Perhaps no industry has witnessed a more cyclical activity than the petroleum industry! Oil and natural gas account for a substantial part, over 70 percent, of world energy demand and utilization beside the worldwide application of its by-products. It is the main source of foreign exchange earnings for many developing economies.

Crude oil price volatility, especially in the recent past, has made decision-making and strategic planning extremely difficult for oil companies. Oil companies have responded to the low oil prices by reducing research and development budget, capital spending, and employment pattern. The operators are even more cautious than ever before in capital spending and expansion despite the current rising trend in crude oil prices.

This paper uses the basic laws of demand and supply and the concept of elasticity as well as user cost relations to evaluate the responsiveness of oil industry activity to changes in oil and natural gas price from 1960 to 2000. It relies on some E&P industry performance measures to evaluate the state of the oil and gas industry in response to crude oil price variability and instability. The results show that the profit margin of the major operators have been on the decline since the advent of OPEC and so is the demand for labor in the industry. The consequences of price instability have led to mergers and acquisitions and internal re-organization in order to attempt to maximize profit in the past few years. Finally, the paper attempts to forecast future oil and gas prices and evaluate their effects on oil industry activity over the next decade using economic impact analysis and the economic concept of price elasticity.

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