That invocation of stability calls to mind the rhetoric pioneered by Prince Abdulaziz’s most celebrated predecessor, Sheikh Ahmed Zaki Yamani. During his 24-year career as the kingdom’s oil minister until 1986, Yamani promoted price stability as the key goal of global energy policies — with his country using its unparalleled reserves of crude to guarantee that objective.
Rarely was that task harder than in the wake of the second oil shock in the early 1980s. On one hand, European countries caught out by the 1973 crude embargo were experiencing a surge in output, as investments in domestic fields such as the North Sea started to come to fruition. The UK alone increased output by more than a million daily barrels between 1979 and 1985.
The same thing was happening in the Soviet Union, where a population boom and stagnant agricultural productivity meant that Moscow had to sell ever-increasing volumes of crude to pay for grain imports to feed its cities.
Demand was also struggling. The 1973 embargo had driven consuming nations to seek for alternatives to petroleum. Fuel oil, that was generating about a quarter of the world’s electricity in the early 1970s, quickly fell to levels below 5% from which it’s never recovered. Oil consumption in Europe and the Soviet Union, accounting for four out of 10 additional barrels consumed between 1965 and 1980, was slowing to a standstill. Demand from those two regions has never again come close to the 25 million barrels used in 1979.
Meanwhile, Federal Reserve Chair Paul Volcker was relentlessly driving up interest rates in an effort to stamp out the inflation stirred up by the previous decade’s oil crises, putting a further crimp into oil demand.
OPEC had problems at home, too. The Iran-Iraq war choked off supplies from two of the biggest producers. Chasing stability, Saudi Arabia’s only option was to cut and cut, desperately trying to limit its own supply to keep the market in balance. That imposed severe costs of its own: By 1985, the kingdom had almost lost its role as the biggest crude exporter to the USSR. The riyal suffered a run of devaluations until it was finally pegged to the dollar in 1986.
The one bright spot in all that chaos was the effect on the climate. Few were paying much attention to carbon dioxide in the early 1980s, but all that turmoil in the pre-eminent fossil fuel had a markedly positive effect. Emissions fell about 3.7% between 1979 and 1982, a drop almost as dramatic as the 4.9% slump during the pandemic year of 2020. If that momentum had been sustained over the four decades since 1982, our current carbon footprint would be about a quarter of its present size.
The resemblances to the present are striking. Once again, we have a government in Moscow relentlessly exporting crude in an all-or-nothing campaign to replenish its shaky foreign-exchange reserves. Once again, the Federal Reserve has slammed the brakes on the global economy. Once again, the biggest source of marginal oil demand over the previous decades — this time China, rather than western and eastern Europe — is sputtering.
Meanwhile, technological substitution is in full swing. Just as oil importers raced to build coal and nuclear plants and close down fuel-oil generators in the 1970s and 1980s, so they’re clamoring to purchase lower-emission vehicles now. Fully one in five cars sold worldwide this year will come with a plug. In China and the European Union, electric vehicles will have market shares of about a third and a quarter respectively.
Saudi Arabia’s attempts to manage these contradictions rarely end well. Riyadh now needs crude prices to be about 14% higher to compensate for the revenue shortfall from the 1.5 million barrels it has cut since the start of April. In fact, even after the shock and awe of the weekend’s latest reduction, they’re about 3.4% lower.
In the 1980s, the kingdom’s Samson-like attempts to carry the entire global oil market on its shoulders ended in a shocking reversal. When Prince Mohammed bin Salman was a few weeks old and Back to the Future was top of the US box office in September 1985, Yamani abandoned his policy of restraint, cutting prices and producing freely to the point where output nearly tripled by the early 1990s. When Riyadh decided to pump freely, it turned out that the world really did have a limitless appetite for crude.
Should the current run of restraint by Saudi Arabia end with another reversal — something we saw briefly in its brief production spurt at the start of 2020 — the accelerating energy transition will present the kingdom with an alarming question. Perhaps this time when the Saudis open the taps, the world will no longer want what they’re selling?
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.
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