Structural Characteristics of OIL Industry - Essay Example

Structural Characteristics of OIL Industry Introduction Petroleum and its close associate, Natural gas, has been one of the key energy sources for the ever energy hungry human race, and this industry has played a critical role in shaping the political, economic and social structure of the world. The petroleum and natural gas industry is one of the most critical industries in the world, and is the primary energy source for industry, transportation and a lot many other sectors. As a matter of fact, about 2/3rds of the world’s total primary energy was derived from oil and natural gas in the year 1999. (The Energy Situation: Challenges for the 21st Century, n.d.) It can arguably be termed as the ‘back bone’ of modern day life as it is imperative to the proper functioning of social or economic aspects. To start with, oil, is extracted in the form of ‘Crude Oil’ or petroleum. The ‘Oil Industry’ functions in exploration, extraction, refining, then marketing and supply of the derived forms of crude oil which are then used as fuel in transports. By products’ of petroleum refineries are also used as raw material for a range of industries, namely pesticide/ fertilizer, medicine, etc. Structural Characteristics of OIL Industry   Global trends reflect the overpowering nature of a selected few oil companies over the world wide oil market. EXXON MOBIL Corporation, Royal Dutch & Shell (Netherlands), BP (U.K.), Petroleos De Venezuela (Venezuela), China National Petroleum Company (China), Saudi Arabian Oil company (Saudi Arabia),Chevron Corp, National Iranian Oil company (Iran), etc. are some of the Biggest Oil companies in the world. Energy security is one of the most important factors that drive the foreign policy of nations. Given that oil is the most important source of primary energy, the biggest petroleum exploration and petroleum refining companies in this sector are state owned or more popularly known as Nationalized Oil Companies (NOC). (PetroStrategies Inc., 2003) Oil & gas being of strategic importance to Nation’s security, many countries (ex: China, Venezuela, Russia, etc) have national oil behemoths under the state’s fold. The world oil exploration and refining industry is dominated by a few oil companies. While the top 10 oil firms own, directly or indirectly, about 80%of all oil reserves, they are also This Oligopolistic market structure enables the players in the oil industry to earn super normal profit through monopolistic pricing. By the end of the first world war the oil industry had gained much traction and more so after the 2nd world war. Under the patronage of respective Governments, few companies took control of the whole value chain of oil production in the world. This was gained through complete hold over the resources of the petroleum producing countries. In this scenario, these companies were making huge profit, huge tax collection was happening in Oil consuming countries but however on the other end of the value chain, the oil producing countries were loosing out. This occurrence gave rise to the formation Organization of Petroleum Exporting Countries, OPEC, which was a cartel of major Petroleum exporting countries. Presently OPEC consists of 12 countries viz.: Iran, Iraq, Kuwait, Qatar, Saudi Arabia, UAE [Middle East]. Algeria, Angola, Libya, Nigeria [AFRICA]. Ecuador, Venezuela. OPEC has 78% of Crude Oil reserves under its member countries. (OPEC Share of World Crude oil Reserves, 2007) So it is evident that on both fronts i.e. oil exporting countries or oil companies, a cartelist attitude exists. The barriers to entry and exit exist in the oil industry Some of the common barriers to entry and exit into the oil industry are as follows, High Capital Investment High level of difficulty in getting licenses for Oil exploration in oil blocks of other countries. High level technological prowess needed. Political connotation: Oil being of strategic importance, geo-politics plays an important role in granting of licenses & other factors. Uncertainty: Many firms exploring a certain area, while only one might strike new oil blocks. To counter this high charges and other barriers, many big firms form cartels here also in terms of understanding between them. In the process they share information, technology, resources. This ultimately creates more barriers for newer & smaller firms. Scale of production & oligopolistic tendencies: If the entry barriers are high & minimum scale of production is relatively large in comparison to other industries (as incase of oil), there is a normal tendency of the firms to flock together and form a cartel. Below is given the production capacity of two of world’s biggest oil companies: EXXON MOBIL Corporation – The biggest private