In the market, stocks in the energy sector comprised 35% of the Standard & Poor’s 500 Index. This should have raised a note of caution since any sector that commands that much of the market may be in an investor “bubble.” Two personal examples illustrate the mindset of energy that we now know was sheer unjustified mania.
I had been away from our oil business for four years and was in pension investments at RJR, managing investment advisors who were buying stocks for us. I was trying to make sense of the enthusiasm for energy stocks because one of my charges was to avoid portfolio concentration in one industry. Nobody was interested in a contrary opinion on the future of energy. It was disturbing.
One of our investment advisors visited me in the fall of 1980. He had recently joined his firm after being Assistant Secretary of Energy in Washington, clearly, he was better informed than most to what was happening in the world of oil. His company was overweight in oil stocks, and he laid out a case for their position. Oil was $39 a barrel in June 1980, its peak. A few weeks before, he had met with the Saudi Oil Minister, Sheik Zaki Yamani. At that moment everyone in the world was listening to Yamani’s pronouncements. He was instrumental in setting Saudi oil prices; it would be a stretch to label him the most powerful man in the world at that moment. My advisor said that in his meeting, Yamani “had personally assured that by April 1981 oil would hit $100 a barrel,” two and a half times the current price – a frightening thought when “experts” were already declaring that the general population would have to cut back on food to buy gas for their cars.
My second experience happened at about the same time. I customarily gave an annual fifteen-minute pension fund review to the finance committee of the RJR board. This year I stressed my concern that oil stocks were becoming too big a part of the market. My words were carefully and cautiously chosen. I did not say that oil stocks would decline. Rather, that they might not be a bargain relative to other stocks. No sooner had I made the comment than one of the directors interrupted and asked, “Did you say oil stocks are going down?“ His tone made it clear that he strongly disagreed with what I had said. I clarified and moved on with my talk, but it was apparent that others in the room shared his view that I was completely wrong about oil.
Spring 1981, the price of crude was far below $100 a barrel, actually a bit below $39. Oil would not reach $100 until February 2008, another twenty-seven years. When it comes to major economic turning points, there are no experts!
The man who had talked to Yamani surely believed the Sheik’s assurance that hundred-dollar oil would be a reality, and perhaps Yamani believed it himself. The RJR Board had their own view and were not accustomed to being contradicted or challenged on their strong beliefs. But they could be just as wrong as anybody else.