during this period occurred following Iraq's invasion of Kuwait in August, 1990. It is significant to note, however, that even Iraq's invasion of Kuwait and the ensuing Gulf War did not cause an "energy crisis."

The cutoff in oil supplies that resulted from Iraq's invasion of Kuwait caused a more brief disturbance in the world oil market than previous supply disruptions, partly as a result of the workings of the spot and future markets for crude oil. The futures market for crude oil (begun in 1983) provides openly-reported prices, and prices on soon-to-be executed futures contracts are closely related to less-visible spot prices. The timely price information conveyed by the futures market helped prices to efficiently and expeditiously balance oil supply and production. In addition, replacement production, which came mainly from Saudi Arabia, and withdrawals from the U.S. Strategic Petroleum Reserve had a calming effect on world oil markets.

The oil price collapse of 1986 and the generally lower level of oil prices thereafter brought yet a further reversal of earlier energy policies both in the United States and abroad. For example, taxation on oil production was reduced, investments by U.S. energy companies abroad received greater acceptance by foreign oil-producing countries, and some OPEC members expanded their interests downstream into developed petroleum markets.

Other Energy

At first, the oil price shock of the Arab Oil Embargo spurred the energy conservation movement and gave new impetus to the development of coal, nuclear energy, synthetic fuels (e.g., shale oil and tar sands), and renewable sources of energy (e.g., solar, wind, tidal, and geothermal), and to the search for new petroleum reserves both at home (mainly in Alaska and on the Outer Continental Shelf) and overseas. From the late 1970's through the early 1990's, FRS company involvement in nuclear and alternative energy was influenced by two major factors: sharply rising and then declining oil prices; and U.S. domestic policy developments, particularly with respect to nuclear plant safety and other environmental concerns.

Throughout the post-World War II era, sometimes referred to as the dawn of the Atomic Age, nuclear energy had held out the promise of a clean, abundant, reliable, and inexpensive source of energy, particularly for the generation of electricity, but also for the propulsion of oceangoing vessels, both military (e.g., nuclear-powered submarines) and civilian (the first

nuclear-powered freighter). The oil price shock of 1974 spurred even greater interest in nuclear energy.

The 1974-1986 period saw FRS company activity in nuclear energy at first grow and then diminish. The decline in oil prices was certainly one important factor in this turnaround. Uranium prices declined more sharply than oil prices due to excessive nuclear fuel inventories during much of the 1980's. However, declining prices do not tell the whole story. The ThreeMile Island nuclear plant accident in 1979 in Pennsylvania and the Chernobyl explosion and fire in 1986 in Ukraine, combined with growing concern about the safe disposal of nuclear plant waste, brought a virtual halt to the growth in the United States of the nuclear energy industry. This, in turn, reduced the demand for uranium. By 1989, all FRS companies except Chevron had left the uranium production industry; shortly thereafter, Chevron announced plans to sell off a sizeable share of its uranium operations.

Nothing illustrates the volatility of the FRS companies' investment targets during the past two decades better than the waxing and waning of their activities and investments in alternative energy in the late 1970's and 1980's. Alternative energy includes renewable energy (e.g., solar, wind, tidal, and geothermal energy), cogeneration, and the production of refinable hydrocarbons from tar sands, oil shale, and coal. At first, FRS companies viewed many alternative energy technologies as promising. For example, Exxon and Suncor (Sun Oil's Canadian subsidiary) had synfuel (tar sands) operations. Unocal and Coastal had geothermal operations. In 1982, a dozen FRS companies invested more than $1 billion in oil shale development.

The Federal Government was also enthusiastic about alternative energy. In fact, the 1977 National Energy Plan made Federal dollars and tax credits available for alternative energy investment. At that time, FRS companies already had an investment base of almost $2 billion in alternative energy.

In 1980, President Carter launched the Federal Government's own alternative energy initiative, the U.S. Synfuels Corporation, to foster a new industry that would tap unconventional energy resources like coal gasification, tar sands, oil shale, and heavy crude to meet future U.S. oil and natural gas needs. As a sign of its commitment to this mission, Congress empowered this new energy investment bank to spend up to $88 billion. While the price tag was high, public sentiment in the wake of the Arab Oil Embargo suggested that U.S. independence from foreign oil supplies might justify the expected outlays. By 1982, the FRS companies'

investment base in alternative energy peaked at just over $5 billion.

The U.S. Synfuels Corporation initially was expected to approve up to $20 billion in financial backing of loans and product prices to reach its first milestone: the production of 500,000 barrels per day of crude oil equivalent by 1987. However, as with nuclear energy, declining oil prices from 1981-1986 made investing in alternative energy very unattractive. As of July 1985, the Synfuels Corporation had committed only $1.2 billion for three projects that would yield less than 2 percent of the 1987 production target. A combination of several factors, including charges of mismanagement, waning support from Congress, and declining oil prices brought the Synfuels Corporation to an end in May, 1986. After 1982, the FRS companies' investment base in alternative energy declined nearly every year; by 1992, FRS alternative energy investments had dropped below $3 billion.

