Chapter 14 | Section 2
Oil Boom and Bust
As we have seen, Oklahoma’s economy rises and falls with the energy industry, specifically with oil and gas production. New technology has played a key role in increasing oil and gas production in Oklahoma’s Anadarko Basin. For example, hydraulic fracturing (also called fracking) first started in Oklahoma in 1949. By the 1980s, shale fracking emerged as the fastest way to produce the greatest amount of both oil and natural gas. The fracking process involved drilling deep into the crust of the earth and injecting a mixture of chemicals and water. A lot of wastewater was created in the process. That wastewater was then injected back into the ground and would later lead to increasing earthquakes in Oklahoma and debates over the safety of fracking practices. Today fracking is regulated by the government to decrease harmful side effects on the environment.
While fracking became a controversial subject in the 21st century, the oil and gas boom of the late 1970s and early 1980s created much optimism and a strong economy. Oklahoma enjoyed an oil boom during these years. To take advantage of soaring oil and gas prices, oil companies drilled more wells. With the deregulation of natural gas, Elk City in southwestern Oklahoma experienced a shortage of mobile homes and motel rooms as unemployed workers from other states flocked to work in the oil fields in that region. By 1982 everything had changed. The oil boom was slowing down. This led to Oklahoma’s first revenue failure in state history. Energy jobs dropped from 100,000 in 1982 to just over 40,000 in 1988. Oklahoma’s unemployment rate moved from among the lowest to among the highest in the nation during the 1980s.
During the 1970s and early 1980s, Oklahoma experienced an oil and gas boom. This led oil companies to drill more wells in the hopes of increasing their profits. Unfortunately, the boom turned to bust in 1984 when oil prices dropped. This image shows workers reinstalling in 1988 the pumping unit to historic State Well No. 5 near the Oklahoma State Capitol.
Courtesy of the Oklahoma Historical Society.
How had the 1980s gone from boom to bust? The Organization of the Petroleum Exporting Countries (OPEC) placed an oil embargo on the United States, banning petroleum exports to that nation due to its support of Israel during the 1973 Arab-Israeli War. These international developments led to long lines at the gas pump across the United States. In Oklahoma, old wells were restored and new ones built as the price of crude oil increased. OPEC nations slowed their output and increased their prices. World oil prices of $12 a barrel went to $20, then to $25, $30, $35. Oklahomans working in the oil fields worked around the clock, and new wells went deeper and deeper. Pipes went miles beneath the surface of the Anadarko Basin to access natural gas.
In 1984, the oil bubble burst. OPEC nations broke rank, releasing many more barrels of oil into the market than usual and causing world oil prices to drop. Crude oil prices dropped from $35 to $30, and then $27 to $13 a barrel, and many oil workers lost their jobs.
Penn Square Bank
Penn Square Bank was established in 1960 in a shopping mall in Oklahoma City. It offered a new drive-up window, which was an innovation at the time. By 1975 the bank began to finance oil exploration and drilling. The bank made loans and then sold shares in the loans to other banks. As payments came in, Penn Square Bank charged a fee to divide up the funds among the banks according to their share or “participation.” This allowed the bank to originate over $2 billion worth of these investments. By the late 1970s the federal banking regulators determined that Penn Square Bank had overextended itself in its lending practices, carrying more debt than it could handle. The bank had given out too many loans. When oil prices dropped in the early 1980s, the bank could not survive. Penn Square Bank closed and formed a new bank so that the Federal Deposit Insurance Corporation (FDIC) could pay the $207 million that was due to insured depositors. Uninsured deposits of $163 million were not paid.
Penn Square Bank had provided easy credit with weak requirements for collateral (money or property pledged to a lender as a guarantee of repayment) to help fund western Oklahoma’s oil boom. When oil prices dropped in the early 1980s, Penn Square Bank closed its doors in 1982. During the 1980s at least seventy banks failed in Oklahoma. Many bank closures happened in rural communities due to defaulted loans. For example, Farmers and Merchants National in Hennessey closed in 1985 and Homestead Savings and Loan in Woodward closed in 1986. Why had banks failed? There were too many unsecured and undersecured loans, especially in the oil and gas industry. The closing of Penn Square Bank foreshadowed the national savings and loan collapse in the banking industry. Bank closures were happening in Oklahoma, Kansas, and Nebraska, and throughout the United States.
The failure of Penn Square Bank led to firmer banking laws and regulations in Oklahoma and throughout the United States. By 1988, regulators took control of fourteen savings and loan companies. The federal government closed or “bailed out” seven of every ten savings and loan companies in Oklahoma. National banking reform arrived in 1989 with the Financial Institutions Reform, Recovery and Enforcement Act, and in 1991 with the Federal Deposit Insurance Corporation Improvement Act.
By 2000, Oklahoma’s energy economy had rebounded, but many companies focused on overseas production. However, oil and gas remained a significant contributor to the state’s economy.
This Oklahoma Times newspaper photo shows signs on the doors of Penn Square Bank following its July 1982 failure, due to its risky lending practices. Penn Square Bank’s closure was a precursor to the national savings and loan failure of the 1980s and national banking reform in the early 1990s.
Courtesy of the Oklahoma Historical Society.