(FORTUNE Magazine) – THE BATTERED oil industry could use a respite after 15 years of wild booms, painful busts, and run-amok prices. At first glance the 1990s look like just & what the doctor ordered. Most forecasters predict moderate growth in demand and adequate supply. The conventional wisdom seems to be that prices, while volatile, should be trending upward comfortably above the $15 a barrel that most U.S. companies need to make a profit. According to this view, the Nineties hold out the promise of spare change jingling once more in oil patch pockets. Look again. In all probability the 1990s will bring neither rest nor recuperation. Instead, two powerful forces will keep up the tumult of the recent past. First, oil and gas in the U.S. are becoming harder to find and more costly to produce. Nothing has happened in two decades, since the discovery of oil in Prudhoe Bay, to reverse this trend. As long as it continues, the domestic industry must keep on consolidating. Second, a historic confrontation looms between the U.S. public's yearning for a cleaner environment and its desire for a healthy, growing economy. The oil industry, from wellhead to gasoline pump, will be caught in the middle. Before the 1990s end, compliance with new environmental regulations may be soaking up oil companies' capital and postponing the good times that would normally follow a rise in prices. There's not much R&R in that. Unless R&R stands for retrench and retool. The U.S. economy is facing an energy squeeze. After falling for most of the 1980s, oil consumption began rising just over two years ago as cheap fuel made energy conservation less of a priority. Since then, demand has risen about 7%, upping U.S. consumption by one million barrels per day. At the same time, low world prices depressed production in the U.S., which has fallen about one million barrels a day. Says Richard J. Stegemeier, chairman of Unocal: ''This country is based on energy, but we show no stomach for reducing consumption or increasing production. I see great trouble when this comes to a head.'' Alternatives to oil and gas are not likely to provide relief. Synthetic fuels -- such as those made from oil shale or coal -- which were under development in the 1970s when the industry was anticipating oil prices of $50 per barrel and higher, are not competitive at today's prices -- about $19 a barrel. Construction of coal-fired power plants is slowing to a crawl, and the nuclear industry is stalemated. Hydroelectric and geothermal resources are limited, and environmentalists sometimes oppose developing even these relatively clean types of energy because they require building dams or drilling for steam. All of which is driving the economy to rely more on oil and gas. Natural gas, in particular, should come to be seen as increasingly important. Despite this, new drilling for oil and gas is running into stiff opposition from environmentalists too. In the wake of the Valdez oil spill, exploration in Alaska and off California's shores has been postponed. Unless there is a prolonged recession or prices spike high enough to provoke conservation, the public will go on demanding more oil and gas in the years ahead but won't permit the industry to drill for it here. The widening gap between oil consumption and domestic production is being made up by imports, which exceeded 50% of daily demand in July. That is the highest level since 1977. This year, according to John Lichtblau, president of Petroleum Industry Research Foundation Inc., a not-for-profit think tank, the net import bill for oil will total almost $44 billion, 25% higher than last year. Oil imports now make up nearly one-third of the nation's trade deficit. Warns John Bookout Jr., a member of Royal Dutch/Shell's board: ''Somewhere in the 1990s we will have to face the consequences of that rising import bill.'' Even before reckoning day, the search for a cleaner environment and the dwindling of petroleum resources will have dramatic effects on the industry. Many will be headaches, but some will present opportunities. Look for these currents to roil the industry in the decade ahead: -- DISRUPTED MARKETS. With a self-proclaimed environmentalist in the White House, government will become increasingly active in promoting cleaner fuels, using taxes, fiats, and the like. This will probably cause oil companies all sorts of dislocations. Earlier this summer, for instance, eight Northeastern states in conjunction with the Environmental Protection Agency moved up by three years the deadline for reducing the vapor pressure in gasoline sold in highly polluted areas. (Vapor pressure causes gasoline to evaporate, thus releasing into the atmosphere molecules that contribute to air pollution.) To comply, oil refiners had to replace a fuel component, chiefly butane, with more gasoline. Gasoline wholesalers, knowing that refineries around the country were already running near capacity, feared a shortage and bid up the price of gasoline. Expect a lot more of that. The Administration wants to promote cleaner fuels, with methanol, a natural gas derivative, looking like the favored candidate. Whatever methanol's virtues as a clean fuel -- and these are still being debated (FORTUNE, September 25) -- its promotion by government dictate would probably cause major upsets in the market. Methanol is more expensive than most