Major Issues In The Petroleum Industrys History Economics Essay

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There is no doubt that the petroleum Industry has made a major influence in the history of its existence. This paper seeks to analyze and discuss some of the major issues in the history of the petroleum industry. These include the nationalization of oil supply that occurred within the twentieth century, the major impact of OPEC (Organization of Petroleum Exporting Counties) in the international economy, a brief history of the growing dependence on petroleum and the impact of alternative energy in our global economy. A SWOT analysis on the petroleum industry along with the future of the industry is also presented in this case study.

To begin with, the nationalization of oil industries was indeed a significant moment in history which occurred between the periods 1900 to 2000. Governments restored ownership of oil industries to the state. Their main motives behind the acquisition were both economical and political. Mexico protected state ownership of its oil in the constitution of 1917; however the country (Mexico) lacked the required capital and technological innovation to promote and develop their oil industry. Other main oil producing countries such as Iraq, Kuwait, Qatar, Venezuela and Saudi Arabia nationalized their petroleum industries within the period 1950 to 1976. This was seen as a move to protect national interest. The practice of energy nationalism stems from major increases in oil prices on the global market.

Another major influential force in the history of the oil industry was the emergence of OPEC (Organization of Petroleum Exporting Countries) in 1960. OPEC which comprised of oil producing nations like Arab, Iran, Iraq and Venezuela exerted its premier influence in 1973 by imposing drastic price increases from $3 a barrel to $11.75. Since then OPEC has been able to maintain control over the production and supply of oil. Indirectly, OPEC maintains control over the prices of oil and gas. Its implication on the global economy is obvious. The norm of creating artificial shortages lead to prices increases ; this in turn will adversely affects people's spending as it has before. The period between 1995 to1996 experienced continuous increases in demand for fuel, supported by fast growing economies of Asia and other third world economies. The year 1996 recorded its highest increase ever of 3% in world energy from the last highest growth rate in 1988. The global petroleum utilization also increased by 2.4% within the same year.

Nevertheless, prices began to decline after 1997; each year petroleum businesses were seeking to replace utilized energy reserves through new oil field findings. However new technological developments helped to solve the issue of replacement by prolonging the life of oil fields in the same period. This period also witnessed the major oil companies competing with independent petroleum companies on almost every vertical level. It appeared that the oil companies who were vigilant reacted faster to opportunities and to attained superior performance.

Within our modern economy, it has become apparent that Mexico's oil reserves is rapidly depleting. The decrease in oil production is evident at other flourishing fields in Mexico, such as Cantarell (an offshore field) in the Gulf of Mexico. According to an article published in the San Francisco Chronicle, "Like much of Mexico's giant oil production apparatus, this area, known as the Bellota oil field, is in an apparently unstoppable decline. At current extraction rates, the nation has only 10 years of proven oil reserves remaining." (San Francisco Chronicle, 2006) The future of Mexico's state owned petroleum industry has raised concerns about the country's lacks of resources to end the decline, which in turn will create additional pressure on the world wide supply of petroleum. This will also adversely impact the domestic market of Mexico.

As a result of all these oil crises mentioned above, there is a movement or an initiative to adopt both more cost effective and cleaner energy sources. Global Conferences are therefore held to discuss the approaches on the way forward. In the 2009 Copenhagen Conference, members of the UNFCCC (United Nations Framework Convention on Climate Change) got together on a governmental level prior the climate agreement need to be changed. Some of the major issues discussed are the prevention of climate change and global warming, emissions cuts, considerable funds to deter deforestation (conservation groups believed that this area needs to be safeguarded), collective and committed pooling of finance by developing economies to nurture the needs of developing countries, a due date for a treaty to form an official and legally binding treaty and a endeavor to replace Kyoto which actually a procedure to be taken to put a stop to climate changes and global warming.

Petroleum industry was one of the earliest global commerce that has made a major impact in practically every area of business, geopolitics and economics during or over the past 100 years of its existence. The products of this industry have changed the way we live. People all over the world use it in their daily lives. From switching on a light bulb to driving a motor vehicle, energy surrounds us all; oil is indeed a major source of energy used in our everyday living. The refinery process allows the creation of more useful oil products such as fuel, asphalt base, kerosene, and heating oil. The importance and uses of crude oil has certainly grown over the century of its continuance. The discovery of its (crude oil) various uses has attracted many investors to venture into the industry for the purpose of reaping huge profits (investors realize the potential to reap huge profits). Hence, the efforts invested in manipulating and securing the rights of entry to oil supplies and markets were the primary contributors to the global conflict during the period of 1900 to 2000. The industry as depicted in the case used their Strength, Weakness, Opportunities and Treats to combat economical, political, and environmental crisis. Provided Hereunder just a few ways in which the industry survives in this global era.

