Rig Count Downturn Moves into Uncharted Territory

As Mark Twain said, “History seldom repeats, but it often rhymes.” That philosophy has led investors and analysts to track the progression of the current rig downturn against prior ones in an attempt to gauge just how far the rig count still might have to fall before hitting bottom. Many analysts suggested that the current decline would more likely mirror the rig downturns of 2001-2002 or 1998-1999. Those industry downturns are within the business memories of many of the Wall Street
analysts and some company executives, but we have been suggesting that the correction might more closely resemble the debacle that followed the industry boom of the 1970s. Even that model, however, may not prove an accurate guide for forecasting the bottom, or definitely how quickly we get there, this time.

The primary difference between past industry downturns and the current one is the existence of a global credit crisis in conjunction with a worldwide recession. There were credit market problems in 1997-1999, but they were primarily regional and associated with foreign currency problems that impacted certain countries in Southeast Asia. The collapse of the value of a handful of Asian currencies as their economies imploded due to the bursting of speculative property bubbles disrupted global trade and curtailed consumption. This economic contraction happened just after a decision by OPEC to boost its production to satisfy the growing oil thirst of these boom economies. The resulting supply glut depressed oil prices until global oil-supplying nations joined together and agreed to curtail production to bring supply and demand back into balance.

The 2001-2002 correction, on the other hand, was driven initially by the collapse of the technology company-driven stock market of the late 1990s. The September 11th attacks on the United States by al- Qaeda further contributed to the downturn. The economic recession was driven by the destruction of consumer and corporate wealth due to the stock market collapse and an increased fear that political stability worldwide was at risk of imploding.

Rigzone