sector oil & gas company in the world. The top 5 oil companies control The nature of the competitive strategies The world’s workshop China with its high GDP growth rate ia perennially in hunt for new sources of oil, throughout the world. In this context CNOOC (China National Offshore Oil Corp) & CNPC (Petro china) two of its biggest oil companies are scouting for oil reserves in distant parts of the globe. African countries like Sudan, etc are under China’s radar in this context. (Zweig D. and Jianhai B., October 2005) Vladimir Putin the president of Russia has used oil & gas supply as a strategic tool to arm twist those European countries who are not exactly in friendly terms with Russia. Recently on Jan-7th’2009 – Russia under Putin stopped supply of Gas to Europe, through Ukraine. More than 25% of Europe’s gas supply is dependent on Russia & 80% of that comes through Ukraine. (Russia stops all gas supply to Europe via Ukraine, January 2009) Like any other industry, the oil & petroleum companies also come up with innovative marketing strategies which would give them competitive advantage. For example: Mobil North American Marketing and refining; how it changed itself from a commodity manufacturer to a customer centric company. KRAs (Key result areas) identified: Improve operational excellence: - Competitive pricing, quality of product, timely delivery. Customer centricity: Emphasis on long term relationship with the customer through personalized & focused services. Leader in product offerings: Focus on development of unique products through out of the box innovation. (Kaplan R.S. and Norton D.P., September 2000) Geopolitical strategy compulsions force them to act at harmony with their Govt’s foreign policy & strategic vision, in terms of expansion, take over, etc. Hence, these NOCs, unlike publicly owned oil companies, are not primariy driven by financial aims. Again from a marketing point of view, being an industry, which is primarily state controlled & has oligopolistic & some monopolistic characters, it is assumed that these companies would not like to stretch themselves in terms of marketing and other strategies. But to the contrary, they are seen to imbibe new age strategies & management learning (As in case of MOBIL) to reach out to the new age consumer. Performance characteristics in the light of this structure The petroleum and oil industry is characterized by the three following factors: Oligopolistic nature of the market Presence of Geo-political factors as pivotal force behind decision making NOCs being the major players in the industry As a result of the above mentioned factors, price, production, and hence consumption of oil derivatives is influenced by non market forces. For example, the infamous oil shock of the 1970s resulted in a drastic hike in the prices of oil, thereby changing the consumption pattern of oil and oil derivatives all over the world. OPEC, the group of all major oil exporting countries of the world, strongly influence the volume of oil that is allowed in the world market. Additionally, geo-political disturbances in oil rich areas like the Middle East, African countries and in Russia strongly influence the price, production and consumption of oil. While publicly held oil companies are driven by the sole aim of maximizing shareholder’s wealth, the NOCs have different set of aims. NOCs have multiple objectives like wealth distribution, employment generation, economic development, foreign policy, energy security and vertical integration. These differences in objectives are the prime reasons behind the difference as measured by various performance parameters. For example, while ExxonMobil(publicly help company) has only 19 employees per million barrels of petroleum produced, Petro China(an NOC) employs about 265 employees per barrel produced. Hence, unlike any perfect economy industry, the oil industry is shaped by a complex web of economical, geographical and political factors. References Kaplan R.S. and Norton D.P., (September 2000), Having Trouble with Your Strategy? Then Map It, Harvard Business Review, retrieved March 22, 2009, from Organisation of the Petroleum Exporting Countries, (2007), Home, OPEC FACTS AND FIGURES, OPEC Share of World Crude oil Reserves, retrieved March 22, 2009, from PetroStrategies Inc., (2003), World's Largest Refiners, retrieved March 22, 2009, from Russia stops all gas supply to Europe via Ukraine, (January 2009), Community Weblog, retrieved March 22, 2009, from The Energy Situation: Challenges for the 21st Century, (No Date), University of Connecticut, School of Business, retrieved March 22, 2009, from Zweig D. and Jianhai B., (October 2005), China's Global Hunt for Energy, Foreign Affairs, Council of Foreign Affairs, retrieved March 22, 2009, from Read More