For those who remember the 1980s, it’s not unreasonable to speculate that they remember the great Robin Leach. He was one of the faces of the mis-named “Decade of Greed.”
Leach was the cheerful host of Lifestyles of the Rich and Famous, a show that so many watched to learn more about the rich and famous. The British immigrant in Leach enthusiastically took viewers into the lives and houses of those with more. He was a lot of fun, and most would agree that any documentary meant to give viewers a feel for the ‘80s would have to include Leach and Lifestyles.
Interesting about the show is that occasionally Leach would pivot to where wealth was once abundant. In particular, his travels sometimes took him to Houston, TX. While prosperity there had skyrocketed in the weak-dollar 1970s that logically coincided with huge surges in the price of a barrel of oil, Ronald Reagan’s election in 1980 quickly reversed a semi-artificial boom in Houston that was arguably paid for by Americans who didn’t live in Houston, but who suffered the predictable consequences of inflation. Expressed briefly, when the value of the dollar is shrunk, we the people have the fruits of our work taken from us. Opportunity shrinks too when money is devalued. Figure that the investors whose capital commitments create all companies and jobs aren’t going to invest as aggressively if any returns are going to come back in devalued dollars.
Back to Reagan and the 1980s, the 40th president ran on reviving a dollar that had been debased in the 1970s. And presidents get the dollar they want. Are you paying attention, President Biden? During Reagan’s presidency, and in particular from 1981 to 1985, the White House’s stance in favor of a stronger dollar was reflected in the marketplace. As the dollar zoomed out of the inflationary territory that had defined the 1970s, oil plummeted; at times trading as low as $9/barrel.
Cheap gasoline born of a non-inflationary dollar proved beneficial to most Americans (Reagan won re-election 49 states to 1 in 1984), but it was challenging for an oil industry in Texas that had grown larger via a money illusion of sorts. Leach captured the aftermath of this growth. In one episode of Lifestyles, his cameras turned to a parking lot of a Houston pawn shop lined with Rolls-Royces. All too many Houston wildcatters had expanded too much and too fast based on a dollar illusion, only for the illusion to morph into a nightmare once the inflation ended.
About the pain suffered by Houstonians back in the 1980s, this opinion piece should in no way be construed as critical. Or gleeful. Quite the opposite. It’s more a way of pointing out the horrors of money that is not an unchanging measure of worth. In other words, when money lacks definition capital allocations are distorted. Such was the case for Texas. A retreat from inflation, while great for the vast majority of Americans, was painful for an energy industry in Texas that went dormant in the Reagan ‘80s, and the Bill Clinton ‘90s.
Please consider this truth in terms of the present. With oil prices back to levels reached during the George W. Bush and Barack Obama presidencies, cable hosts and their devoted watchers are yelling endlessly about “pumping” stateside. The silly phrase “Drill Baby, Drill,” is seemingly back. It’s all so simple.
Except that it’s not. That it’s not simple isn’t an environmental statement, nor is it a statement favoring government control over the energy exploration that government shouldn’t control. “Drill Baby, Drill” isn’t simple simply because oil exploration is not costless despite what you’re told on cable television. In truth, drilling is very risky as evidenced by all the Houstonians who suddenly had to pawn their Rolls-Royces in the 1980s. Since the price of a barrel isn’t always $100 or more, drilling isn’t a sure thing.
But wait, some will say, “we’ve got more oil in the U.S.” than (name your country). Ok, while it may be true that oil is abundant here, it’s also true that extraction of what’s abundant is not cheap. While the cost of extraction in Saudi Arabia can still be measured in the single dollar digits per barrel, that’s not true in the U.S. It’s said that “break even” is $30/barrel in Texas’s Permian Basin, but it’s higher outside of Texas.
All of which explains why “Drill Baby, Drill,” though great for nightly commentary meant to instigate, is not good for U.S. wildcatters. It may surprise readers to know this, but they don’t want to wind up in the poor house in the way that their predecessors did back in the 1980s. Better yet, those who finance their exploration similarly don’t want to end up in the poor house.
Which hopefully clarifies why there’s been no major surge of U.S. drilling at $130, $100, or even $75/barrel. There hasn’t been simply because oil companies must do what’s much more than break even to remain oil companies. While words are cheap in the land of commentary (this includes the musings of yours truly) the actions of real businesses in involve costs, profits and loss, and other serious things like that.
Markets don’t trust this oil price’s staying power, and since they don’t U.S. drilling activity will remain quiet. This is an inconvenient truth that the “Drill Baby, Drill” crowd would be wise to familiarize themselves with, lest they start sounding like the clueless-about-business Democrats they despise.