Strengths

In this ever changing world we inhibit, companies/industries need to build on their strengths to remain competitive in this global era. The case depicts industries that have used its strengths to develop strategies that would generate profits to sustain them on the market. It is observed that the industry's strength came from alliances and joint venture. It seems that it was the only way in which industry could have participated in certain markets. For example India restricts equity participation by foreign firms in local operation to 40%. In addition, almost all important oil and gas fields were handled through joint ventures. This gave the industry leverage as they were able to have quicker access to other countries. For example there were pipelines running from fields in the North Sea to landfall in the United Kingdom. Joint ventures also became popular as a mechanism to rationalize downstream activities. The Organization of Petroleum Exporting Countries, which originally stated with the Arab oil producers plus Iran and Venezuela, used joint ventures and mergers to combat pricing crisis. For example, during the 1990's, pricing crisis was averted at the beginning of the decade on the outbreak of hostilities in the Middle East, when a sudden steep rise in prices on panic-stricken markets was moderated by output increases from OPEC Members. Prices somewhat remained relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in South-East Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery simple by creating mega mergers among the major international oil companies in an industry that was experiencing major technological advances. The demand for oil currently will continue to rise especially with nations such as china and India in the process of wide-scale industrialization. It is acknowledge that when demand is high and production is not increased, prices rice. OPEC's Strength therefore lies among the different oil production countries that together set production levels, thus, by controlling production the organization has a direct affect on the prices countries pay. The industry's strength depicts monopolistic characteristics because most of its products and services are not offered by other industries; therefore, it will be difficult to compete against the industry. For example, the use of heating and electrical energy, these two products are in great demand in the market and can only be provided by oil companies. In an event where there is a shortage of finances among consumers, the need for these products, among all other related ones (gasoline, plastics, etc.) are so great, that investments in the market are guaranteed, therefore achieving a profitable market, and thus giving room for collaboration within the monopoly. Commodity future markets allow commercial producers and commercial consumers to offset the risk of adverse future price movements in the commodities that they are selling or buying. In addition, strength of the oil industry is the ability of the industry to utilize the primary product i.e oil to produce secondary products. Most industries are not these opportunity hence if their primary product fails then their industry fails. The oil industry can use these secondary products as a financial support mechanism to primary products.

Weaknesses

As identified in the oil industry there are many strengths and it is evident that it is rich in production however, the oil industry is not without weaknesses. These weaknesses include the fluctuation of oil prices, the intentional destruction of the environment and the endangerment of supply.

Firstly, let's pay closer attention to the instability of oil. Demand for oil is always high when demand gets to the point that there is not enough oil to supply it prices rise in order to keep some sort of on control on demand however, if a new oil reserve is found supply is able to meet demand again and prices fall. Nevertheless there has been an increasing use of gasoline over the years and according to the American International Automobile Dealers Associating (A.I.A.D.A), China is the reason for the great rise in oil prices. This is because over the years China is becoming more and more competitive on a global scale. There economy grows bigger everyday and like America there streets are getting filled with more vehicles and along with it more construction of highways to support all the vehicles coming in. Therefore, the demand for oil in China is almost as great as the need for it in the United States. In fact China is now the second largest oil importing company in the word; and as China and America import more oil prices will continue to rise in order to manage this intense demand. This is a factor of the oil industry that cannot be easily maintained. At the same time the competition between China and the United States for oil from the Middle East may cause serious repercussions on their relationship. The Chinese government even believes that the U.S may be striving to take control of the Middle East and the oil wells within the country. As can be seen the oil industry also tends to cause divisions between nations which can, and has lead to battle between nations, wars and terrorism threats.

Secondly, oil companies also need to focus on, and try to decrease the harm they put on the surrounding environments, or they too can be adversely affected in the long run. Just the process of drilling oil for example has dire consequences for the environment. The fluids that come through drilling are not healthy for our environment. In previous years for example, the drilling sites used oil based mud in order to keep drill cuttings from getting in the way. On the down side, this mud contained both diesel and mineral oil which caused harm to the environment. There are water based muds that are use for drill sites. The problem is that the water based muds does not work as well as the oil based muds do. Still, oil companies have to try and find more environment friendly ways of extracting their oil if the environment is to kept clean and free from harm.