gasoline, which means that special tax treatment or a subsidy might be needed to get motorists to put it in their tanks. More extensive use of the clean fuel will require major investments in new processing plants, which, because of environmental opposition, will probably be built abroad, adding to the trade deficit. Because it takes roughly 1.8 gallons of methanol to power a car as far as one gallon of gasoline, the already vast distribution system for motor fuel -- all those gas stations -- would have to be expanded. Methanol is more corrosive than gasoline, and the valves and joints in the pipelines and storage tanks of that distribution system could require a lot of refitting to handle it. If the industry doesn't upgrade its facilities in time to meet deadlines, expect shortages at the pumps and more price increases. Says Tom Petrie, president of Petrie Parkman & Co., a Denver investment bank: ''The whole production and distribution part of the industry could become a deep pit for nonproductive expenditures on the environmental problem.'' -- THE BIG SHRINK GOES ON. Since crude prices started tumbling in 1981, the industry has undergone a wrenching consolidation. Integrated producers curtailed exploration for new oil and turned instead to developing their existing reserves and to buying others' where they could. The result: Eleven of the country's 25 biggest oil companies in 1980 are no longer independent (see chart). A recent study of the industry's mergers and acquisitions over the past decade by the research and consulting firm John S. Herold Inc. found that roughly one-third of the nation's proven reserves of oil and gas had changed hands. Only a stunning discovery of new oil fields far greater even than those in Alaska's North Slope or a major run-up in prices might dampen the industry's urge to merge. While some finds look promising (see box), a truly big strike seems unlikely. In August the Department of the Interior revised sharply downward its estimates of America's undiscovered and untapped oil reserves to around 49 billion barrels, 40% below the department's 1981 estimate. As domestic reserves dwindle, Herold President Arthur L. Smith expects oil companies to continue to cannibalize one another. Says he: ''There's no reason why the Six Sisters, which were the Seven before Chevron bought Gulf, can't be the Five, or the Four.'' Pressure from shareholders and from takeover artists has forced energy companies to find ways to slash costs. Occidental Petroleum, for example, recently announced that it would cut 900 employees from the payroll of its domestic oil and gas division in a bid to save some $100 million a year. Expect such moves to continue. Bill Rutherford, a vice president with the consulting firm United Research Co., thinks the industry could cut another 50% out of overhead over the next few years. Field operations are coming under increasing scrutiny. Maxus Energy Corp., formerly the exploration and production division of Diamond Shamrock Corp., for example, has relocated all its exploration geologists from regional offices to its Dallas headquarters. That way, says Maxus Chairman Charles Blackburn, they won't waste a lot of money trying to promote exploration in their regions. -- EVER HIGHER TECH. As new oil becomes harder to find and the old stuff gets harder to extract, the game is to improve the methods of finding and to lower the costs of extracting. Two promising technologies, three-dimensional seismography and horizontal drilling, are already moving into common use. Using supercomputers to crunch geologic data, 3D seismographs present explorers with three-dimensional views of the underground structures that trap oil and gas, greatly improving the accuracy of exploratory wells. The biggest boost to production in the 1990s may come from horizontal drilling. Using this technique, a driller can bore a well down to the oil reservoir, make a 90-degree turn, and bore through the reservoir rock horizontally for 3,000 feet or more. Thus, one horizontal well does the work of many vertical wells. In one application of the technology, studied by the investment bank Petrie Parkman, development costs were cut more than 30%. Horizontal drilling can also yield more oil. In southern Texas, for example, Oryx Energy -- it used to be Sun Co.'s exploration arm -- is extracting 1,300 barrels a day of crude oil out of wells that formerly yielded between 30 and 40 barrels a day. -- THE BALLOONING OF GAS. One thing the petroleum industry and the environmental movement agree on is that natural gas is a clean fuel. Currently used mostly to generate electricity and to heat commercial buildings, natural gas will become one of the industry's few growth businesses in the 1990s, particularly as a feedstock for refining methanol. Says Joseph Stanislaw, a managing director of Cambridge Energy Research Associates: ''For the first time this business will be truly the oil and gas business. Gas will become really competitive, and its growth will be environmentally driven.'' Major oil companies like Amoco are rushing to add to their natural gas reserves. Last September, Amoco purchased Dome Petroleum of Canada for its gas; then, three months later, it paid $5.1 billion to acquire some of Tenneco's reserves. The acquisitions have made the company the largest holder of natural gas reserves in North America.

