(FORTUNE Magazine) – BIG OIL, big profits -- obscene profits, even. That's been the industry's image, but look at what really happened over the past decade: In 1980, after two huge run-ups in oil prices, the FORTUNE 500 petroleum refining group -- which includes all the major integrated oil companies like Exxon and Mobil -- accounted for 36% of the 500's net income. By 1990, the Year of Saddam Hussein, their share of the 500's profit pie was down to 21%. Nor is Big Oil still so big. Through mergers and takeovers, the group shrank over the decade from 41 companies to 27. The squeeze brought on by a drop in the price of crude -- from an average of $35 a barrel in 1981 to a low of $10 in 1986 -- accounts for much of the slimming down. As for the rest: Americans consumed 6% less oil in 1990 than in 1978, the peak year, and many oil companies adjusted too slowly to the change. Now, for the first time since the early 1970s, the industry appears to be facing what in any other line of work might be called business as usual. The standard indicators point to modest growth and improved profits: In the 1990s overall demand for petroleum should rise by a fairly predictable, if modest, percentage point or two a year. Prices will bounce up and down quite a bit, but on average they are likely to keep pace with inflation. Most companies will increase capital spending to find and develop new reserves. Many oil executives believe the industry will be somewhat more profitable in the 1990s than it was in the 1980s, when return on shareholders' equity averaged 11.8% a year -- vs. 13.1% for the 500. Beneath this relatively calm surface, however, a major shift is going on. Following the fiery upheaval in the Persian Gulf, the industry looks determined to spread its risks as widely as it can. Big oil companies, often in partnership with the non-OPEC governments of the world, will take advantage of relative stability to fan out in search of new, non-OPEC sources of oil and -- even more important -- new, non-oil sources of energy. They will turn more to natural gas, develop increasingly advanced technologies to create new fuels and expand reserves, and explore once forbidden frontiers in countries like the Soviet Union, Argentina, and Vietnam, where the doors have long been closed to exploration by Western companies. The petroleum industry is entering a new age of diversity. No one should confuse this historic change of course with the misguided diversifications of the 1970s, when oil companies branched out into such unrelated industries as electronics and retailing on the theory that their core business was dying. Now the industry is looking to diversify the types of energy it produces -- a goal strongly reinforced by political pressures to protect the environment and reduce dependence on OPEC oil. Says Kenneth Derr, chairman of Chevron: ''I'm confident that whatever fuels the world demands, $ Chevron will be making them. We are in energy for the long haul.'' THE NEW IMPULSE to diversify is a natural outgrowth of the turmoil of the past 20 years. During the 1970s, OPEC power combined with government price and allocation controls to create spot shortages, near panic in energy markets, and higher prices. Crude oil rose from roughly $4 a barrel to $40 -- a 900% increase. High prices brought new production and stifled demand so decisively that when the power of the free market returned in the 1980s, it blew through the oil patch with gale force. Oil companies, though renowned as bold risk takers and rugged defenders of Adam Smith, were pitifully unprepared for the change of weather. Prices collapsed and companies -- bloated with too many people, refineries, and gasoline stations -- cut operations frantically. Many were dismembered, destroyed, or captured by other companies. One reason that calling the 1990s a decade of business as usual won't quite fly is that stability, for oilmen, is only a distant memory. In the oil patch these days business as usual means turmoil as usual. Perhaps nowhere is the shrinkage of the industry more dramatic than in the combination of Chevron and Gulf Oil. In 1983, the year before Chevron acquired Gulf, the combined revenues of the two companies came to $58 billion. By 1986 sales of the merged companies had sunk to $24 billion. Last year, bolstered by war-related price increases, they rose to $39 billion -- nearly a third less than 1983 revenues even without adjusting for inflation. Today that image of rugged risk taking fits the industry -- or at least the survivors -- a lot better than it did in 1980. Productivity is higher. The number of gasoline stations in the U.S. has fallen from 160,000 to about 115,000. Refineries are running at over 84% of capacity, vs. 60% at the beginning of the decade. Sales per employee are up 55% at Arco, 74% at Exxon, 212% at Mobil. The industry's fitness exercises should pay off in the 1990s. Says