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Dark Days for Black Gold

Supply has outpaced demand for oil more often than not for 130 years. But lately, the industry's outlook seemed particularly bleak.

Crude-oil prices traded at about $11.50 a barrel in December, capping the worst year for producers in more than a quarter-century. With prices so low, domestic production dropped to a 50-year low this spring, which also marked a low in the number of oil rigs -- 488 -- at work in the U.S. since 1944, the year statistics were first kept. A quarter of the 574,000 oil wells in the U.S. have been shut down as small independents, unable to make money at today's prices, wait for better days.

The major oil companies have suffered, too, with 1998 earnings down significantly. Shareholders of

Exxon

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and

Mobil

(MOB)

, Nos. 1 and 2, respectively, among U.S. oil companies, approved a plan last month to combine, thereby reducing costs in this harsh climate. A

BP Amoco

(BPA)

/

Atlantic Richfield

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union is in the works. Companies that aren't marrying are entering strategic alliances with former competitors. (It should be noted that the mergers are not without their own troubles: This week, the

European Commission

said it would hold an inquiry into the Exxon-Mobil merger and that it would open an investigation into BP Amoco's planned purchase of Atlantic Richfield.)

The

OPEC

nations have been hurt even more. All depend on oil income to support their economies, and some, like Saudi Arabia, have also relied on the prosperity brought by oil to cushion political dissent at home. In March, OPEC members agreed to reduce their oil output by 2 million barrels a day. The price of crude oil, which was trading on the

New York Mercantile Exchange

for as low as $11.35 a barrel in February, rose to $19 a barrel in May.

A review of oil's history might help us understand how we got to this point.

Say "oil" and people think of Texas gushers and the millionaires they made. Actually, Texas blew its chance to discover oil in 1844, when it was an independent republic. Lorna Geer Sheppard, in

An Editor's View of Early Texas

, recently reprinted an 1844 newspaper report of the discovery of a quarter-mile-wide lake in Jefferson County, a little west of Beaumont, "where an oil liquid continually boiled up from the bottom." The item speculated that "this may at some future day become valuable as a substitute for coal in the formation of gas to light." Sadly, no one immediately followed up on the idea.

Oil was "officially" discovered 15 years later -- not in Texas, but in tiny Titusville, Pa. The town was notorious for an ill-smelling and tasting substance that fouled wells, ponds and fields. It was called Seneca oil, named after local Indians who had used it as medicine. In the days before electricity, a group of men concluded that this substance might substitute for expensive whale oil used in lamps. After 15 months of digging, a well was made in August 1859 at a depth of 70 feet. The oil industry was born.

In its first decades, the price of crude oil displayed a volatility that ranged from $3 to $13.75 a barrel, the low points during times of overproduction. By 1862, western Pennsylvania was pumping some 3 million barrels of it annually. It was not always a totally free market, however.

John D. Rockefeller

and his

TheStreet Recommends

Standard Oil Trust

, which by the 1890s refined and sold 85% of the kerosene produced, exerted great pressure on the oil producers to sell for the price that Rockefeller was willing to pay.

As the century turned, the equation changed in three key respects. First, demand jumped. Although

Thomas Edison

and his light bulb were making kerosene lamps obsolete, the increasingly popular automobile needed the fuel the lamps no longer did -- and more. Second, Standard Oil Trust's competitive stranglehold on the oil industry was

broken up in 1911 by the federal courts, and a freer market emerged. Finally, supply increased dramatically when Texas got another chance to be the oil capital of the world. In 1901, on Spindletop Hill, not far from where the lake of oil had been found -- and ignored -- in 1844, a giant well was brought in, producing 80,000 to 100,000 barrels a day almost immediately. A year later, there were 285 wells pumping on Spindletop Hill, including the forebears of

Texaco

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,

Gulf

, Mobil, and

Sunoco

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. America was awash in oil.

World War I impressed upon the U.S. the military importance of oil. Supplemental sources of it were discovered, first in South America and then in the Middle East.

The era of cheap oil ended in October 1973, when the Arab states clamped an embargo on it. The diminished supply raised oil's price as high as $32 a barrel in December 1985. Meanwhile, the U.S. and its allies searched for new fields, developing the North Sea, Alaskan and Gulf of Mexico fields, for example. They also expanded domestic drilling.

The Arab embargo lasted a dozen years, breaking down as some states, wanting more revenue, increased production. Finally, Saudi Arabia threw in the towel and doubled its production as well. In the first few months of 1986, the price of oil plummeted to $11 a barrel.

Right now, there is more oil around than needed, which, over the past 130 years, has been the rule rather than the exception. Statistics published by

WTRG Economics

, which collects and analyzes data for the energy industry, indicate that U.S. crude-oil prices, adjusted for inflation, have averaged $18.63 a barrel from 1869 to the present, not terribly far from today's $17 range.

Is there anything on the horizon to alter that?

Alternative fuels, war in the Mideast and global-warming concerns might affect prices.

For the moment, while demand is getting stronger, it is stifled by difficult financial times in emerging nations and the Orient. Global reserves have grown more than 75% since the Arab embargo, the result of increased exploration and improved technology. Indeed, according to several respected scientists quoted in a recent

Wall Street Journal

article, the world is far from running out of oil. A few engineers are beginning to suspect that some fields actually replenish themselves.

If OPEC members hang tough in reducing production and the U.S. production and exploration efforts are not stepped up, the price of crude might remain within spitting distance of its $18.63 historical norm. Otherwise, it might go further south.

Richard B. Marrin has practiced litigation and corporate law for nearly 30 years and is a partner in New York City law firm Ford Marrin Esposito Witmeyer & Gleser. He is the author of several books and a number of articles on American history. He can be reached at

rbm68@aol.com.

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