Natural gas is easier to find and more evenly distributed around the globe than oil. Many developing countries that lack domestic oil reserves are beginning to discover and develop natural gas to displace oil imports that eat up their precious foreign currency reserves. Exports of liquefied natural gas should help boost the economies of countries such as Algeria and Indonesia that sit upon huge gas fields. -- THE RISE OF NATIONS. National oil companies will continue to grow in size and importance. Eight of the worldwide industry's 15 largest companies, ranked according to production and reserves by Petroleum Intelligence Weekly, are state-owned companies, with Aramco of Saudi Arabia leading the list. (Independent Royal Dutch/Shell is second, and Exxon is third.) Some are now evolving from mere revenue-collecting agencies into true operating companies, and spreading beyond their national borders in the process. The exploration arm of Kuwait Petroleum Corp. has begun looking for oil and gas in, among other places, Algeria, Indonesia, and Australia. Aramco geologists recently made their first major discovery, a field located south of Riyadh that may produce 8,000 barrels of oil a day. Says one old hand in the industry: ''They were happy as kids with their achievement, and now they'll be more arrogant than ever.'' Through acquisitions, the nationals are also moving downstream into the refining and marketing end of the business. In 1986 Petroleos de Venezuela purchased 50% of Citgo. Last year the Saudis bought 50% of three Texaco refineries, along with 11,400 Texaco gas stations. But the pace of such acquisitions may slow. Prices for refining and marketing operations are rising, and and some of the biggest players, like the Saudis, are facing budgetary constraints, believe it or not. -- EXPLORATION GOES GLOBAL. With geology and environmental concerns diminishing the prospects for exploration and refining in the U.S., American companies are spreading out ever farther across the globe in search of new reserves and new customers. Charles Blackburn of Maxus Energy estimates that the price of discovering new oil overseas is about $5 per barrel, or roughly half what it costs in the U.S. Maxus recently discovered a 275-million-barrel oil reserve in Sumatra and is exploring in South America, Gabon, and Spain. The company has increased its foreign holdings from 35% of the company's reserves two years ago to 50% today. The fastest-growing region for energy consumption in the world is likely to be the Pacific Rim countries. Because the booming economies of Asia's Little Dragons took off during a period of plentiful supply and relatively low prices, their industries' energy demand per unit of output is far higher than in the West. Demand in Taiwan and South Korea, for example, is rising at a 20% annual rate, according to the consulting firm of Purvin & Gertz. Barring a long recession that sharply curtails their growth, these countries should continue to slurp oil. IF THE PAST TWO DECADES offer any guide to what lies ahead, expect at least one profanity-eliciting oil surprise in the 1990s. The unpleasantness may come where experts least expect it -- a sharp rise in crude oil prices. The prevailing view is that we're not likely to again see price spikes like those of the 1970s. OPEC seems to have learned the lesson that runaway prices bring a painful market response, and key OPEC countries have acquired downstream operations that keep them in touch with real market conditions. There is a global surplus of production capacity that won't soon be worked off. The free market, led by the futures market at the New York Mercantile Exchange, has more of a hand these days in steadying oil prices against sudden disruptions. But conventional wisdom could, once again, prove wrong. Vahan Zanoyan, a senior director with the consulting firm Petroleum Finance Corp., thinks potential world demand is being underestimated. Several years of relatively low energy prices, he argues, have set demand on an upward curve that will be difficult to reverse. If demand should accelerate too quickly, an industry that has been contracting may not be able to respond in time. Anyone in danger of being lulled into complacency should think hard on the 1980s. The decade began with gas lines and predictions of $100-a-barrel oil % and is ending with low prices and American drivers once again indulging their appetite for gas-guzzlers. If prices don't surprise us in the Nineties, something else will.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHAT'S LEFT OF OIL'S TOP 25 Eleven of America's 25 largest independent oil and gas companies in 1980 have been acquired, merged, or sold off. Look for the consolidation to continue in the decade ahead.