Constantine S. Nicandros, the president of Conoco, who may be more optimistic than most: ''Without the enormous surplus capacity of the 1980s, profitability of the industry should go way up.'' Another reason for cheer: the altered state of OPEC. Theodore Eck, chief economist at Amoco, observes that the crisis in the Gulf forced oil producers to conduct a giant field test of their global ability to pump crude, cranking up spare capacity wherever they could find it. That margin of unused capacity turned out to be only about four million barrels a day -- enough to compensate for the embargo against Iraq but a good deal less than many people expected. Excess capacity of ten million barrels and more in the 1980s contributed heavily to that decade's wild price gyrations. Another damping factor for the 1990s: Most of today's spare capacity is in moderate OPEC countries -- Saudi Arabia, the United Arab Emirates, and Venezuela. Since Saudi Arabia comes out of the Gulf war holding a strong hand, look for a more rational and controlled OPEC in the 1990s. As the age of diversity dawns, several intertwining trends are vying to shape the character of the coming decade. Just as the 1970s was the Decade of Government Regulation and the 1980s the Decade of the Market, so the 1990s may someday be remembered as one -- or more -- of the following. But which? -- The Decade of the Environment. The movement for a cleaner planet is already shaking the industry. But will its importance increase, level off, or decline? For now, it appears to grow ever stronger. A report issued in December by the Department of Energy estimates that compliance with anticipated tightening of the air- and water-quality regulations that govern drilling and production could cost the oil industry up to $79 billion in the 1990s. (A yardstick for comparison: Salomon Brothers estimates that the 159 largest U.S. oil and gas companies spent about $18 billion on exploration and production in 1990.) The Environmental Protection Agency is drafting rules for reformulating fuels used in transportation so they will burn more cleanly. According to Purvin & Gertz, a consulting firm in Houston, it could take an additional $10 billion to $30 billion to alter refineries to produce the new fuels.

As a result, companies are creating huge reserves against earnings to cover future environmental expenses. Last year, Amoco expensed $500 million for cleanup costs, Arco $220 million. The price of improving the environment could be the spoiler in the 1990s. Robert Hauptfuhrer, chairman of Oryx, the largest independent U.S. exploration and production company (see box), thinks a lot of small and medium-size companies will founder, unable to pay the price of meeting new environmental goals. -- The Decade of Natural Gas. Gas has always been a bridesmaid, never a bride. But bells could sound in the 1990s. Because gas is the cleanest hydrocarbon fuel, environmentalists favor it. It is more widely dispersed around the globe & than oil: Bolivia and Pakistan, for instance, produce natural gas for domestic use but so far pump no oil to speak of. Other nations desperate to reduce oil imports will be starting up their own natural gas mini-industries. Frank Knuettel, an analyst at Prudential Securities, estimates that from now to 1996 global natural gas demand will grow 5% a year, at least 2 1/2 times as fast as oil. If the environmental movement remains strong, as many expect, natural gas will become a fuel of preference and new gas pipelines will be needed. Eck of Amoco says a small boom is already under way with construction now beginning on the Iroquois pipeline, which will bring sorely needed Canadian gas into the Northeast, and the Kern River pipeline, which will transport gas from Wyoming to Southern California. Big lines may also be needed to bring Iranian and Norwegian gas into Europe. -- The Decade of Reinvestment. After years of retrenchment and buying-in stock, oilmen are beginning to increase their investments in new assets in the oil patch. The search for non-OPEC energy supplies will soak up exploration and development funds. Some will go into capital intensive ''enhanced recovery'' projects that use water, steam, and CO2 to tease more oil out of existing reservoirs. Chevron and Texaco, for instance, are spending $2 billion to create the world's largest steam-recovery operation at the Duri oil field in Indonesia. They will drill 5,000 wells into a field the size of Manhattan and pump in steam to push more oil out of the rock. Texaco's chief executive, James Kinnear, calls this ''discovering oil with technology instead of wildcat exploration.'' The project aims to boost production at Duri from 42,000 barrels a day to 300,000 barrels by 1995. The overworked refining industry, too, will need new plant to make cleaner burning fuels and meet new demand. And, of course, Iraq and Kuwait will have to be restored. Look