Crude oil has collapsed four times over the past three decades. In each case, the dramatic decline in prices was triggered by the oversupply of crude oil following a significant reduction in demand. The price of crude oil often took months or years to reach precrisis levels following these declines, while most of the price action was determined by OPEC decision-making.
These historical price declines could provide insights into how long the current decline in oil prices might be expected to last.
1980s: Wars Cause Supply Crisis
Crude oil prices fell from over $35 per barrel in 1980 to below $10 per barrel by 1986. Only after four years did prices eventually recover from the dramatic decline.
The Yom Kippur War and Iranian Revolution in the 1970s interrupted crude oil supplies from the Middle East and triggered petroleum shortages, elevating prices across the world’s major developed countries. In response to the crisis, the U.S. brought the Trans-Atlantic Pipeline online in 1977 and the Prudoe Bay Oil Field entered into peak production by 1988, contributing 2 million barrels per day and representing a quarter of U.S. production.
OPEC initially responded to lower oil prices by attempting to cut production in order to bolster prices. However, these strategies backfired as non-OPEC production soared across Siberia, Alaska, the North Sea, and the Gulf of Mexico. Saudi Arabia reversed its strategy in 1985 by producing at full capacity and creating a huge surplus. High-cost oil production facilities became less profitable, oil prices fell as low as $7 per barrel, and a lot of U.S. production went offline.
1990s: Lack of Demand Spurs Crisis
Crude oil prices fell from a high of just over $25 per barrel in 1997 to less than $11 per barrel by 1998. Prices eventually recovered by the end of 1999 to their precrisis levels.
Asian emerging markets were hot commodities in the mid-1990s. With large current account deficits and fixed exchange rates, hot money sought to take advantage of interest rate differentials, fueling an economic bubble. OPEC increased production around this time in order to meet the region’s growing demand for energy. Unfortunately, the bubble quickly popped when Thailand was forced to float the bhat and abandon its peg to the U.S. dollar.
OPEC quickly cut production in an attempt to contain the damage, but the market’s oversupply kept a lid on crude oil price appreciation for nearly a year. However, prices quickly doubled the next year after the excess production wore off and programs designed to fix the Asian Financial Crisis gained some traction. The U.S. was also in the middle of the dot-com boom at the time, which helped support demand among developed countries.
2000s: Great Recession Halts Demand
Crude oil prices collapsed from a peak of around $160 per barrel in mid-2008 to about $40 per barrel later by 2009. Prices have never fully recovered from the decline.
The Great Recession was triggered by the U.S. subprime mortgage crisis and fueled by excessive credit across developed and emerging markets. As the worst financial crisis since the Great Depression in the 1930s, the period led to a significant reduction in crude oil demand around the world as economies contracted. These declines occurred at different times across different parts of the world and the ramifications continue to this day.
OPEC responded to the reduction in demand by agreeing to the biggest ever supply cut in an attempt to boost prices. These supply cuts proved to be effective as crude oil prices quickly began to recover in 2009 and continued to move higher until early 2011. At that point, non-OPEC production began to take hold and the rise in prices halted. Prices reached only around $120 per barrel before trading sideways over subsequent years.
2010s: U.S. Jumps Supply
Crude oil prices fell from around $120 per barrel in mid-2014 to a low of around $30 per barrel in 2016 in an ongoing crisis facing the energy markets.
Unconventional drilling techniques helped the U.S. double its crude oil output over the past five years, which capped oil prices at around $120 per barrel. After the global economy experienced another recession, particularly in Europe, crude oil prices began to fall. OPEC opted not to cut back production in an attempt to starve higher-cost U.S. producers. Prices fell more than 70% to around $30 per barrel before recovering to about $40 per barrel.
The dramatic fall this time around mirrors the past crises in several years. In the 1980s, OPEC used a similar strategy to shut down U.S. production and oil prices eventually recovered. If OPEC were to cut production and cave in, the 1990s and 2000s show just how quickly prices could recover. The difference this time around is that U.S. producers continue to produce and could implement a ceiling on prices at around $100 per barrel.
The Bottom Line
Crude oil prices have fallen dramatically four times over the past three decades, which provides an interesting case study for the current decline in prices. In the past, crude oil prices have rebounded in months or years, but some experts believe it could be a bit longer this time around.