Introduction
Oil in its purest state is known as Crude oil and is located in the earth's geological foundation. When extracted from the earth a range of bi-products can be obtained; gasoline, jet fuel, diesel and petroleum to name a few. Crude oil was discovered in north western Pennsylvania in 1859, through the process of well-drilling (Podolny & Roberts, 1998). The market for this product developed initially due to conservation concerns dealing with the close extinction of whales and the vitality in its oil price. Since that time the oil industry has developed into a worldwide business. In today's world the oil industry has a tremendous influence on all aspects of the economies and geopolitical stability.
Research has shown that since 1998 price of oil has been on a steady rise, due to rapid expansions in the world's economy and the war on terrorism in Iraq. Consumption of oil in the world's emerging markets and developing countries has been increasing at a rapid pace, adding to the hike in prices being experienced over the past few years. For instance, China and India together have consumed about 35% of incremental oil (Ogawa). It is predicted that by 2030 the production of oil will be similar to that experienced in 1980 as shown in the graph labeled figure 1 found in the appendix (Silver is Money, 2008).
BP Amoco, Exxon Mobil and Shell are the three biggest privately owned oil companies in the world. They are referred to as the three sisters. Today, one the top three holders among the world of both proven oil and natural gas reserve is the Organization of Petroleum Exporting Countries (OPEC). This cartel controls 70% of the world proven reserves (International Monetary Fund, 2005). OPEC is made up of thirteen oil producing countries of which Saudi Arabia is the largest producer. Since it is predicted that oil consumption will increase, their oil capacity and reserves will therefore have to increase in order to sustain that demand. OPEC occupies a unique position in the oil industry, since it is basically able to influence the prices of oil.
Although, there has been a consistent fall its intensity, crude oil remains a much valued commodity. Statistically, it accounts for eight percent (8%) of global trade in services and goods, and 2.5% of world activity (International Monetary Fund, 2005). Over the past thirty (30) years, oil prices have moved in the range of US $8-96, even surpassing the US $100 mark in 2005. It was also recognized that volatility has increased remarkably (International Monetary Fund, 2005). This is due to a decline in excess capacity which is being held entirely by the members of OPEC.
Venezuela's is among the top ten countries in the world for oil which generates half of the central government's income, accounts for about 80 percent of the country's total export revenue and is responsible for about one-third of the country's gross domestic product (GDP). These dramatic Increases in world oil prices during pass years have allowed Venezuelan President Hugo Chavez to expand social program spending, have commercial ties with other countries, and make a name for himself on the International Market.
Statement of Problems facing the industry
Growing demand:
The demand for oil is on a potential high and is viewed as an 'oil demand shock' by many. The advanced economies of America, Japan and Europe are the premier consumers of oil, consuming more than half of the world's global oil output (Luft, 2006). However in recent years, the emerging BRIC markets; Brazil, Russia, India and China, have placed tremendous strain on the oil suppliers. The U.S Department of Energy reported that "the world demand for crude oil will grow from 85 million barrels per day today to 103 million barrels per day in 2015 and to just over 119 million barrels per day in 2025," however its demand will be mostly a factor of price (Luft, 2006). It is evident that with the development of technology and emerging markets the consumption of oil is likely to increase.
Lack of supply / constrained supply:
An increase in the demand for oil means that the suppliers will have to increase production capacity. However, the problem of oil depletion also affects the major oil suppliers. The supply chain in the oil and gas industry consists of operators, main contractors, subcontractors and suppliers. The forces that influence the supply chain of the oil industry are both internal and external. They include:
If marginal fields are going to be developed and other alternative sources of energy to be kept at bay the cost of field development must be reduced;
The merging of oil companies tend to increase their sizes;
The fluctuation of oil prices; and
Oil companies are subject to a number of various political issues.
summary of the situation and analysis of issues
SWOT Analysis
Strengths:
Oil is a commodity that millions around the world are extremely dependent on. It could be said that no country has ever showed signs that they are not addicted to oil.
The companies within the oil industry are massive cash flow machines.
Countries that produce oil tend to have a high Gross Domestic Product (GDP) because of the extra aggregated revenue which is being generated.
Most of the world's oil producing countries is members of OPEC. OPEC countries supply about two-fifths of the world's oil consumption and possess about 70% of the world's proven oil reserves. The oil industry could be considered to be a monopoly since the supply, demand and pricing is controlled by OPEC.
