The Late, Great Oil Boom Was Really a Mirage

The oil booms of my father’s time--the real booms, the ones that transformed the landscape of the American Southwest in the 1920s and 1930s--were created by the discovery of the great oil fields. But 50 years later there were no more great oil fields to be found in the United States, and damned few small ones.

Nevertheless, we had a boom in the 1970s and early 1980s--or was it a boom? It was driven not by new discoveries but by higher prices and, more than that, by the expectation that prices would go even higher. The most dramatic change brought about by this boom was not the physical transformation of the landscape but the psychological transformation of the oilman. For almost 10 crazy years, an entire industry lived in a dream world.

It began with the Arab oil embargo in the winter of 1973, when members of the Organization of Petroleum Exporting Countries agreed to production quotas. By 1979, the momentum was building when the second shock hit. Americans remember long lines at gas stations, the soaring cost of home heating oil and pleas from Washington to conserve energy and keep the thermostats at 68 degrees. They also remember the feelings of frustration and even fear that a handful of small countries, most of them halfway around the world, could disrupt the lives and economy of the most powerful nation on earth. It was called “the moral equivalent of war.”

Oil Withheld From Market

There was a lot of talk about the “shortage” of oil when in fact there was no shortage; it was simply being withheld from the market. At the time, oilmen seemed to share the national outrage, but they were crying with a ham on their shoulder. We all thought we were rich, for the price of oil had been steadily moving up since the first embargo.

Just as the rest of the country headed into a recession fed by the high cost of energy, the oil industry was moving straight up. There was a widespread perception that we had become dangerously dependent on foreign oil, and a consensus developed that the domestic industry needed to intensify the search for oil and gas.

With the “energy crisis” of 1979, brought on by the fall of the Shah of Iran, the domestic industry took off. Iranian production dropped from 5 million barrels a day to almost nothing overnight, and the world oil price rose from $13 to $30 a barrel almost as fast.

The industry wanted the government to decontrol oil and gas immediately and let oil prices rise to the world level, for government regulation had kept prices artificially low. Decontrol would make exploration profitable again. It would also cause conservation, but nobody was focusing on that possibility. The decontrol of oil came in 1980, and in December, 1981, prices reached their peak. Oil had topped $40 a barrel, and newly discovered natural gas had skyrocketed to more than $10 per thousand cubic feet.

The perception of an eternal short supply caused euphoria in the Oil Patch. If you didn’t believe it, all you had to do was ask the experts, who were all predicting prices of $50, $60 or even $100 a barrel. There seemed to be no limit to how high they could go, based on the myth of the “shortage.”

But there were limits, after all. In the past four years, banks, service companies, drilling companies--hundreds of businesses in the Southwest that bet that the boom would never end--have gone under. Before the shakeout ends, hundreds more will join them. As the industry struggles to cope with its most severe slump ever, it’s no wonder that oilmen look back on the energy crisis with nostalgia.

Boom Fueled by Dreams

It was quite a ride--from $3 to $40 a barrel. For better or worse, I was on board for a lot of the journey. My own theories about the energy crisis went against those of most oilmen. I have never been all that concerned about America’s so-called dependence on foreign oil. As long as OPEC is willing to sell cheap, it seems we should buy. It makes much more sense for us to deplete foreign oil reserves at a cheap price instead of our own. After all, there is no safer place for oil and gas than in the ground. On the other hand, the domestic industry should be free to drill anytime it wants. I’m not suggesting that U.S. exploration be shut down.

I don’t think the oil boom is anything to get misty-eyed over. Admittedly, I’m using the wisdom of hindsight here. We did get carried away at Mesa, although we came to our senses sooner than most. But it’s clear that the boom was never much more than a mirage. It was fueled by dreamsthat prices would keep going up, and that more oil would be found--rather than by facts. It was a boom devoid of reality. Some oilmen don’t understand, and some don’t want to understand, the great damage that was done.

High prices can cover up a lot of sins. The domestic oil business had become a mature industry, like the smokestack industries of the Northeast. And, despite increased exploration, the industry was not making the discoveries to justify the expenditure.

In 1970, the domestic oil industry failed to replace its annual production with new reserves for the first time. By 1980, the larger companies were lucky to be replacing 50% to 60% of their reserves. That led to the harshest truth of all: Throughout the boom, most oil companies were actually in a state of liquidation, because they were producing more oil than they were finding. Indeed, the production of many companies actually declined. But with higher prices leading to record profits and cash flow, it was easy to overlook these unpleasant facts.

I’m convinced that without OPEC’s help, the industry would have had to face its problems much earlier, like 10 years earlier. Many of the things going on now--the restructuring, the spinoffs of properties to stockholders, the stock buybacks and so on--would have taken place in the 1970s. There would have been a lot less pain had it happened over a longer period and not just after a boom that wasn’t paid for.

1987 by T. Boone Pickens Jr. and Beatrice Carr Pickens.