Out of every period of excess in the economy comes a period of pain and a return of common sense.
The oil industry is an obvious case in point, or would be if T. Boone Pickens and company weren't terrorizing major companies with the theory that they ought to break themselves up to give shareholders a quick profit.
If you ignore all that turmoil, you see an industry setting a more logical course for itself than it did in those heady days when profits reached embarrassing proportions. As humans often do when they come into a lot of money too easily, industry leaders began getting some fancy ideas. They saw themselves managing all manner of assets beyond oil.
It was in that period that Mobil used its capital to purchase Montgomery Ward, enraging critics who said the industry should have used its big profits and big tax breaks to pay for finding more oil. It was also a time when Exxon became enamored of electric motors, Atlantic Richfield tried to become a natural resources company and others tried land development and other non-energy ventures.
The idea was that good managers could manage anything, because all they were really doing was managing money. Such diversification mania has rolled through many industries over the years, and it's amazing that memories are so short about the mischief that results.
The mischief has become apparent in the oil industry. Exxon has discovered there's not much magic in motors. Arco has written off nearly $800 million in extraneous assets. Mobil has hired an investment banker to help it assess what to keep and what to drop. It's difficult to see how Montgomery Ward will survive such a test.
The emphasis has shifted back toward maximizing earnings in the basic business and away from other activities that might drain profits.
With energy prices likely to continue dropping for a while, it may be some time before the oil companies can enjoy the fruits of such efforts. For now, most of the concern is to slim operations down.
One oil company president says privately that he's gearing energy operations to make money even if oil prices collapse to as low as $20 a barrel from the current $28. It's a worst-case forecast, but he's convinced that prices will drop at least to $24 or $25 a barrel. Profits will be plowed back to ensure his company's future in the energy business, not to seek more big-gulp diversification moves.
"We'll position ourselves in a small way in a number of areas just to see what we can do," he says. But big acquisitions, even of oil properties, divert too much executive time to putting things together and away from looking ahead, he argues.
Along with this fundamental change in attitude comes a new perspective on the future of the energy business. There's less concern now over depleting reserves. The industry has seen how readily consumers lower demand as shortages loom and prices rise. It has seen how much higher prices can stimulate work on alternative fuels.
True, recent energy developments have pushed alternative fuel development programs to the back burner. Offsetting that, however, is greater attention to emerging technologies that should increase recovery of known oil reserves.
None of this is likely to solve the low values of oil company shares anytime soon. And that means continuing turmoil as those companies that have survived the takeover wave to date face a continuing threat from outsiders who seek to cash in on the value of the oil reserves now.
Already, this has led to some major oil company mergers--Getty into Texaco, for instance, and Gulf into Chevron. It remains to be seen whether that's an efficient way to reorganize the shrinking industry or just a distraction from the real task of improving operations.
Big mergers and rapid diversification always look like a nice shortcut to corporate success. Unfortunately, they seldom turn out that way.