Demand and Supply Factors - Rosneft - Coursework Example

? work Contents Introduction 3 Demand and supply factors 3 Market Structure 4 Requirements to compete in the market 5 Elasti Concepts 5 Efficient use of Resources 6 Economic Growth 6 Unemployment 7 Inflation 7 Balance of Payments 7 Business cycle 7 Conclusion 8 Reference 9 Introduction The company that is taken under consideration in the underlying project is Rosneft. The company operates in the energy sector. The company was established in the year 1993 and in 1995 the company was transformed into a joint stock company. In the three years from 1995 to 1998 the company witnessed constant alteration in the management and as a result the assets left unmanaged (Rosneft, 2007—2008). The company is involved in geological exploration, storage as well as processing and marketing of hydrocarbons. Demand and supply factors As the chosen company operates in the oil and gas sector the demand side factors that can affect sales and the profitability of the company include weather, demographics, economic growth, fuel consumption, storage and the exports potential. From the supply side, the factors which can affect the sales are capacity of the pipeline, storage, gas drilling, issues on technical grounds and imports. The demand follows the cyclical patterns. It also depends on the time and season factors. The demand for the products rises during the hottest months while the demand takes the declining curve during the winter months ((EIA, 2008). The price of the natural gas affects those consumers who have the potential to switch to the fuel of their dependence. The demand that is created by the retail consumers will get affected by the price of electricity. Storage of the produced products is difficult for the companies in this sector and so excess supply cause a fall in the price level. The price is generally set at the equilibrium level as there are several competitors present in the market. Technological advancements can also play a role in the demand of natural gas. The appliances which can be operated through electricity can now be operated through natural gas and this has caused the demand for the product to shoot up. The other barriers that can impact upon the supply of natural gas are availability of skilled labor and availability of well developed systems of delivery. The financial environment can also affect the supply of natural gas both off-shore and on-shore ((Natural Gas, n.d.). Market Structure The consumers can now enjoy the luxury of choice and competition. The price mechanism is beyond the regulations of the government. The price is set by the market by following the usual demand and supply factors. These factors play its role in setting the price at the equilibrium level. A straight forward market structure characterized the market for natural gas prior to deregulation and unbundling of pipeline. Bundled products are offered by the less developed countries and they play their role in supplying the products to the end users. Marketers serve the purpose of mobilizing the natural gas to end users. (Natural gas, n.d.). The increased liquidity in the market has called for the emergence of non-contract LNG market. The producer owns the gas at well head and sells to the marketers, and less developed countries and even sometimes to the end users. The market faces a serious constraint as it cannot react to the usual changes in demand and supply and requires sufficient time before the adjustment process takes place ((Soligo and Jaffe, p.2, 2004). Requirements to compete in the market The companies that operate in this sector enjoy monopoly power and that is the reason why they tend to be more profitable. The main requisite for the organizations to maintain the profitable position is to avoid preferential as well as discriminatory service. Inefficient investments in other sectors can be avoided. The strategies of unfair pricing would also not help the company to serve the purpose. There is no substitute to quality and so measures to maintain the quality of the products should be undertaken. The company can act as a substitute where the concept of competition is absent. Policies that can impact upon the competition needs to be implemented ((OECD, 2000, p 9). Structuring an environment friendly infrastructure shall be beneficial. The company uses scarce resources and so apart from making wastages, the company can take several initiatives to prevent such wastages and make optimum use of the resources. Elasticity Concepts One of the important concepts that can influence the pricing strategy is price elasticity of demand which shows the change in the quantity demanded of a certain product due to change in the price of the same product. Suppose Rosneft reduces the price of one of its products by 10% and the demand of the same product increases by 20% then the price elasticity is 2. The demand curve of the natural gas are said to be elastic. Again if the price of the natural gas increases by 10% but