Weaknesses:
Oil is a major contributor to the division amongst nations and governments. Research has shown that countries where oil production is prevalent are magnets for civil wars and other atrocities. The bombing of the oil field in Kuwait by Iraq where the United Nations had to step in to help is a perfect example of an armed dispute instigated by the production of oil. There is a current civil war going on in Nigeria and one of the motives for this war is oil.
The oil industry does not attract many investors. A major contributor to this is the fact that infrastructural development for the refining of oil is too expensive. A typical example is Trinidad which is a Caribbean country where crude oil is extracted but unfortunately it has to export its oil in its purest state to other countries to get refined. Additionally, at least 109 platforms were damaged during Hurricane Katrina and Rita in the Gulf of Mexico even though the federal government changed the infrastructural policy on platform construction standards (Robin-McCaskill, 2006). After investigation, it was found that only one platform has been reconstructed since this particular policy was implemented. It can be safe to conclude that this was a resultant from the high cost associated with the infrastructure of oil refineries.
The two factors that have been controlling the increase in the price of oil are demand and cutback in supply. It is estimated that the world's population is going to grow to a dramatic 9.8 billion by 2050, placing an increased strain on the already substandard living conditions (Organization of Petroleum Exporting Countries, 2010). The second reason for increase in price is due to the fact that OPEC has agreed to a major cutback in supply; four million barrels of oil a day, causing a decrease in supply which. The result of these two factors has led to dramatic increases in crude oil prices from a low of about $11 to $12 earlier this year to $27 today, the equivalent of about a 30 to 35 cent a gallon increase at the pump (Organization of Petroleum Exporting Countries, 2010).
Oil is a natural resource and if proper measures are not put in place there is a possibility that its capacity could deplete. For example, in 2004, the Cantarell a Pemex group, Mexico's state owned energy company, produced more than 2 million barrels per day, however this had been reduced to a low of 713,000 bpd in April last year, below Pemex's forecast of 756,000 bpd for 2009. Research has proven that Cantarell has pushed Mexican oil output down to levels unseen since the mid-1990s.
Opportunities
It has been realized that several emerging markets are on the rise. Countries such as India, Russia, China and Brazil are considered to be emerging markets. With an emerging market comes an emerging middle class which means that there will be an increase in consumption.
The development of technological advancement aids in the extension in the lifespan of existing fields and allows an easier method of oil extraction and refinery.
The oil industry is consolidated. As established, it is too costly for investors to set up or establish themselves within the industry; hence, the intra-rivalry competition is limited. This can act as an incentive for investors to capitalize on.
Threats
The changes in human behaviours as it regards to becoming environmental friendly by using biodegradable products and alternative sources for energy can result in the decline in demand for petroleum products. In addition, the attention drawn from conservationist as it relates to the effects that exhaust ignitions from the use petroleum products has on the ecosystem and biodiversity habitats can be detrimental to the oil industry future growth. This was evident in the environmental issues debated in the Copenhagen climate summit. Three innovative approach in combating these environmental issue created includes solar cars and electric cars. The solar car uses a solar array consisting of BP Saturn solar cells which are quite common and relatively inexpensive compared to the top teams. The array produces around 1200 watts in full sun, which is about enough to boil a kettle or run a toaster (HybridCars, 2010). On the other hand, the electric car electric car is powered by an electric motor instead of a gasoline engine. It is also known as electric vehicle or EV and uses energy stored in its rechargeable batteries, which are recharged by common household electricity. An electric car is powered exclusively by electricity unlike the hybrid car which is fueled by gasoline. Electric cars produce no tailpipe emissions, reduce our dependency on oil, and are cheaper to operate (HybridCars, 2010). This car produces steam instead of exhaust. A device called the fuel cell is what makes the hydrogen car possible. This cell converts to electricity giving out by-products of heat and water, which is environmental friendly (Lampton, 2010). These cars can be essential in the emerging markets such as Grenada.
