Is an Oil Bust Coming?
Oil has strange effects on communities. Right now, the Bakken commercial real estate market is experiencing a great boom, but this has happened before. In the 1980’s, North Dakota experienced an oil boom, then it experienced an oil bust. The whole world did. As an astute investor, you might ask if it can happen again.
The 1980’s Oil Boom
In the 1970s, the oil market had two major shocks. In response to United States’ support for Israel in the 1973 Yom Kippur War, OPEC countries stopped shipping oil to the US. In 1979, in the wake of Iran’s regime change from being led by Shah Reza Pahlavi to being ruled by the Ayatollah Khomeini and the commencement of the Iran-Iraq war, oil prices also skyrocketed. These factors pushed the US into high levels of inflation.
With higher prices in the US, domestic oil production became more important and oil that was harder to exploit became affordable to extract. However, as the world’s market returned to normalcy, prices dropped and large areas of the US – including North Dakota — got abandoned. These changes impacted many areas, creating declining values for what would be Bakken commercial real estate today.
With hindsight, we can see that the boom ended for three reasons:
- The United States’ inflation problem ended, thanks to aggressive action by President Reagan and the then-Federal Reserve chair, Paul Volcker.
- Middle Eastern oil shipments returned to normalcy.
- New oil sources – including Alaska, Nigeria, Venezuela, Mexico and the North Sea – came online
Why Today Is Different
The three factors that drive the 1980s oil boom and bust aren’t present today. The United States has had systemically low inflation for years, going with its low inflation. The Middle East is becoming a less vital part of the world’s oil supply, making the ongoing unrest there less of a factor.
Finally, much of the world’s “easy” oil has been found and extracted. The days of drilling a shallow well and tapping a nearly limitless supply of oil such as happened in places like Saudi Arabia’s Ghawar Field, are long over. What this means is that oil that takes some effort to extract – such as the fracking that drives shale oil production in the Bakken – is closer to the norm, making North Dakota oil more cost competitive than in the past.
The picture for the prospects of Bakken commercial real estate and the greater Bakken economy are even rosier. When the oil bust happened in the 1980s, the world didn’t have a great deal of demand pressure. Back then, China and India were largely dependent on non-motorized transportation and parts of the USSR got around in animal-driven transportation. Today, the 37 percent of the world’s population that lives in China and India – the equivalent of more than eight USAs – are rapidly transitioning to car-based transportation. The Iron Curtain has fallen and middle classes are growing in once Third-World countries. This all bodes well for global oil demand.
The greater macroeconomic picture appears to indicate that today’s Bakken oil boom is nothing like booms of the past. The hope is that the growth will be long-lasting and systemic and support high values for Bakken commercial real estate for many years to come.