Facing new oil glut, Saudis avoid 1980s mistakes to halt price slide

Tue Oct 14, 2014 1:40pm EDT
 
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By Rania El Gamal

DUBAI (Reuters) - Still haunted by its failed attempt to prevent a steep drop in oil prices by slashing production by almost three quarters in the 1980s, the world's top oil exporter Saudi Arabia is determined not to make the same mistake again.

The oil glut of the 1980s, the early days of the modern crude market and a distant memory for most traders, has resurfaced recently in conversations with Saudi officials and veteran analysts who see it as the defining moment behind the kingdom's new strategy to protect medium-term market share.

While the latest 25 percent slide in oil prices to below $90 a barrel is so far modest compared with the 1980s slump that took crude from $35 to below $10, many observers see similarities in a global market that is on the brink of a pivotal turn from an era of scarcity to one of abundance.

Three decades ago, the spike in prices caused by the 1973 Arab oil embargo and Iran's 1979 revolution sapped global oil demand, while the discovery of oil offshore in the North Sea spurred a new influx of non-OPEC crude.

With world markets awash in oil, Saudi Arabia embarked on a strategy of defending prices, which at the time were largely set by exporters rather than the nascent futures market. The kingdom slashed its own output from more than 10 million barrels per day in 1980 to less than 2.5 million bpd in 1985-86.

Other producers failed to follow suit, however, both within the Organization of the Petroleum Exporting Countries and among new petroleum powers such as Britain and Norway. Prices fell into a years-long slump, leading to 16 years of Saudi budget deficits that left the country deeply in debt.

Finally, in 1985, Riyadh shifted gears, revving up output and cutting prices in a move that triggered a final slump in markets but ultimately paved the way for a gradual recovery.

"The big mistake was that they continued to cut production to try to prop the prices and the price fell anyway," said analyst Yasser Elguindi of Medley Global Advisors.   Continued...

 
A view of the Khurais oilfield, about 160 km (99 miles) from Riyadh, June 23, 2008.  REUTERS/Ali Jarekji