Despite continuing low oil prices, some revival of interest in alternative energy has occurred recently. The

heightened interest is a response to ongoing concerns regarding the adverse environmental effects of fossil fuel consumption. Not everyone, however, has seen things the same way. For example, in 1990, ARCO sold off its solar business. Then, in April 1992, the U.S. Department of Energy awarded $22 million in solar energy research funds to seven firms, including two FRS companies. There were similarly mixed developments with respect to other forms of renewable energy. For example, in 1992, Unocal announced the planned sale of some geothermal plants and properties; these sales, however, represented only 9 percent of their geothermal assets.

As the twentieth century draws to a close, U.S. energy independence remains an elusive goal. Complicating the outlook for the world's energy industry still further are the growing concerns about gaseous emissions released by petroleum consumption. It is within this ever-changing and complicated context that the FRS companies continue their pursuit to fulfill the world's still increasing demand for petroleum.

The onset of sharply higher oil prices following the Arab Oil Embargo greatly increased the cash flow from the FRS companies' operations (Figure 15). Increased cash flow furnished the wherewithal for reinvestment and expansion of productive activities. However, political and market developments sharply altered the FRS companies' customary outlets for investment. Abroad, nationalizations by some producing nations reduced the role of multinational petroleum companies from equity oil producers to service companies or, in some countries, consigned them to financial exile. In the United States, price controls on crude oil, which were of uncertain duration until the phased deregulation of crude oil prices began in 1978, were a partial deterrent to investment in oil and gas exploration. Downstream (petroleum refining, marketing, and transport), expectations of growth in demand were diminished by the prospects of continued rises in petroleum prices. This was a turnabout from the postwar experience when petroleum demand, worldwide, grew threefold as did the channels for distributing the ever-growing volume of petroleum products.

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Sharply increased inflows of cash, combined with the impairment of investment opportunities in petroleum operations, presented the FRS companies with unusual challenges following the oil price escalation of 19731974. In the mid-1970's, corporate growth continued to be among the uppermost values of investors and top executives. For investors, tax laws favored capital gains, which encouraged reinvestment and discouraged the payout of cash flow in the form of dividends. For managers, growth in the scale and range of businesses provided the route to higher plateaus in corporate hierarchies. The rapid economic growth in industrialized nations following World War II facilitated the reinvestment of cash flow for expansion of productive assets. For example, demand for petroleum products in

Growth and Diversification

During the 1974-1981 period of rising oil prices and increasing FRS cash flow, businesses outside energy and chemical manufacture became targets of investment for many FRS companies. The increased attractiveness of diversification in part reflected the diminished outlook for petroleum demand, but the FRS companies' scope of expertise in their core petroleum and chemical operations appeared to promise sources of synergistic profits in a number of businesses. Integrated petroleum and chemical manufacture involve a variety of functions including extraction, bulk movement and storage of commodities, marine transport, refining, product distribution, and marketing to final consumers (including advertising, consumer credit, and direct mail). Notable diversification moves included primary metals and nonfuel minerals mining, engineering and construction, real estate development, timber, agriculture, trucking, convenience stores, insurance, computer services, and direct mail retailing. Other pursuits appeared to be of a more conglomerate nature such as department stores, automobile parts, shipbuilding, meat packing, and office and other electrical equipment.

Diversified enterprises, as represented by the other nonenergy line of business, were second only to oil and gas production in growth of capital expenditures over the 1974-1981 period. Growth was modest at first with capital expenditures rising from $0.9 billion in 1974 to $1.9 billion in 1978 (Table 26).143 Mergers and acquisitions, which offered footholds and immediate expertise in new lines of activity, accounted for the bulk of other nonenergy capital expenditures in 1974-1978.144 As the

The surge in capital expenditures for diversification was led by companies that were among the least diversified at the beginning of the period. In 1974, the FRS companies clearly fell into four categories with respect to the share of net investment allocated to the other nonenergy line of business: the railroads in the group (Burlington Northern and Union Pacific), companies that were heavily diversified ("early diversifiers") with a share of net investment allocated to the other nonenergy line of business ranging from 14 percent to 36 percent (5 companies) in 1974, 15 companies for whom the comparable share was 5 percent or less ("late diversifiers") in 1974, and the remaining four companies who had a zero share over the entire 19741981 span. In 1974, the late diversifiers accounted for only 17 percent of the FRS companies' total capital expenditures for the other nonenergy line of business (Table 27). Their share increased to 60 percent in 1978, and, in 1981, the year of peak capital expenditures, the late diversifiers' $4.8 billion of expenditures for businesses outside energy and chemicals was over 75 percent of the FRS total. Over the entire 1974-1981 period, the late diversifiers accounted for nearly 90 percent of the growth in the FRS companies' capital expenditures for diversification efforts.

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