Transportation of oil is also a serious problem because of potential oil leaks that can kill many of nature's water life. For instance in 1989, 11 million gallons of oil was leaked continuously into the sea when the ship had hit a rock, resulting in the deaths of animals including seals, whales and birds. Transportation of oil can also become an economic crisis as a result of these leakages. Using the same disaster from 1989 $2.5 billion had to be spent in oil clean ups which took three years to complete. Oil companies need to set more effective systems in place to reduce, if not stop all at once, the damages that oil transportation and drilling causes to the environment.

Lastly, we must remember that oil supply is not unlimited. It is a non renewable resource. Though the earth is able to produce more oil, it will require millions of years through the process of fossil decomposition. Today, oil reserves are low. However, there are upon trillions of barrels of oil available to the world. About 34% of the oil comes from North, Central and Latin America, Europe, Asia, Africa and the Soviet Union. The other 66% resides in the Middle East, Saudi Arabia and Iraq; two of the biggest oil producing countries. On the downside of all this however, the United States seems to impose a threat on the oil industry. In the U.S, they have in place something called the "U.S. Strategic Petroleum Reserve" (SPR). Based on the writings of Alan Reynolds, a Cato Institute writer, the United States has been putting in 160 thousand barrels of oil daily into the SPR. There has been no sign of selling these collections of barrels however, and this is what concerns the OPEC. Every day, the stockpile keeps growing and OPEC is beginning to see it as threatening to the oil bosses of the oil industry. This however, may still not be so threatening, as America uses around 20 million barrels of oil a day. Still the problem remains that the U.S. could be causing some form of weakness in the oil industry through holding so much the oil.

Opportunities

The rising demand for petroleum (oil) in China creates a grand opportunity for the oil industry to increase their oil supply. China is currently undergoing industrialization as it grows to be larger, better, and more internationally competitive. The improvement in byways and minor roads together with the construction of new highways welcome this social and economic change. The highways and streets of China are now packed more and more with vehicles that are utilizing more and more petrol. Apart from the Chinese influence on the supply of oil, India is also beginning to enjoy the driving experience on improved roads and street. Hence, the petroleum industry embraces golden opportunity to meet the increasing demands both China and India for oil.

Next, the dawn of the global warming which has given rise to the green movement whilst it poses a threat to the oil industry provides an opportunity for the petroleum industry to place more focus on secondary products including pharmaceutical, plastics and grease amongst others. These secondary products produced by the oil industry have a readily available market and has yield millions to the industry over the years. Since the industry main focus is on the supply of energy based products and services, much emphasis have not been placed on secondary products because they don not yield high financial turnovers as energy based products. The pressure on the industry by the green movement forcing it to deeper forms of diversification can allow for increased employment and other economic benefits.

Lastly, opportunity exit where the oil industry can answer the call to the growing dependence by countries such as America and Europe for a safer, resourceful, and cleaner burning gas to warm and cool houses. The shift in focus by the petroleum industry to produce an increasing alternative energy source such as natural gas provides the superb opportunity for the industry in the advent of unstoppable decline in fuel.

Threats

The oil industry is faced with several major threats which are correlated to a multiplicity of smaller threats to the industry. While some of these treats seem inevitable, the industry has the responsibility to plan and prepare itself for preventing, where possible, and putting structures in place to lessen the effects of such.

The most obvious and current threat to the industry is interrelated to the topical issue of anthropogenic climate change or global warming. It is thought that the emission of gases into the atmosphere, inherent from many oil based products is a major contributor to the diverse effects that is brought on by global warming. This phenomenon has prompted many organizations and the global political directorate to plan for and take action as it relates to global warming. Many summits have been held to deal with this issue, the most recent of which was the Copenhagen conference on Climate change which brought together technocrats and political leaders from around the world. These leaders discussed and committed to ways to cut greenhouse gas emissions and scale back the use of fossil fuels, which produce carbon dioxide when burned. Plans included moving away from the use of oil based products and services which have been proven scientifically to be have adverse effects on the environment. Alternative forms of energy is being pursued and encouraged including coal, hydrogen fuel cells, biofuels, renewable energy, nuclear (thorium) and to a lesser extent natural gas. These alternative sources if used can replace most oil and oil- based products.

