many investors blamed the shale oil revolution for the sharp fall in oil prices, which sunk as low as $26 dollars by 2016. But, oil’s recent $100 price point was equally at fault.
Oil’s recent slide, on an historical basis, paints a dramatic picture. The long-term view of oil prices going back to 1861, since oil became incorporated to everyday use, draws the eye to the most recent boom and bust.
But this latest rise and fall can be brought into perspective if prices are adjusted for inflation. On an inflation-adjusted basis, there have been two major oil price plummets before—one in the 1980s, and one in the 1860s.
The story of oil has always had two sides to it: supply and demand. But in terms of the crashes, the narrative has been driven by supply.
The first crash happened after a surge of oil came on the market during the Pennsylvania oil rush. The 1980s crash came as Saudi Arabia and OPEC nations ramped up production, which almost shut down the U.S. oil industry. The third crash came as an oil boom, led by shale technology, which increased worldwide production by 10 million barrels per day over the past decade.
Each oil price spike, when adjusted for inflation, has a similar magnitude, reaching $100 to $120 and then crashing to the $20 to $40 range.
At $100 per barrel there was significant investment in innovation, research and production, which in turn brought oil prices lower, notes Stephen Schork, president of the Schork Group. At the $40 level, companies are not going to devote as many resources to technological research.
But a slowdown in research and investment is not going to put upward pressure on prices anytime soon, says Schork. Additionally, the price drop that shut down the U.S. oil industry in the 1980s is unlikely to happen again.
“I hate to say ‘this time is different,’ but this time really is different,” says Schork. “Part of the reason there’s an oil oversupply has been because of shale oil producers, and they're much more flexible to increase or drop production relatively quickly. In oil market shocks of the past, producers had a slow to reaction to supply and demand. Now, supply and demand can find balance without a decades long wait.”