Marathon Petroleum Corporation: Case Study - Assignment Example

Marathon Petroleum Corporation: Case Study Introduction Marathon Petroleum Corporation (MPC) is the fifth largest US refiner which engages in extensive marketing and transporting operations, and is based in Findlay, Ohio. The company was formed as a subsidiary of the former Marathon Ashland Petroleum, LLC; presently the MPC operates as a subsidiary of Marathon Oil Corporation. This paper will mainly explore the process of converting crude oil to consumer fuels, such as gasoline for transportation. Relationship between gasoline price and crude oil demand Crude oil is a naturally occurring liquid which mainly contains hydrogen and carbon. Crude oil is the major component in the production of fuel for cars, trucks, trains, boats, and airplanes. In addition, crude oil is also used for wide varieties of other purposes. The fractional distillation of gasoline produces an output known as gasoline. Gasoline is mainly used as fuel in internal combustion engines. Gasoline is traded in regional market; whereas, crude oil is the part of global market. Generally, the price of a commodity increases as demand increases (there are some exceptions to this rule) (Oxford). Since crude oil is a non-renewable energy source, its demand will not fall regardless of its price variation. Hence, when the demand for crude oil increases, its price also increases. Crude oil prices have a direct impact on the gasoline prices as crude is the major raw material used in the production of gasoline and other petroleum products. “Crude oil accounts for 55% of the price of gasoline while distribution and taxes influence the remaining 45 %” (Mazeel, 2010, pp.106-107). To illustrate, one barrel of crude oil contains 42 gallons of oil. If the price for one barrel of crude oil is $75, raw material worth $1.78 is required to produce a gallon of gasoline. This figure does not include transportation and other process charges. In total, when the global demand for crude oil increases, there will be a proportional increase in the retail price of gasoline also. How to keep the price at the pump the same? When the global crude oil production is decreased by 10%, the crude oil supply might fall and this situation would probably result in a rise in crude oil price. Under such circumstances, domestic oil retailers may be forced to raise their prices in order to avoid loss. If Marathon adopts effective business strategies, the company may keep the price at the pump the same without losing profits even in times of a decline in global crude oil production. In order to achieve this goal, the Marathon has to acquire materials at reduced rate by researching different markets because a decrease in cost of production is the most effective method to retain the same prices. In the view of Cox and Brittain (2006) it is advisable for the company to make bulk purchases as this system offers the benefits of cash discounts (p.159). This additionally earned money by way of cash discount may assist the company to keep the oil prices at the pump the same. It is obvious that the bulk purchase increases the inventory for supply; this increased stock may benefit the company to retain prices in the situation of a further reduction in global crude oil production. The Marathon may also connect with other oil corporations to purchase comparable products that provide quantity breaks. It is advisable for the Marathon management to analyze the company’s monthly expenses with previous quarters; this practice would largely assist the company to reduce its operating expenses by averting unnecessary costs such as luxury corporate offices. Finally, the top management may insist the departmental leaders to review their budgeted revenues and expenses and reduce their account payables. These strategies may be helpful for the Marathon Petroleum Corporation to maintain their oil prices stable at the pump. Deepwater drilling and gas prices in US Deepwater drilling is the process carried out to explore oil and gases, and this process includes the production in depths of more than 500 feet. In June 2010, US president Barack Obama imposed a six month deepwater drilling moratorium in response to the Deepwater Horizon oil spill that happened in the Gulf of Mexico. The major intention of this temporary ban on deepwater drilling was to give the presidential commission the time to study improvements in the safety of offshore operations. Although this moratorium intended to improve the safety of deepwater drilling, this regulation adversely affected the retail gas prices in the Untied States. As a result of this ban, number of offshore service and supply companies were compelled to stop their operations. According to Brown (2010), it has been estimated that offshore wells contribute a significant portion to US oil and natural gas production. Therefore, it is evident that this ban would significantly reduce the supply of gas products in US. Naturally, demand for gas increases when its supply falls. In order to take advantages of this favorable situation, marketers may set higher gas prices. Hence, inadequate supply of gas products and higher gas prices would be the direct impacts of another moratorium on deepwater drilling in US. Under such a situation, the US government may be forced to import more gas products from foreign countries in order to overcome the energy crisis. This practice would impose additional cost on the supply chain and which may ultimately result in a further gas price rise in the United States. Therefore, the government has to heed genuine attention to this situation seriously and must formulate effective measures to resolve the issue. Marathon’s social responsibility The Marathon Petroleum Corporation has clearly stated its Health, Environment, Safety, and Security (HES&S) policies under its corporate citizenship strategy. According to the company’s corporate citizenship strategy, high standards of HES&S performance are integral part of MPC’s organizational culture. Similarly, the company offers unbiased services to all communities. As the MPC considers HES&S policies as the integral part of its organizational culture, the company timely evaluates and amends its social and political trends (LARA). From the MPC’s website, it is clear that the company has a comprehensive HES&S policy and associated performance principles, which are highly integrated with management systems, so as to drive continual improvement. It is interesting to see that the company’s mission and vision also relates to its HES&S policy. In the modern days, organizations give greater emphasis on social responsibility programs as stimulants to promote sales. The MPC also adopts the same strategy. The company believes that an effective worksite environment plays a vital role in employee motivation; therefore, MPC gives first priority to the employee welfare by providing a safe and healthy workplace environment to its employees, contractors, and others involved in the workforce. In total, the company strives to become a responsible corporate citizen by undertaking environmental protection as its basic duty. The MPC’s “plan-do-check-adjust” management system assists the company to ensure that its HES&S vision is effectively aligned with company’s core values because this system is highly successful in assessing risks, setting targets, and measuring progress. The organization also ensures the active participation of its employees, contractors, and other third parties to meet its HES&S commitments. In order to make its corporate citizenship strategy more apparent, the company always welcomes SES&S suggestions. In total, the company’s ideologies regarding HES&S policy are clearly reflected from its attitude, actions, and expectations. Conclusion The above discussion indicates that retail price of gasoline increases with an increase in global demand for crude oil. Evidently, bulk purchase is one of the major methods to keep the price at the pump the same even though global crude oil production is decreased significantly. Likewise, a critical market analysis reveals that another moratorium on deepwater drilling may cause considerable gas price rises in the United States. Finally, it is found that Marathon’s statement on Health, Environment, Safety, and Security effectively reflects its industrial expectations. References Brown, S. P. A. (June 2010). Backgrounder: Some implications of tightening regulation of U.S. deepwater drilling. Resources for the Future. 1-13. Retrieved from http://www.rff.org/rff/documents/RFF-BCK-Brown-Regulations.pdf Cox, R & Brittain, P. (2006). Retailing: An Introduction. 5th Edn. India: Pearson Education India. Mazeel, M. A. (2011). Iraq Oil and Gas Papers 2010. Hamburg: Disserta Verglag. Marathon’s Detroit refinery and holly construction recognized as stars in workplace safety & health excellence. (2010). Lara: Department of Licensing and Regulatory Affairs. State of Michigan. Retrieved from http://www.michigan.gov/lara/0,1607,7-154-10573_11472-244860--,00.html Supply & demand on price. (2011). Oxford Futures, Inc. Retrieved from http://www.oxfordfutures.com/futures-education/fundamental-analysis/supply-demand.htm Read More