The study prepared by Dr. D. J. BEHLING, Jr. places recent developments in historical context by looking at the interactions among petroleum industry operations, capital spending and financing over the past fifty years. Behling's chronicle begins with the state of the US oil industry in the 1930's, which at the time was for all intents and purposes the world industry, and notes close parallels with the situation prevailing today. Then, as now, the industry was characterized by excess capacity, depressed and volatile prices, declining profitability, limited availability of external finance and relatively low investment. The domestic situation did improve owing to policy initiatives implemented in the mid-1930's. Even so, the structure of the oil industry through the end of the Second World War remained pretty much as before, with the US still the dominant factor.
It was only in the first two decades of the post-war era that the world oil industry became truly internationalized. The process occurred along two distinct lines: first, Western Europe and Japan were added to the consumption equation, and second non-traditional producers, above all in the Middle East, became an increasingly important component of total supply. The first effect led to the rapid growth of downstream investment both in absolute terms and relative to total investment spending. By 1968, the amount of capital committed to downstream activities equalled upstream investments.
On the other hand, the rapid development of low cost supplies outside the United States meant that a growing volume of world demand was being met from non-traditional sources. Between 1945 and 1959, such output accounted for fully 75% of incremental world oil production. The favourable economics associated with Middle Eastern production initially yielded financial returns significantly higher than those obtainable in the USA. Moreover, the fact that new supplies were being added at a faster rate than they were being produced resulted in the more or less continuous decline in real oil prices over this period.
Not surprisingly, the rapid build-up of Middle Eastern production capacity reversed the rising trend in upstream investment evident in the first post-war decade. Between 1956 and 1973, upstream investment remained more or less constant around $20 billion (1985 prices); stable upstream investment levels led to a corresponding decline in ration of debt to total capital employed.
All of this changed as market conditions began to tighten in the late 1960s, culminating in the first oil shock of 1973. Consumption growth began to slow in keeping with higher real oil prices, while the focus of upstream activity shifted from the Middle East to other, less