The occurrence of unforeseen catastrophes (natural disasters or pandemic flu outbreak) can be detrimental to the oil industry. These devastations can results in the downturn of demand for oil and economic growth. At least 109 platforms were damaged during Hurricane Katrina and Rita in the Gulf of Mexico even though the federal government changed the infrastructural policy on platform construction standards (Robin-McCaskill, 2006). After investigation, it was found that only one platform was reconstructed since that policy was implemented. It can be safe to conclude that this was a resultant from the high cost associated with the infrastructure of oil refineries.
Off shore oil drilling rigs are increasingly computer dependent and are found in remote areas. This makes them vulnerable to attacks from hackers worldwide. A contractor was charged in federal courts with sabotage of the computerized controls on an oil rig which was sitting in a remote area off the coast. Researchers from the SINTEF group have warned oil companies worldwide about off shore oil rigs and their vulnerability to hackers (Grant, 2009).
The recent new discoveries of oil will lead to increase supply in the oil industry hence decreasing the price of oil products. Brazil has just discovered oil. But, should they be rejoicing because people notion of finding oil is that it could be actually bad news know as the "curse of natural resources". By looking beyond the difficulties research has forecasted that presently Brazil generates one unit of the national currency (the real) from other resources but with extra value added from oil, this translates into roughly one real of extra aggregate GDP.
Oil producing countries for instance Saudi Arabia are prone to terrorism and political instability. Rapid population growth, unemployment, democracy defeat, failure, and youth bulges make them suffer from conflict. Oil companies that are seeking new oil reserves are moving into unstable countries like Iraq, Sudan among others. The instability of these countries is due to civil wars, Middle East wars and drug cartels. The new oil companies are faced with kidnapping of employees, sabotaging of pipe lines and hacking of off shore oil rigs.
strategic alternatives and recommendations for strategy
Reduce obstacles to investment:
There are many obstacles to oil investment in the oil sector. They range from fluctuating world prices to political risk. There is some oil producing countries that limit or even forbid foreign investors from participating in oil sector projects. While some may see this as a desirable strategic reason, it could lead to lover development of fields and reduce access to the latest technology. If obstacles are reduced a friendlier environment for investments will be created with increased investment for capacity expansion, which would lead to greater development in the oil market (International Monetary Fund, 2005).
Create additional roles for government:
There have been several arguments for government to intervene to reduce the volatility in the oil industry.
Making the oil market work:
In order for the oil market to work better, a number of factors have to be taken into consideration; they include strengthening transparency participation in the hedging market and ensuring that taxation and regulatory frameworks are stable and add to its volatility (International Monetary Fund, 2005).
Strengthening Transparency:
Reliability and timeliness of data on oil supply, demand and inventories must be improved.
Participation in the hedging markets:
By hedging on future derivatives markets oil producer and consumers could protect themselves against increase volatility. Companies and governments do not operate on hedging market due to the fact that they are not able to benefit from the increase (International Monetary Fund, 2005).
Ensuring that taxation and regulatory frameworks are stable and add no volatility: Certain changes and unexpected raises in taxes should be avoided. Countries that use ad-valorem to specify taxation of oil products should shift away from such taxation methods. By doing that the industry will be able to reduce the price volatility of oil.
Implementing different climate policies strategies:
An example is Shell European Company that supports the Kyoto protocol. It has a set of ambiguous goals to deduce its own Green house gas (GHG emission and has began investing in renewable energy) (Skjaerseth & Skodvin, 2001).
conclusion
The demand for oil is expected to increase but it is important to keep in mind that new oil discovery, uses of alternative fuels and economic growth could also decrease the demand for oil in years to come. Presently, oil has a major impact on the global financial sector, investment (Kuwait investing in Grenada road building) and exchange rates. Exxon Mobil is ranked by the Fortune 500 as been the #1 oil producing company to date.
Today Oil and gas volumes increased 22% to 31,238 barrels of oil or 340 per day, when compared to the three months ended December 31, 2008. Also, Oil and gas revenues increased 16% to $1.2 million compared to $1.0 million, due to the increase in sales volumes, partially offset by a 5% decline in blended oil and gas prices from $40.29 per BOE in Q2-09 to $38.46 per BOE in Q2-10. The increase in volumes was the result of drilling and work-over operations in the Giddings Field in central Texas. Reference is now made to figure 1 in the appendix, where it can be seen that oil supply may decrease in the next ten years.
Appendix
Figure 1: world oil production 1990-2080
Figure 2: G7 oil consumption
