A new wave of mergers is likely to sweep through the oil industry as cash-rich companies such as ExxonMobil eye up smaller rivals - possibly even Shell - after the collapse in the price of crude.

Analysts think many firms have made themselves vulnerable to takeover because they took on major new commitments when the oil price was rattling up to its summer high of $147 a barrel, compared with the current level of under $40.

Oil companies enjoyed record earnings over the last couple of years and have in some cases been spending billions of pounds rewarding investors through share buybacks. Service companies such as Schlumberger and Halliburton have also seen profits soar as steadily increasing crude prices led to a drilling boom that enabled them to charge much higher prices for providing rigs, well work and personnel. Until last year there were huge shortages of equipment, and massive inflation, in the industry. But now that situation is changing fast.

"In my 30-year career I have never seen before so many in the industry - even the most conservative companies - believe so hard in the fairytale of unjustifiably high crude prices," says Fadel Gheit, analyst with Oppenheimer & Co in New York. "We saw a range of mega-mergers in 1998 when the price collapsed to $9, including BP taking over Amoco, Exxon acquiring Mobil, and Chevron buying Texaco, and I would not rule out a similar outcome this year."

Gheit, who told US Senate committee hearings in 2008 that the high crude price was unwarranted by supply and demand fundamentals and would not last, says Exxon is likely to be the lead predator in a new wave of consolidation because it has $40bn of free cash and a pile of highly valued Treasury bonds.

"Every oil company is a potential takeover target for Exxon," says the Oppenheimer analyst, who believes an acquisition of Shell might be desirable for the world's biggest quoted oil company, but unlikely to happen because of competition concerns.

Shell has privately let it be known that it sees itself as a buyer in any future shake-up, having accepted that it let BP steal a march on it last time when its rival, then led by Lord Browne, bought Amoco, Arco and Burmah Castrol in quick succession. Under new chief executive Tony Hayward, BP is also unlikely to sit on the sidelines - but even Shell and BP together are now less than half the size of Exxon.

Much depends on the future direction of crude prices, which have been plunging on the back of scares about a collapse in demand triggered by a global economic slowdown.

The oil producers' cartel Opec has been busy cutting back its output in a bid to put a floor under future falls, so far to little avail, although some analysts, such as Barclays Capital, still expect a $76 oil price in 2009. Goldman Sachs, on the other hand, believes it could sink to $30 this quarter.

The damage being done to the oil sector will become visible at the start of February when BP will report a $6bn slump in pre-tax profits between the third and final quarter. Chevron is expected to show a more than 40% decline in earnings over that period.

This squeeze is likely to trigger a scaling-back in capital expenditure for the next 12 months, particularly for projects such as tar sands exploitation in Canada, which needs crude to cost more than $70 a barrel to be truly profitable. Firms in the North Sea can survive at prices of $45, but if prices remain around $50 this year - as most on Wall Street expect - no new investment is likely into developing new British fields.

The most vulnerable companies to takeover are the smaller independent exploration and production firms. Oilexco North Sea, which has been one of the most active drillers off the UK, has called in the administrator, saying that its lenders, led by Royal Bank of Scotland, were not prepared to underwrite the future development of new fields.

Schlumberger, the world's largest oil services group, has already outlined plans to axe 1,000 staff, and rival Halliburton has said it is also likely to make an unspecified number of redundancies. "We have been consistent in our view that our results would be affected in the event of a severe global economic downturn," says Schlumberger chief executive Andrew Gould.

Critics are surprised at the speed with which some companies have become distressed given recent records highs for oil, but industry insiders say companies expect to fund new developments with a mixture of their own, now declining, cashflow and bank borrowings, which are hard to obtain in a world where no one knows what lies ahead.

Meanwhile, bidding for a joint project between Saudi Aramco and ConocoPhillips to build a 400,000-barrels-a-day refinery in the Saudi port of Yanbu has been delayed. As one industry figure puts it: "Everyone sits up and takes note when Saudi Arabia starts cutting back on its investment levels."