What's structural?

Is the current slump in oil prices structural? Everyone in the oil and gas industry wants to know.

The market crisis might indeed have structural dimensions, which is not to say that prices will stay at current levels, or any level, forever. Structural effects depend on how key market participants respond.

Prices are low for good reasons. When those reasons no longer apply, prices will rise unless new reasons emerge for them to stay low. And no one should doubt that current prices are too low. When all producers hurt, as all do now, price levels are not sustainable.

Too much oil

The reason prices languish at current levels is that too much oil is at hand. Until recently, producers developed capacity to satisfy demand that failed to materialize after first Asia and then Latin America fell into economic torpor. And since early last year, the United Nations has pulled as hard as possible on Iraqi reserves to fulfill humanitarian responsibilities that should belong to Saddam Hussein.

So oil poured into inventories in 1997 and 1998. It threatens to pour out of inventory this year. Speed of this essential correction depends on what demand does.

These wretched market fundamentals play out against the grim backdrop of a general slump in values of all commodities. This, too, will change in time, although there's no telling when.

The market diagnosis thus is easy to make, however difficult the problem was to predict. But there is no reason to think that oil has lost value permanently. When the fundamentals are right, prices will rebound.

The larger question is what structural changes may take place between now and whenever the market regains health. Three disparate groups of industry participants will determine the answer.

The first group includes the world's largest producers. With their national budgets in shambles, will nationalized megaproducers such as Saudi Arabia and Kuwait continue to reject foreign exploration and development capital and thereby divert funds to production projects with which they ultimately must compete? If pressures of the moment make them decide to let capital flow to logical use-meaning the biggest reserves, cheapest to produce-the oil market will evolve toward stability.

The second group that will determine structural change related to this crisis comprises the world's smallest producers. Can stripper-well producers-most of them in the U.S.-survive? Without help from state and federal governments, many of them probably will not. Some bigger but now-economically marginal producers are in similar jeopardy. The beneficiaries of tax and royalty revenues in the U.S., from school systems in Texas and Oklahoma to the U.S. Treasury, thus enter an interesting balance of interest with royal families of the Middle East, which face survival questions of their own.

The third group of oil industry participants influencing the potential for structural change idncludes people-individuals-who work or until recently did work in the oil and gas business. Their careers are once again in danger.

Victims of success

Petroleum professionals have fallen victim to their own success. Responding to the last price crisis, they devised better, faster, and cheaper ways to find and produce oil and gas. They identified new places in which to search for fluid hydrocarbons. They transformed their industry from one that relied on mass and money to solve engineering and geophysical problems into a financially streamlined engine of innovation fueled by human imagination. So now there's too much oil and, according to the harsh calculus of modern management, too many people committed to finding and producing it.

The current price slump thus holds potential to reshape the petroleum industry in lasting ways. In that sense, it might be structural. Change now lies in the hands of key players with reason to wish that the current structure involved fewer nasty surprises.