if the demand rose by only 5% then the demand curve comes out as inelastic (Biz/ed, 1998). Another important concept is the income elasticity which is referred to as change in demand of a certain product (natural gas in this case) due to changes in the income of the people keeping the other conditions as constant. Since natural gas is considered as normal good the income elasticity will be positive. Elasticity of cross price is measured as the variation in demand for a product (gas) due to fluctuations in the price of substitutes of that good. Efficient use of Resources The company is currently targeting to follow the sustainable growth path of crude oil production. The priority of the company is extraction of efficient reserve and achieve highest possible recovery factor at its fields. The company has taken initiatives to enlarge the refineries. There has been an agreement on acquisition of 50% Ruhr Oel GmbH. The company is paving the path for expansion, optimization as well as modernizing the filling stations. In order to gain the benefits from vertical integration, the company is developing businesses in new sectors like aircraft refueling. Economic Growth Economic Growth brings increased income for the population. The chosen company is likely to be benefited from such growth as increased income will allow the consumers of the company to demand more. The high demand indicates more revenue and profits will display in the balance sheet. The export possibilities will rise which allows the company to acquire the steep rising path. Economic growth is a phase of the business cycle and so the company should prepare itself from the conditions when the slag in demand occurs. Unemployment In situations characterized by unemployment it will be difficult for the company to operate at its efficient level. As a result it will not be able to make maximum utilization of the resources. The efficiency of the whole economy is likely to get reduced as frictional unemployed labor will operate at below efficiency level. Inflation In an inflated economy, the interest rates will take the steep rising path. The input prices will also follow the pattern of the interest rate. As a result the potential to trade will get affected (Bowett n.d.). The revenue stream will suffer from the material changes in prices. The ability to borrow money and further employment opportunities will also suffer from the shock. Balance of Payments Healthy balance of payments situation can act as the driver to attract investments. The investments can be utilized in order to generate technological up gradations that would be beneficial for the company in the long run. Fluctuations in the balance of payments will reduce the aggregate demand and would cause an unwanted situation for the concerned company. Business cycle In the phase of prosperity or boom the economy is characterized by high levels of effective demand. Higher productivity and trade possibilities are the additional characteristics. Recession will affect every industry sector either partly or wholly. Reduction in the volume of demand and exports will affect the forecasted revenues and back up measures are to be undertaken without delay. This situation is partly compensated in the recovery phase as it will bring investments for the organization but it depends on the organization on whether it will be able to make optimal utilization. The business possibilities will open up slowly and balance sheet may witness profits once again. Conclusion There it can be stated conclusively that the company under consideration will have to take several measures in order to gain comparative advantage. There are many competitors operating in this type of market structure and in order to gain the market share, the company has to make initiatives to access monopoly power as that will credit the organization something above normal profit. Reference Natural Gas, n.d., Natural Gas Supply.[online]. Available at: http://www.naturalgas.org/business/supply.asp. [Accessed: 24th June, 2012]. EIA, 2008, Natural Gas Demand. [online]. Available at: http://www.naturalgas.org/business/demand.asp. [Accessed: 24th June, 2012]. Rosneft, 2007-2008. History. [online]. Available at: http://www.rosneft.com/about/history/. [Accessed: 24th June, 2012]. OECD. 2000. Promoting Competition in the Natural Gas Industry.[pdf]. Available at: http://www.oecd.org/dataoecd/34/23/1920080.pdf. [Accessed: 24th June, 2012]. Biz/ed, 1998, Price Elasticity and Pricing Policy.[online].Available at: http://www.bized.co.uk/learn/business/accounting/busaccounts/notes/pl.htm?page=14. [Accessed: 24th June, 2012]. Bowett R., External environment-business and inflation.[online]. Available at: http://tutor2u.net/business/external/economy_inflation.htm. [Accessed: 24th June, 2012]. Soligo. R. and Jaffe, A. 2004. Market Structure in the New Gas Economy: Is Cartelization Possible? [pdf]. Available at: http://iis-db.stanford.edu/pubs/20705/Gas_OPEC_final.pdf. [Accessed: 24th June, 2012]. Read More