for plates overflowing and bulldozers overheating at major engineering and construction firms like Bechtel and Fluor. -- The Decade of Technology. The industry has been adding to its bag of technological tricks for decades -- building platforms to extract oil and gas beneath ocean waters of ever-increasing depths, for example. But the core of the business was simply pumping off the great reserves in places like Texas and Saudi Arabia. Now the big reserves are either seriously depleted or under the control of the national oil companies of OPEC. So Western oilmen are promoting high technology from its once exotic role to the very heart of their business. And it has, perhaps, the greatest potential for surprise. For example, three-dimensional seismic techniques using supercomputers are enabling explorers to ''see'' extremely subtle hints of oil-bearing formations in rock buried under layers of salt off the coast of Angola. Over two billion barrels of oil reserves have already been discovered there; that's about a quarter of what remains to be tapped at the mammoth Prudhoe Bay field in Alaska. BP is using laser sensors mounted on aircraft to scan the ocean surface for microscopically thin oil slicks that may be telltale leaks from undiscovered oil or gas reservoirs beneath the ocean floor. Chevron is about to construct the first iceberg-resistant offshore production platform for use in ''iceberg alley'' near Newfoundland. The structure will have huge concrete teeth projecting outward to break up oncoming floes. And the laboratories are always searching for a Holy Grail or two: Scientists at Amoco are trying to create catalysts that will inexpensively turn natural gas into gasoline. Such a discovery would open up huge gas reserves in remote locations that are not now economic to exploit, like Alaska, by making the gas easily transportable. That, says Richard Leet, Amoco's vice chairman, would ''alter the history of the 1990s.'' -- The Decade of NOPEC. The history of oil in the 1990s may well be written in one or more of the non-OPEC producing countries. Norway is quietly expanding output and will surpass Great Britain as Europe's largest producer sometime in this decade. With twice as many reserves as Britain and several promising offshore zones yet to be explored, Norway's full potential remains unknown. Perhaps the greatest wild card is the Soviet Union. It's the world's largest producer of oil, pumping 28% more than the second-place U.S. and almost twice as much as No. 3 Saudi Arabia. But technological and managerial backwardness combined with political turmoil caused Soviet production to fall from 12.5 million barrels daily in 1987 to 11.4 million in 1990. Bernard Picchi, an analyst with Salomon Brothers, estimates that it could drop an additional two million barrels, or nearly 20%, by 1995 if conditions don't improve. A fall of that magnitude -- almost 4% of total world production, as much as the output of Venezuela or Prudhoe Bay -- could push up prices. While the Soviets have invited Western companies to help them reverse the slide, many executives report slow progress. The biggest problem? No one seems to be in charge. Says an official of a major U.S. oil company: ''We're negotiating with Moscow. We're talking with the local governments. We've met just about everybody. I'm optimistic that someone we've talked to is the real authority.''

If the Soviets can get their act together, they could hold oil prices down -- perhaps for decades. The amount of Soviet reserves is a state secret, but BP estimates 58 billion barrels -- twice as much as in the U.S. Modern exploration and production technology has barely scratched the surface. Vast areas of remote Siberia have never been explored. The Samotlor field, one of the world's three largest, was discovered in the 1960s and only began pumping in 1969. A big change in Soviet production -- up or down -- could be the oil event of the decade. Developments in the U.S., too, could play a major role. President Bush's recently announced national energy strategy makes important proposals, including opening up such frontier areas as a small but highly promising piece of the Arctic National Wildlife Refuge in Alaska. But many of his ideas face a tough battle in Congress, and it is not clear what will come of them. If nothing does, it would be an opportunity missed. The U.S. has long suffered from the lack of a coherent energy policy, and the American oil industry is in the best shape in years to respond to clearly stated national goals with a variety of solutions -- from tried and true to totally new.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: OIL'S SHRINKING SHARE OF THE 500 Big Oil looms less large on the landscape of U.S. industry than it used to, but it's a lot more productive.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: WHERE THE BIG TEN STAND AFTER A NO-GROWTH DECADE