As the Organization of Petroleum Exporting Countries and other oil-producing powers maneuvered last week toward a new pricing structure, their deliberations were closely watched from the steel and glass towers that house the major oil companies.
Falling prices, oil executives and analysts say, are going to shrink revenues, depress profits, constrict cash flow and perhaps put pressure on dividends and jobs in an industry that for the past decade has seemed to have everything its own way.
In addition, analysts say, the industry may throttle back on spending on exploration, which in time could lead to lower domestic oil production. Many analysts believe these problems will be temporary, however, and say that rising demand will restore the industry's health.
Nevertheless, the hazards immediately ahead are causing concern in executive suites where officials are waiting for oil to find its new floor.
But the impact of the drop in prices will not be felt with equal force across the industry; some segments, in fact, may be better off.
Those companies that produce crude oil will be the hardest hit, for the most part, as the price of a barrel of crude falls, while those that process crude into gasoline, heating oil and other products will enjoy lower raw material prices.
Those that do both -- the huge integrated oil companies such as Exxon Corp., Mobil Corp., and Standard Oil of Indiana, which have become the undisputed giants of American industry in recent years as prices have ballooned, will in sum be injured, analysts say, because crude production is a much larger share of their overall business.
The drop in oil prices will have a secondary, beneficial effect on Exxon, Mobil, Texaco Inc., and Standard Oil Co. of California, which make up the Aramco partnership that takes oil out of Saudi Arabia. Because the Saudi Arabian price has been pegged above the world market price, these companies have suffered from the so-called "Saudi disadvantage" that has forced them to pay more than the going rate for much of the oil they use.
William Randol, an analyst at First Boston Corp., reckons that the Saudi disadvantage has cost the four Aramco partners a whopping $2.5 billion in profits in the past year. Between them, the four companies -- four of the nation's five largest industrial firms -- had profits of $9.4 billion last year, off from $13.6 billion in 1982.
With the Saudi price realigned with the world price, the Aramco partners will no longer be at a competitive disadvantage to the rest of the industry. But they will still be victims of the general contraction in the industry's size, revenues and spending brought on by generally lower prices.
For companies such as Ashland Oil Inc., which relies on other oil companies for the crude oil it refines into petroleum products, the lower prices mean cheaper raw material costs and, as a result, more profits. Refiners such as Ashland, which are said in the industry to be "downstream" in the flow of oil from well to gas tank, have been taking a beating in recent years because of high crude oil prices. The drop in prices will help them recover some of their lost profits from recent years, although an oversupply of refining capacity in the industry will blunt that advantage.
Those companies further "upstream," however, could be left without a paddle. The small and medium-sized crude-oil-producing companies that are the backbone of the U.S. oil industry are finding the prices of their oil and natural gas eroding, cutting into profits and crippling cash flow.
These companies have already had problems in recent months as the domestic price of oil has led the world price down. Although that also means these companies have already absorbed some of the decline in world prices, they nevertheless will be hard-pressed to find any bright spots in the next few months, because they lack refining operations to offset the declines in their crude oil business or the independent financial strength to make capital investments regardless of business conditions.
For many, the lower prices and their effects on balance sheets will make it hard to borrow money needed to spud new wells, thus slowing the pace of exploration for oil to replace that being pumped out of the ground.
"Since the U.S. is one of the highest-cost -- if not the highest-cost -- producers, it's going to hit harder here than in other oil-producing countries," says John Sawhill, the former deputy secretary of the Department of Energy who is now an analyst a McKinsey & Co. "I think we're in for a continued shakeout in the exploration and production end of the business.... I think you're going to see some of the smaller, marginal producers go out of business."
The expected decline in drilling activity will have a ripple effect, analysts say. It will further depress the already troubled oilfield-service industry, and in the oil-producing regions of the Southwest, where falling oil prices have already caused economic hardship in the past few months, the further decline is going to exacerbate problems.
The integrated oil companies that both produce and refine oil will also be hit by the declining crude-oil price, because the advantages to their refining operations will not be enough to offset the cost to their producing operations, analysts say. The results for them, too, will be shrunken revenues and profits.
"We're looking for a general contraction in total industry activity," says Theodore Eck, chief economist at Standard Oil of Indiana.
That contraction is expected to cause retrenchment in capital spending programs. With less money coming in, companies are less likely to be willing to commit huge amounts of money to efforts to find new oil, analysts believe.
"The reduction in cash flow clearly diminishes the ability of a company to spend for replacement and growth," says Sanford Margoshes, an analyst with Shearson/American Express. "It also reduces the incentive."
Some experts see the expected slowdown in exploration setting a "time-bomb" that will go off in a few years in the form of a drop in production. "You really won't see it for five or six years," Eck says. "Then everybody will say, 'Gee, we're running out of oil and gas.'"
"We will be paying for today's relaxation sometime in the latter 1980s or early 1990s in the form of smaller increments of new production capacity and therefore a tighter supply in the early 1990s than would otherwise exist -- and greater vulnerability to unforeseen interruption," Margoshes says.
If there is a shortfall, however small, the missing domestic oil will likely be made up by imported petroleum probably from OPEC. "It's nice to have dollar gasoline, but if it means increased imports as a result, then maybe it's no bargain in the long run," Eck says. And such a shoftfall would tend to raise prices.
But nobody expects to have to wait that long for the oil markets to recover. As the world economy strengthens in coming months, experts expect that oil demand will again firm up, and prices, though they may not rise, to be freed from downward pressure. As stability returns to the oil market, analysts say, so will it return to the oil industry.
"I think it's going to be a temporary fall," Margoshes says.
"The general expectation is that a year from now the world will be consuming, generally, more oil, especially OPEC oil, than it does presently," Eck says. "If the economy of the world recovers, and if winter ever returns to the Northern Hemisphere, all these factors will tend to increase demand."