EDITORIAL The outlook: 1997-99

The triennium beginning next Jan. 1 holds both promise and questions for the oil and gas industry.

OGJ's 3-Year Forecast, the special report beginning on p. 45, notes that all signs point to economic growth in most of the world. Growth requires energy, the market for which is dominated by oil and gas. For sellers of fluid hydrocarbons able to make money by increasing volumes, therefore, the last 3 years of the 20th century look very good indeed.

Price is another story. The recent surge in oil and gas prices relates mostly to weather and probably does not represent a durable market turn. There is little reason to expect prices to remain at current levels once inventories have been restored.

To be sure, rising demand will give prices a measure of support in the coming 3 years. But the worldwide capacity to produce will still exceed demand. As long as that remains the case and there are no serious upsets to oil trade, price gains, if they happen at all, will be modest.

So prosperity will continue to depend on efficiency. Competition will be based on knowledge and know-how. And the biggest threat to what should be a very solid period for the oil and gas business will be not a price slump but widespread recession. If such an economic reversal occurs in the forecast period, it will do so for political reasons that can't be predicted now.

No certainty

Of course, nothing about the future is ever certain. It is not difficult to imagine events that would make the rest of the century differ greatly from the picture presented here. A major war would certainly change things. A setback to international trade would stall economic progress, as would a revival of Communism in the former Soviet Union. Political measures to curb oil consumption would both hurt petroleum prospects and retard growth.

Developments like these are possible but treated in OGJ's forecast as improbable. To repeat, if nothing gets in the way of global economic progress, the coming triennium will be very good for oil and gas.

Whether or not markets behave as predicted, the coming 3 years will bring into focus issues not directly tied to the market but nevertheless able to affect the future. Important questions that may receive answers in the forecast period include these:

What will happen to the Organization of Petroleum Exporting Countries? How the group responds to resumption of Iraqi exports will tell several doubtful members whether staying with OPEC is worth the costs. By 1999, the group may be much smaller in terms of membership-but not significantly so in terms of reserves and production capacity. And if key members continue to shield reserves from foreign equity capital, they will still be struggling in the competition for share of the oil market.
What will oil and gas companies look like? Cuts, unlike change, can't go on forever.
Who will provide the next round of technological advances? Operating companies are profiting from the technological fruits of yesterday's research-and from closing their research departments. To some degree, service companies and national laboratories are picking up the slack, providing what might be called just-in-time research. Whether such a system can deliver operating efficiencies comparable to those yielded by its more deliberate-and less financially efficient-predecessor remains to be seen.
Will there be a reversal in the politics of resource development? Governments have come to recognize hydrocarbon resources as a potential foundation for economic growth. Since the late 1980s, the world has blossomed with exploration and production opportunities. Where activities that generate profits for foreign companies don't quickly yield benefits to large groups of people, however, political problems inevitably arise.

The path toward larger markets thus will take some turns in the next 3 years. Some, no doubt, are impossible today to predict.