1985: Oil Prices Will Go Up Forever

This is not a post about a bubble, real or imagined. It’s a lesson from when I was 20 years old.

I showed up at MIT as an eager freshman. I was 17, from Dallas, with a nice pair of cowboy boots and long hair. On my first day, at the freshman picnic, I heard that 50% of us would end up in the bottom half of our class. Fifteen minutes later I was whisked away in a white van to ADP, the fraternity I ended up pledging and living in for four years, next to WILG and across the street from The Mandarin (no longer there), Mary Chung (still there and still awesome), and Toscanini’s (still there and even more awesome.) That night I met Dave Jilk, my first business partner and one of my best friends.

Dave was a senior and I was a freshman. He took me under his wing and we became thick as thieves. He was Course 6 and easily one of the best coders around, even though we didn’t call them coders there. I was pretty good also, but limited to BASIC and Pascal, which were the two languages I used to write the commercial software I was working on for Petcom. Dave was into business, read Forbes cover to cover each time it came out, and hung around with some Sloan people. We’d go to Mandarin, Mary Chung, or somewhere in the North End, eat and drink way too much, and talk about computers and business. Ok – we talked about other things that 18 – 22 year old young men talk about, but there was a lot of computers and business in the mix.

Petcom, the company I worked for, wrote PC-based oil and gas software. They had one competitor – David P. Cook and Associates (which, in a twist of irony, morphed into Blockbuster – if you don’t know the story, Wikipedia has a fun history snippet.) In addition to getting paid $10 / hour (which quickly taught me that if I worked more hours, I got paid more money) I received a 5% royalty on gross sales of the two products I wrote (PC Log and PC Economics).

In 1983 the oil business was booming and Petcom was growing quickly. As a freshman, I’d get a monthly royalty check – sometimes $1,000, sometimes $2,500, and once $11,000. I never knew what it was going to be, so I was always very excited when the blue Petcom check showed up at 351 Massachusetts Avenue in my mail cubby. I’d often grab a bunch of frat brothers for lunch, go to Mandarin, and pay for whatever we ate.

via chartsbin.com

The graph gives away the punch line.

While the price of oil more than doubled between 1978 and 1979, from $14 to $31 / barrel, it had been slowly drifting down from a high of almost $37 in 1980 to $29 in 1983. But that drift was seductive since it was so much higher than the $14 / barrel in 1978 and created this sense that it would once again go much higher.

In the summer of 1985, I was working full time at Petcom. Things for the company were absolutely rocking. We had grown from three people (the two founder + me) when I started to over 20 people. We had fancy offices on the 7th floor of a building across the street in the Dallas from the beautiful Galleria Mall. Software was being sold, my royalty checks were huge (I think I made around $80,000 in 1985, but that’s just a vague guess), and life was grand.

I went back to school in the fall. That’s when I uttered a deeply stupid phrase to Dave.

“Oil Prices Will Go Up Forever”

Dave challenged me. We argued. We probably went out to dinner somewhere in the North End, ate a huge amount of pasta and red wine, and then went to The Parker House in downtown Boston and drank scotch until we eventually stumbled back to 351 Mass Ave.

In December, 1985, Saudi Arabia flooded the market for oil and by the end of 1986 the price of a barrel of oil was around $10.

I didn’t work at Petcom that summer. Their phones stopped ringing. Customers went out of business right and left. The company shrunk back down to the two founders who then started the first CD music store in Dallas, repurposing their software for the CD business, just like David P. Cook had done for the video business. My royalty checks had stopped, but fortunately I had started Feld Technologies and 1986 was the summer of 2430 Denmark in Garland, Texas.

The oil and gas business wasn’t the only one that got slaughtered by this. Texas real estate was booming, until it wasn’t. My dad, a doctor, was a small partner in a bunch of real estate partnerships. By 1990 he was a large partner in a small number of the real estate partnerships that hadn’t failed, as he was one of the few partners who could keep writing checks. I don’t know exactly how it turned out for him, but since he had staying power I expect he broke even or even made some money. But I remember the stress around the dinner table when I was home in the summer and over the phone when we talked as he was fighting through what was likely a very similar mess to the one I would encounter several times later in my life.

I learned a powerful lesson that laid some fundamental groundwork for how I think about business. In the Internet bubble, while I kept this lesson in the back of my mind, I ended up suspending disbelief, like so many others, in 2000 and into the spring of 2001. I learned this lesson again, but in a more profound way.

Through each of these aggressive down cycles, amazing companies were created. Some of the great real estate fortunes emerged from the rubble of Dallas in the 1980s. You don’t have to look very far to see some remarkable companies that survived and transcended the Internet bubble collapsing in 2001. And for many, 2008 and 2009 seems very far in the distant past, even though it still massively impacts others in a very negative way.

