Moratorium on Deep-Water Drilling For Retail Gas Prices - Coursework Example

Moratorium on Deep-Water Drilling For Retail Gas Prices Overview Marathon Petroleum Corporation (MPC) is one of the leading transportation fuel refiners in the world and was established in 1887 in Ohio, America with the name Ohio Oil Company. The company was renamed as Marathon Oil Company in 1962 and was later split into two separate entities, Marathon Petroleum Company and Marathon Oil Company (as cited in Marathon Petroleum Corporation, 2011). The paper will be focused on the recognition of the production process and operations management strategies adopted by the company with due consideration to the external market scenario. 1.0. Marathon’s Product Process The production process in MPC takes place in three phases, i.e. refining, transporting, and marketing. The refining phase is executed with the assistance of sis-plant refinery network system. Crude oils gathered from the supply markets of Midwest and various parts of Southeast are refined in these plants with the capacity of around 1,142,000 barrels per day (bpd) accumulatively. Notably, two different types of crude oils are refined in these plants, i.e. sweet crude oils (46% approx) and sour crude oils (54% approx) which are collected from national as well as international suppliers. These refineries are located in six different parts of the continent, i.e. Louisiana, Kentucky, Illinois, Michigan, Ohio and Texas. The refineries are not only different in terms of their location but are also diverse in terms of sizes and their strengths (as cited in Marathon Petroleum Corporation, 2011). The shipping of the transportation oils or the refined crude oils takes place through terminals, roadway transportations and railroad transportations as well as through pipelines. MPC also uses the waterways for the shipping of the transport oils to retailers and wholesalers. The company in this phase tends to use the transportation means which have been owned or leased (as cited in Marathon Petroleum Corporation, 2011). In this context, the biggest limitation of the company shall be recognized as the integrated management system implemented in its refining phase of production. This indicates the refining phase of production process to be open for greatest number of efficiency improvements. It is due to the fact that all the six plants tend to be different from each other to a large extent in terms of operations, size and strengths. Thus, it is likely to become quite challenging to manage the vivid operations through the implementation of an integrated plan. 2.0. Relationship between the Retail Price of Gasoline and World Demand for Crude Oil Experts have stated that the retail price of gasoline and the price for crude oil are asymmetrically related to each other. To be illustrated, the retail price of gasoline is examined to rise substantially with the rise in the price of crude oil. However, the retail price of gasoline tends to fall leisurely when the price for crude oil substantially minimizes. This presents an asymmetric relationship between the two factors (Balke, Brown, & Yücel, 1998). On the similar context, the price elasticity of demand for crude oil is termed to be least, i.e. with a significant rise in the crude oil prices; it is likely that the demand for the product will diminish but not extensively (Cooper, 2003). Therefore, it can be stated that the global demand for the crude oil and retail prices of gasoline are asymmetrically related. This indicates that fall in demand due to the price increase of crude oil will have an inverse impact on the retail price of gasoline resulting in substantial price hike of the commodity. Similarly, fall in the price of crude oil shall encourage the world demand but have an insignificant impact on the retail price of gasoline due to the asymmetric relationship between the factors. 3.0. Operational Strategies Suggested to Marathon for Maintaining Its Profit despite 10% fall in the Global Production of Crude Oil Provided that the world production of crude oil is diminishing by 10%, it can be stated that supply of crude oil is also likely to decrease by 10% in the global market. Considering the basic theory of supply and demand, it can be stated that significant fall in supply shall cause rise in demand of the commodity. However, as the crude oil market is termed to be inelastic, the fall in supply is likely to have no significant impact on the demand. The fact can be presented diagrammatically as below: Fig: 1. The Inelastic Relationship of Demand and Supply in the Crude Oil industry The diagram represents that a considerable change in supply (S1 to S2, i.e. 10%) shall reflect slightest change in the demand for crude oil (D1 to D2, i.e. < 10%). Relating this fact with the relationship existing between the demand for crude oil and price change of the same, it can be stated that the price for crude oil is likely to rise significantly. This in turn shall also raise the price of gasoline substantially as an asymmetric relationship prevails in between the two variables, i.e. world demand of crude oil and price for gasoline ((Balke, Brown, & Yücel, 1998). Therefore, it is quite probable that MPC would be able to earn greater profit during the period by raising the retail prices of gasoline. However, if the company intends to serve the market with unchanged retail price of the commodity and simultaneously maintain its profit, MPC should focus on the retrenchment of the production cost or through the increment of supply in the retail market (Kurtz, 2010). But, due to the fact that reduced production shall restrict the company to increase its supply and maintain the profit margin, it is suggestible that the company should intend to reduce its production cost. It is worth mentioning that reduced production cost shall allow the company to serve its customers with meager reduction in supply and constant price which in turn shall reward MPC with a significant competitive advantage. 4.0. The Impact of a Continued Moratorium on Deep-Water Drilling For Retail Gas Prices in the US The dismissal caused by Gulf of Mexico spill in the early 2010 in the BP deepwater horizon forced the US government to consider moratorium on the deepwater drilling of crude oil with the view to deal with continuously rising retail gas prices in the economy. However, the continuation of the moratorium had raised various issues within the economy. For instance, the moratorium caused significant reduction in the production of crude oil which in turn increased the price of gasoline in the retail market (Mason, 2010). The moratorium also had significant impact on the economic stability of the US. For instance, the moratorium led to considerable job cuts in the market. This constituted to the reduction related to income in the economy enhancing the income disparity. On the other hand, with the reduction in the overall production of crude oil and increment in the retail prices of gasoline, the transportation cost as well as the cost for various commodities also increased in the economy. Thus, the inflationary rate was witnessed to rise significantly which in turn slowed down the growth rate of the economy (as cited in LaRocco, 2011). Therefore, the continuation of moratorium on deepwater drilling of crude oil caused significant disruptions such as hindered employment rate, increasing inflation, and similar other influences which in turn hampered the overall economic growth to a considerable extent. It not only hampered the fundamental growth pillars of the economy but also affected the national income of the US. For instance, reduced production reflected considerable diminution in the tax revenue earned by the economy. This certain aspect can be considered as quite vital for the hindrance of the US economic growth, as the revenue earned from the income tax is termed to be one of the major sources of income for the economy (Mason, 2010). Thus, the impact of continuing the moratorium can be examined as quite massive in the case of the US. References Balke, Nathan S., Brown, Stephen P. A., & Yücel, Mine K. (1998). Crude Oil and Gasoline Prices: An Asymmetric Relationship. Economic Review. Cooper, J. C. B. (2003). Price Elasticity of Demand for Crude Oil: Estimates for 23 Countries. Organisation of the Petroleum Exporting Countries. Kurtz, David L. (2010). Contemporary Marketing 2011. US: Cengage Learning. LaRocco, Lori Ann. (2011). Joe Mason: The Gulf Drilling Moratorium Is Costing US a Billion Dollars a Year. Retrieved from http://www.cnbc.com/id/42248042/Joe_Mason_The_Gulf_Drilling_Moratorium_Is_Costing_US_a_Billion_Dollars_a_Year Marathon Petroleum Corporation. (2011). About MPC. Retrieved from http://www.marathonpetroleum.com/About_MPC/Corporate_Profile/History/ Marathon Petroleum Corporation. (2011). Refining. Retrieved from http://www.marathonpetroleum.com/Operations/Refining_and_Marketing/Refining/ Marathon Petroleum Corporation. (2011). Refining and Marketing. Retrieved from http://www.marathonpetroleum.com/Operations/Refining_and_Marketing/Marketing/ Mason, Joseph R. (2010). The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region. Louisiana State University. ­­ Read More