The all-time low: the next target

What was difficult about that process was that you couldn't do apples-to-apples. Since the all-time real high was in the spring of 1980, and there was no NYMEX number then for purposes of comparison, you had to look at crude oil postings (which are based on the price at the wellhead, not Cushing) and calculate off that. Different approaches could be taken, and numbers ranged from the low $90s to more than $104/b. Whatever it was, obviously, the peak of June-July 2008 blew right through it.

Now it's time to look at what the all-time inflation-adjusted low might be. That one's a lot easier, because we can do apples-to-apples.

The nominal low price for WTI on the NYMEX was set on April 1, 1986. That price was $9.75, and I can still remember the old black computer screen in my office, with the green digits that showed what was going on at the NYMEX, as it dropped below $10. That date remains the only time in the contract's history when the price was below $10, though it ended up settling at more than $11 that day (The day before that, March 31, marks the lowest all-time settlement: $10.42).

Platts' Linda Rafield has calculated that the $9.75 price, adjusted for inflation, is $18.90 in 2009 dollars. The current price, at this writing, would need to drop by almost 50% to get to that level.

Just what made it so low back then? There had been a steady weakness in demand in the early 1980s, but what caused the fairly rapid decline starting in fall 1985 was the Saudi "netback" pricing system. Saudi Arabia, in order to claw back market share that it had lost to other countries, instituted a pricing policy based on the netback a refiner received from the products produced by processing Saudi crude. What it meant was that refining was a guaranteed profitable business. It meant that refiners had no incentive to cut runs to match demand. So they bought, they produced, the market was flooded, and for one day at least, you could buy a barrel of WTI for $10, and get some change back.