Oil prices do not go up forever. Neither does anything else.

  • Arguably, you may still be right over the VERY long run.

    • In the very long run we are all dead.

      • Hah, true. I guess every very long term bet should just be on the heat death of the universe.

        • Sigurdur Gudbrandsson

          Or in a couple of decades .. take your pick, you’ll be very dead either way 😉

      • Matt Kruza

        A little Keynes I see 🙂

  • Indeed. It’s important to keep these experiences in your front pocket sometimes. Those whom are often hit the hardest, at least psychologically, are those with the shortest memories.

  • Sebastien Latapie

    What a great story – so interesting to get some insight into some of your earliest lessons!

  • Lol: “On my first day, at the freshman picnic, I heard that 50% of us would end up in the bottom half of our class.” – I was reminded of this when I failed my first test in college!

    • I got a 20 on my first Physics test at MIT. It was devastating, until I learned the next day that class average was a 32. There’s a fun long story in their that including crying.

      • StevenHB

        Those tests with the ridiculously low class averages were one of a long list of humbling experiences at MIT.

  • Some have said that you can’t be a successful venture capitalist if you’re too much of a cynic. It seems like there’s this delicate cognitive balance given that things that will be big in the future look stupid at the outset, and things that will be stupid in the future also look stupid at the outset.

  • We lived in Houston in the early 90s. When we were looking at real estate we would drive through entire developments of million dollar mcmansions that had just been abandoned mostly by former oil execs. We decided not to buy during that time although had we, we probably would have cleaned up.

  • Great story and so well said.

  • Sam

    “I ended up suspending disbelief, like so many others, in 2000 and into the spring of 2001.” People like to talk about the late 90s bubble “popping,” but it did nothing of the sort. It was a slow, painful deflation, and it took a while for the new reality to sink in.

  • Sigurdur Gudbrandsson

    Wow, how that reminds me of ~2004/2005 when a friend of mine told me that the housing market will go up forever …. I disagreed, then forgot all about it for a couple of years until the housing market crashed ..

    • I was fortunate that I bet on two things and was lucky with both. First, I refinanced back then with a variable interest rate and second, I stayed where I was. The net result via NPV of the interest versus potential gains/losses in the market means that I made a modest amount of money from it all.

  • Yup. Moral of the story, save your pennies. You never know when you will need them. (Or manage your burn rate!)

  • Michael Moroles

    But really, Oil prices are going to go up.

  • DR

    Great analogy. You know when something is beautifully written when the message is every so subtly implied yet does not need another sentence to be crystal clear. Thank you!

  • they do go up forever depending on your time frame.

  • I hate what the price of oil is doing to the Canadian dollar. Down by 30% in the past few months!!

    • I think the commodity crash is a combination of 1. Strong dollar 2. Weak Demand 3. Tepid stock market. Looks to me like American markets could go down by 10%.

      • but it’s such a big part of Cdn exports. anything under $80/barrel and we have to devaluate our currency to make it affordable to drill in Alberta’s black sands.

        • Reserve banks all over the world are devaluing relative to other currencies (EU, China, Japan). Combine that with the commodity price collapse and Canada’s dollar has to go with it. One reason the US Fed might not raise (though an internal memo was leaked that they will in the third quarter) is it will cause the US dollar to increase relative to every other currency making it more expensive to export-which makes it cheaper to import.

    • I hate what it does to my revenues from Canadian companies where I have contracts in CAD$. 🙂

      Besides that direct impact, I agree, however Canada is fortunate that it can still manipulate its currency, unlike Eurozone countries. Greece is already making plans for a “parallel currency”. Be more like Chile, and not Argentina. I hope the Canadian government does what it needs to do, but does it with eyes wide open.

  • In December 1985, GeoGraphix was tracking 23 other companies in our competitor file. Petcom was one of them. In February the bottom dropped out of the market. The phone stopped ringing. The market went into paralysis. And GeoGraphix went into hunker down mode. It wasn’t a fun year. I signed up for every visa card application the mailman brought to me. By the end of that year I had 37 Visa cards all maxed out. I had been using them to make payroll each month. By the end of 1986, there were only three companies left in our competitor file. It took me until the end of 1987 to pay off the last of those credit cards.

    1986 wasn’t a fun year, but I learned a few things that have served me well.

  • Jim Patterson

    Thanks for writing, Brad. This article has even more significance as I live just down the road from your former offices near the Galleria.

  • Moral Max

    When we were looking at real estate we would drive through entire developments of million dollar mcmansions that had just been abandoned mostly by former oil execs. We decided not to buy during that time although had we, we probably would have cleaned up.Casquette Superman