The period of high oil prices. From 1974 through early 1981, oil prices sporadically escalated. Dollar-denominated crude oil prices peaked in the first quarter of 1981 at close to $40 per barrel, a tenfold rise from 1973's oil prices. Accordingly, the rate of return to oil and gas investments rose sharply and was, by far, the majors' most profitable line of activity as well as the source of the major share of net income (see figure entitled "Shares of Allocated Income by Lines of Business for FRS Companies"), even as oil prices gradually declined from 1981 through 1985. Downstream profitability also rose sharply in the late 1970's, in significant part reflecting the rising value of petroleum inventories, but never came close to upstream rates of return. Downstream profits plunged after peaking in 1980. Thereafter, refiners both in the United States and abroad shutdown or otherwise divested massive amounts of refining capacity which had become uneconomic. The declining returns to downstream operations in the early 1980's reflected the financial difficulties of that period.
The 1986 oil price collapse and aftermath. Oil prices collapsed in early 1986, and, by mid-year, fell to levels not seen since 1974. On an inflation-adjusted basis, oil prices for the remainder of the 1980's were generally below the levels of the 1974-1985 period. Upstream profitability plunged in 1986 and remained well below levels realized earlier during the period of high oil prices. Downstream profitability, by contrast, rose steeply in the late 1980's. Lower oil prices led to increased demand for petroleum products. Refiners, overall, completed their retrenchments at just about the time that oil prices collapsed. Both developments favored an upswing in downstream profitability, as did lower crude oil input prices. Lower feedstock costs, stemming from low oil prices, also contributed to a surge in chemical profits. The sharp rise in the profitability of nonpetroleum businesses was largely a reflection of developments in the majors' chemical operations.
The 1990's. Crude oil prices rose sharply in the last two quarters of 1990, largely due to the effects of Iraq's invasion of Kuwait. After the expulsion of Iraqi troops in early 1991, oil prices have tended to vary in the same range prevailing in the late 1980's (on an inflation-adjusted basis). Upstream operations benefitted from the war-induced oil price spike in 1990 but then declined. Although upstream profitability in the 1990's has not come close to pre-collapse levels, it is clearly higher than the levels of 1986-1989. Cost-cutting in the 1990's has helped raise the returns to oil and gas production. Downstream operations have also been a focus of cost-cutting in the 1990's, but, despite these efforts, downstream profitability has trended downwards. The increased share of businesses outside petroleum and natural gas in recent years (see figure entitled "Shares of Allocated Income by Lines of Business for FRS Companies") was largely due to a surge in chemical earnings.
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