- September 4, 2012
- Posted by: essay
- Category: Free essays
The development of the modern oil industry is accompanied by the growing competition between the major rivals. In this respect, countries having consistent oil resources are in an advantageous position compared to countries importing oil because, today, oil is the major source of energy along with gas. In such a situation, the market structure is strictly divided between importers and exporters of oil.
Remarkable, countries exporting oil have absolutely different goals and they conduct absolutely different policies compared to countries importing oil. Exporters of oil aim at the maximization of price to increase their benefits from the production and export of oil, while importers, in contrast, attempt to decrease the price of oil to minimize their expenditures on this source of energy. In such a context, large multinational corporations trading oil worldwide take the dominant position in the market for they develop new and existing oil shells, extract oil, process oil and transport oil worldwide. As a result, both exporters and importers become dependent on the policies and marketing strategies of large multinational corporations operating in the oil industry and it is mainly the large multinational corporations that define the market structure in the oil industry. At the same time, countries exporting oil also tend to regulate their export establishing control over extraction and export of oil. Therefore, countries importing oil and consumers of oil in these countries are in the disadvantageous position because they are dependent on the supply of oil from countries exporting oil.
The domination of large multination corporations in the oil market raise barriers to entry consistently to the extent that new rivals cannot enter the market successfully. Instead, the market tends to mergers and acquisitions which strengthen the position of current industry leaders. In such a way, extremely high barriers to entry increase even more, when large multinational corporations, such as BP, Shell, and others extent their international market share or develop new oil shells (Van der Borght, 2000). As the matter of fact, large multinational corporations tend to the monopolization of the oil market, but the scarcity of oil and the strict domestic economic policies in countries where oil shells are located prevent these corporations from the establishment of the total control over the oil market worldwide.
Nevertheless, they have already taken the lead in the oil industry and, today, not only potential rivals or new companies that attempt to enter the oil market but also states have to take into consideration the position of large multinational corporations.
In spite of the domination of large multinational corporations and the dependence of importers on the supply of oil from countries where the main resources of oil are located, oil prices are still very changeable. The vulnerability of oil prices to changes can be explained by several reasons. First, oil prices change consistently because of financial speculations. To put it more precisely, exporters of oil attempt to maximize their profits selling oil at the maximum price, but the maximum is often reached by means of the artificial decrease of supply (Ogbu, 1993). As a result, the demand pertains or increases, while the decrease of supply creates the deficit of oil and oil prices skyrocket.
Second factor that influences oil prices is the political situation in regions where oil is exported from. In this respect, it is worth mentioning the fact that the change or deterioration of political situation, military conflicts and other problems that raise instability in regions where oil is exported from leads to increase of oil prices. Third factor is the demand for oil. In this respect, it is possible to refer to the recent economic recession which decreased substantially the demand for oil that resulted in the substantial drop of oil price in the world market. Finally, it should be said that oil prices are highly dependent on the situation in international markets.
The development of technology also influences oil prices and the development of the oil industry at large. The fluctuations of oil prices and exorbitant oil prices along with the scarcity of oil stimulate the development of new technologies which tend to substitute oil as the main source of energy in the world. As the matter of fact, today, oil along with gas are major fossil fuels that are used as sources of energy worldwide. However, the development of modern technologies tends to the replacement of oil by alternative sources of energy, including renewable ones (Volti, 2005). The latter represent a serious threat to the development of oil industry because they can offer more effective sources of energy as customers will not need to buy them over and over again as is the case of oil.
At the same time, the cost structure of oil tends to changes too because the scarcity of oil forces companies to develop new shells and implement new technologies to get the oil which could not be extracted before. The increasing difficulties and risks accompanying oil extraction increase the cost of production of oil. As a result, costs spent on the extraction of oil comprise a considerable part of the total costs spent by companies operating in this industry. Furthermore, transportation costs also comprise a significant part in total costs of companies operating in the oil industry because oil is transported worldwide using different means, such as pipes, sea routes, railroads, etc.
Finally, today, companies are growing to be more and more concerned with exploration and development of new oil shells to maintain the stable level of oil supply in the world market (Mouawad, 2009). In this regard, it is costs on transportation that mainly remain fixed, while other costs are variable.
In addition, wages are also an important issue in costs of oil companies because the level of wages is high compared to other industries. At the same time, the benefits of oil companies are high too because they can benefit from the high demand for oil. At any rate, the modern world cannot maintain the normal social order and economic development without the stable oil supply and oil companies can get the full advantage of it. In such the price elasticity of demand remains not very large because demand for oil will persist, at least in the nearest future, while suppliers of oil can speculate as long as the demand persists.
The rivalry in the oil industry is high but there are only few large players ”“ large multinational corporations ”“ that take the lead in the industry and attempt to establish their control over the industry and oil trade. However, their efforts are restricted by the state policies along with supply and demand changes in the oil market. To put it more precisely, many states establish restrictive measures concerning the extraction and export of oil from their territory (Volti, 2005). What is meant here is the fact that in many countries oil industry is nationalized or oil shells are the property of the state. As a result, oil companies can extract and trade oil only on conditions defined by the state. On the other hand, other states do not impose their total control on the oil industry and maintain principles of the fair competition in the oil market.
As for supply and demand, it has been already mentioned that supplies are in an advantageous position because demand for oil persists.
Even the decrease of demand cannot lead to the total refusal of countries importing oil from oil as the major source of energy. Even though the decrease of demand can lead to the drop of oil price, suppliers of oil can easily manipulate and skyrocket prices as soon as the demands starts to grow or when the supply decreases to the extent that the risk of the oil deficit arises in the world market. In addition, supply and demand can change under the impact of social and political factors.