It is significant to note that Governments, NGOs and other organizations have committed significant human and financial resources to this process which will make it difficult, if not impossible for the survival of the oil industry. The process of hybridization in the motor industry threatens to deal a significant blow to the oil industry in terms of loss of revenue which can potentially have a ripple effect of high scale lay off among other smaller threats. With the advent of alternative forms of energy and hybridization it will be more difficult for the industry to compete against this trend towards a safer environment. If stakeholders are successful in making this alternative forms available at a an affordable cost, similar to that of oil based products and services, providing that supply of these products is greater than demand and all other factors constant, the oil industry can face a daunting challenging in getting a profitable price for oil based products. That is providing that consumers are given the opportunity to choose, in which case it is likely that considering the factors of competition, supply and demand, price of all will drop significantly. However to analyze the extreme possibility, which is in fact very probable, based on the support and investment that governments are making towards moving to alternative forms of energy, it is likely that if supply of alternatives is adequate that the use of other forms of energy can be made mandatory. The advent of such an occurrence will cause the demise of the oil industry as we know it and with it the loss of millions of jobs and investments around the globe. This threat may seem far-fetched in nature; however the lack of diversification or inability to do so within the oil industry is in itself a threat to the industry. More clearly said, since oil is what the industry do there is little or no room to do anything else.

Another major threat to the industry is that of depleting the oil supply. The supply of oil is not known to be unlimited and figures from all sources suggest that supply will some day be depleted. Since there are no replacement sources for oil, unless new oil fields are found, the current supply will run out because of rapidly increasing demand. The problem is compounded in that smaller countries with potential oil reserves are having a multiplicity of legalities as it relates to drilling arrangements and boundaries delimitation. Additionally some of these territories with the potential of new reserves do not have the human, physical, financial resources and or government capacity to make efficient use of such. A statistical review of World energy published by British Petroleum plc (BP), the third largest global energy and the 4th largest company in the world, on 13th, July 2007 suggest that the world still has enough "proven" reserves to provide 40 years of consumption at the then rates. However, scientists led by the London-based Oil Depletion Analysis Centre, did not accept that supplies will last so long since global production of oil was expected to peak for four years beginning in 2008 followed by steepening decline which will have great consequences for the oil industry. This theory referred to as the "Peak Oil" theory suggests that consumption of oil will catch, then outstrip the discovery of new reserves and known reserves will begin to be depleted. Colin Campbell, the head of the depletion centre, said: "It's quite a simple theory and one that any beer drinker understands. The glass starts full and ends empty and the faster you drink it the quicker it's gone."

While Petroleum prices for example have tripled in the last five years which translated into companies with the oil industry making supernormal profits. For example in 2006, Chevron Corp. and Exxon Mobil earned profits of $17.5 billion and $ 39.5 billion respectively. These record high profits were the largest profits for any American company ever. However, while the industry have had awash in income, the industry faces serious long term threats that while some companies have been enjoying such great profits, in the same period others have been confronted with the challenge of finding enough new oil fields to replace the petroleum which they now supply. Companies confronted with this dilemma include Exxon, Chevron, BP and Shell. These companies have been in search of new oil fields and have had some success in finding some, unfortunately, while not enough, the fields are located in difficult areas for drilling like the bottom which will cost these companies far more than it does to drill on land. This problem is not only evident with privately owned companies but also with Government- run companies of oil producing countries, including, Saudi Aramco in Saudi Arabia or the National Iranian Oil Co. in Iran,. The worlds ravenous demand for oil of more than 85 million barrel per day and growing, have forced such companies to spend tens of billions of dollars more each year into finding new reserves. Saudi Arabia, Iran, Iraq and Kuwait are the four countries with the biggest reported oil reserves. In 2006, a journalist carrying out a survey in Kuwait, found documents which suggest that the country's reserves were actually half of that which was reported in the BP release. Supporting this view, retired chief executive of the Kingdom Oil Corporation of Saudi Arabia Sadad al-Huseini expressed concerns that Saudi Arabia's oil production can't be increased due to short supply. In a 2007 interview with the New York Times, al- Huseni articulated, "The problem is that you go from 79 million barrels a day in 2002 to 84.5 million in 2004. You're leaping by two to three million [barrels a day]" each year, he told The New York Times. "That's like a whole new Saudi Arabia every couple of years. It can't be done indefinitely." Also in 2007 Iran grabbed the world's attention when the administration there took a decision to implement oil rationing, making Iran the first major oil producer to implement such indicating the view that supply is indeed running low.

