This paper will discuss some of the developments that led to the surge in mergers, acquisitions, and restructurings that began a few years ago. It will conclude that forces affecting oil companies made some companies, more valuable to others than standing alone. Mergers were useful because they brought about a desirable balancing of risks. Consequently, financing was available. The paper will also conclude that the incentives for mergers did not create profit opportunities in takeovers. Finally, we shall suggest that the incentives [or mergers were greater in the first part of this decade than earlier and probably have largely disappeared, or at least substantially decreased in the last year.


Mergers were not events peculiar to the petroleum industry. But the magnitudes and characteristics of the assets involved in these events in the petroleum industry suggest That this industry was particularly impacted by the changes in economic conditions or views of economic conditions that brought on the mergers, acquisitions, and restructurings that took place or were attempted in several industries. So we place or were attempted in several industries. So we need first to look for developments in industry generally and in the entire economy that might help explain what happened.

Inflation, Low Real Interest Rates, and Losses of Reserves Abroad

During, the period of inflation that began in the 1960s and ended in the early 1980s, real interest rates (quoted rates minus inflation) were very low by historical standards. That made it appear unusually attractive to hold assets for long-term appreciation because interest rates were so low that there had to be rather little appreciation in real terms to make the holding of assets worthwhile. Oil in the ground, other natural resources (renewable and not renewable), and even developed and undeveloped land, all were relatively inexpensive to hold. Indeed, during a part of that period, realize real interest rates were negative. Thus, even the holding of assets that were subject to considerable price risk or whose prices were declining slowly price risk or whose prices were declining slowly appeared attractive. Companies in many industries as well as individuals reacted to these incentives by greatly increasing, their holdings of assets. This does not mean that petroleum companies necesarily increased the volume of their reservoir holdings. But the values of these holdings relative to the values of other assets rose greatly in the case of a good many companies.

Between 1970 and about 1981, the price of oil abroad rose more than twenty-fold. Tn the United States, the price of oil increased over ten-fold in money terms between 1970 and 1981. Unit values of other kinds of assets held by many firm, in other industries also rose, but typically not nearly as much.

In the early 1980s, that situation changed drastically. The rate of inflation declined. It now has been very near zero (corrected for the measurement error inherent in price indexes) for at least two or three years.

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