Chapter 34: We’re Going Down

With Iranian oil cut off from the US, redistribution was necessary. Prices soared because of this. The Saudis were the only OPEC nation to advocate lowering prices. They felt that if the price of oil became too high, consuming nations might try to develop alternatives. Also, rising prices could cause recession, depression, or even ruin of the global economy. What mattered most to Saudi Arabia and most nations were the rates: interest, exchange, inflation, and growth rates. The Saudis' objective was to use their significant weight in excess supply to push prices down. The producers had lost sight of the market reality, which would later come back to bite them.

On September 22nd, 1980, the heads of OPEC met in Vienna. At the very same time, Iraq, with a third of the population of Iran, began to launch airstrikes against Iran. The war removed 15% of total OPEC output and 8% of world demand. Thus, the oil supply was cut back sharply as a result of the war, but consumer nations were prepared this time. The International Energy Agency seemed to do a better job (relative to the second oil shock in 1979) of urging companies not to buy in fear or scramble for supplies to drive up prices, but, instead, to draw down their inventories and conserve the oil they had. But, with the war underway, panic buying began again.

A huge inventory build during 1979-1980 made sense when prices were increasing and there was an actual risk of a shortage. However, when demand started to plummet and supply from other non-OPEC sources surged, OPEC had no choice but to unify and bring prices down to Saudi’s $34/ bbl. The prices for “OPEC hawks” began to drop, and October 1981 saw the last OPEC price increase for at least another 10 years.