Clearly the oil industry faces the threat of a serious supply shortage in the long term. It should be noted however that because oil production follows a bell shape curve as shown below in fig.1, oil will not just some day "run out". Rather, as shown on the curve oil is increasingly plentiful on the upslope of the curve and on the converse increasing scarce and very expensive on the down slope. As discussed earlier if oil gets more expensive because of decreasing supply as we approach the down slop whilst alternative forms of energy gets cheaper this will have deepening ramifications for the industry. The peak of the curve coincides with the point where oil will be 50% depleted. Hence, after the peak oil production falls while price increases. Therefore if 2005 was the year of oil production reaching its peak globally as believed by several stakeholders in the industry, then this mean that in the year 2030 global oil production will be the same as it was in the year 1980, hence the limitations as shown in the case will be evident. The difference with the years 1980 and 2030 is that the world will be far more industrialized and its population and dependence on oil in that period is expected to be about twice the amount of that of 1980. This occurrence can mark the explosion of resource wars since the worldwide demand for oil will outpace worldwide demand by a significant margin, resulting in oil prices reaching its highest, hence resulting in oil dependent economies crumbling. Figure 2 shows the depth of the threat in that its becoming a daunting task in finding new oil reserves. The competition therefore has forced oil companies to start preparing for facing this threat. As evidenced in a Bloomberg News article dated October 1st, 2007, the Big Oil companies (Exxon, Chevron, BP and Shell) have been quietly buying back their own stock at alarming rates. Every indication is that the oil industry is faced with the serious problem of steeply increasing demand for oil and quickly decreasing supply, with inability to find enough new reserves to compensate, which leaves the threat of supply depletion most likely sooner that the BP release suggested.

Figure 1:

Figure 2:

The third biggest threat to the oil industry is that of terrorism. Since the Oil industry forms part of the Critical Natural Infrastructure of every nation and all other industries have some form of dependence of the oil industry, the oil industry have become a natural target to terrorist. Terrorists' attacks on the oil industry have been consistently increasing over the years. Statistics reveals that in 2006 there were 344 significant attacks on the industry compared to 265 in 2005. These attacks have costs the industry billions of dollars in repair work, lost production, reputational damage and compensation to families of hundreds of workers who have lost their lives through these attacks. In 2006 over thirty-three (33) oil producing countries have been affected by some form of terrorism on the oil industry. The targets for these attacks varied but the most prominent have been attacks on pipelines and personnel. It is difficult for the industry to effectively protect pipelines since almost 65% of the industry's pipelines are installed above the ground and often follow existing roads or uninhabited areas. The location of these lines makes it easy target reduces the chances of catching the perpetrators. Terrorists' groups believes that attacking lines is the best way of affect the West by cutting off supplies without having to leave the Middle East. Hence, many of these attacks take place in the Middle East with the hope of damaging the economy of the US and other allies. In many cases many pipelines are attacked simultaneously making it difficult and expensive to carry out timely repair. The most popular method used is the placement of IEDs directly on the pipelines. In some places these devices and other secondary devices have also been used on the scene of pipeline attacks to set up landmines with the aim of preventing access to the site by repair crews and causing many fatalities to security and repair personnel. Pipelines have not been the only line of attack. Attacks on refineries, LNG liquefaction plants, bulk storage facilities, terminals and offshore attacks causing major oil spills and damage to the environment. A new area of target is in the form of electronic terrorism on the SCADA (Supervisory Control and Data Acquisition), which are used to monitor or to control processing or transport processes in a wide variety of industries including the distribution of gas and oil pipelines. In the development of these networks little attention was paid to security hence these networks maybe susceptible to attacks and misuses including corruption.

OPEC Countries have also invested in expanding downstream capacity, both inside and outside Member Countries. Cumulative investment in downstream capacity in Member Countries until 2015 is estimated around 40 billion US Dollars. This will expand refining capacity by more than two million barrels per day - to more than 10 million barrels per day. In addition, another 25 billion US Dollars are being invested abroad, adding further capacity to the global refining system.

All this points to one of OPEC's ongoing commitments: investing in production capacity. Such investments help OPEC support market stability.

First, OPEC has consistently ensured supplies to the market in a timely manner. Second, a genuine and forward-looking dialogue has helped improve the mutual understanding of producers and consumers.

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