Analysis of the Petroleum Industry - Paper Example

Introduction

Oil is the number one commodity in the globe that is heavily exported. For instance, in 2015, it accounted for nearly 5 percent of the world value of exported products. Many countries in the world produce the black gold, but the main exporters of this product are Saudi Arabia, Russia, Iraq, United Arab Emirates, Canada, Nigeria, Kuwait, Angola, Venezuela, and Kazakhstan (Clarke, 2017). The petroleum industry incorporates worldwide processes of extrication, analysis, transportation, purification, and marketing of oil/petroleum products. The greatest volume commodities of the industry are heavy oil and petrol. The raw material that is used in most chemical products is petrol. Such chemicals include dressing, solvents, perfumes, drugs, and plastics.

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Petroleum and its products are very valuable commodities that have led the world to term it as the black gold. The oil industry is divided into three parts namely, downstream, upstream and midstream. Downstream and midstream operations often overlap each other. The petroleum institute of America classifies the industry into five parts. There are development and production of fuel part, the downstream part, the pipeline, service & supply, and marine. Crude oil is very crucial to many businesses and is of significance when it comes to upholding the industrial revelation age. Because of this fact, oil is very dear to the nations of the world. Fossil oil is one of the largest consumed modes of energy in the world. The universe uses about thirty barrels of oil per year, and industrialized countries are the biggest consumers. The refining, retailing, creation, and conveyance of oil as a whole depict the globe largest industry in terms of the money value. Countries like the United States of America give public relief to energy companies, with tax cuts at every process of the oil extraction, exploration, analysis, including the price of the drilling technologies (Clarke, 2017).

The principle of supply and demand fundamentally affects the fossil oil industry by setting the price of oil. The price and the assumptions about the cost of petroleum are the vital governing factors in how businesses in the market allot their resources. (Biscardini, Morrison, Branson & Del Maestro, 2017). The charges establish specific stimulus that impacts behavior; this conduct finally feeds back into supply and demand to set the costs of the crude oil. For instance, long periods of inflated fuel prices lead to users avoiding cars that are not energy-saving or cut their driving. If services cost more, enterprises and people may take notice and sustain energy. These conditions reduce demand. On the part of the supply, increased petroleum prices end up resulting in the more drilling programs; more investigation capital is poured in and it ignites innovation in methods and competence. Projects that were not possible at a lower cost can now become viable. These operations increase the supply of the product. A decreased fuel price has the opposite impact of incentives (Kitous, Saveyn, Vandyck, Keramidas & Wojtowicz, 2016).

Manufacturing drops as many firms in the oil market may announce bankruptcy and developmental plans are discontinued. The result of this is that the supply chain will crush. In addition, demand curve rises as individuals drive more and major on efficiency issues due to the low cost of energy (Biscardini, Morrison, Branson & Del Maestro, 2017). By way of illustration of high-cost impact was between the period of 2008 and 2014, where the prices were up by over a hundred dollars. Huge investments flowed into the market by way of new enterprises and credit. Production expanded in reciprocation to the high prices, predominantly with modernization and hydrofracking and oil sands. These huge investments could only be substantiated based on excessive petroleum prices and advanced to the recorded supply in 2014. It's not all that gloom because these high prices have caused people to turn other modes of energy and efficiency. This impacted the reduction in demand for oil as an individual.

Supply and demand curve fluctuations can cause the cost of fuel to change. When the supply of the commodity is more than the demand of the product, the charges of the oil come down and the opposite happens when there is more demand for fuel than what suppliers can meet. The fall in prices can be attributed to a decreased demand for the product by European countries and China and a dependable supply of oil from the Organization of the Petroleum Exporting Countries. The economy of scale of crude oil caused the prices of oil to fall drastically. Ever since the cost of buying fuel has gone up and down, the value of one barrel was 67$ per barrel of oil (Kitous, Saveyn, Vandyck, Keramidas & Wojtowicz, 2016).

Whereas supply and demand influences oil costs, it is surprisingly oil futures that determine the price of fuel. A future agreement for oil is basically a contract that gives a purchaser the privilege of buying oil at a determined price in the future ("OPEC Monthly Oil Market Report", 2017)It's important that the parties to the contract finish the transaction on the set date. Disasters are another facet that can cause fuel payments to shift. To give an example, when Hurricane Katrina hit the united states of America it affected the supply of the black gold thereby causing the prices of fossil oil to rise by three dollars. The political instability in the Middle East region also causes the prices to change. It's important to know that this area contributes most to the global oil supply. For example, the price of a barrel of oil rose up to one hundred and thirty-six dollars due to the anticipation of wars in both Iraq and Afghanistan.

The costs of production also have a say whether the price of oil will go up or down. Whereas petroleum in the Middle East is not expensive to extricate, extraction in Canada is not cheap. Once the stock of low-priced fuel is finished, the cost could go up if the only petroleum left is in the tar sands. The manufacture of oil by the United States of America also impacts the price of oil ("Digital Transformation Initiative Oil and Gas Industry", 2017). With so much overabundance of oil in the market, a decline in manufacturing will reduce the supply of the commodity and automatically cause the prices to shoot up. America produces nine million barrels of oil per day and when that production started going down the pressure was put on oil prices as a result costs increases. Some concerns have been raised in the industry over the decreasing oil storage which influences investment opportunities in the sector.

All the oil redirected to storage has increased greatly, and crucial hubs have experienced their storage filling up very fast. The movement of fuel price is linked to the behavior of the interest rate (Biscardini, Morrison, Branson & Del Maestro, 2017). One of the fundamental concepts states that by increasing the interest, the costs of the users and producers will also rise. This will reduce the monies and tie people spend on operating a motor vehicle. A few people on the roads will cause a fall in demand, thereby causing the cost of the commodity to fall. This scenario is an inverted correlation. By still employing the same concept, when the rates fall down, user are able to appropriate and use money without any restrictions. This will increase the demand of the commodity. The more the usage of fuel, which has an organization of petroleum exporting countries restrictions on production, the more the users bid up the costs.

The oil prices are very tense in the short run due to the inelasticity of supply and demand. This is occasioned by a restricted supply crude oil which indicates that any interruption to distribution will change the supply curve, thereby increasing the prices of the commodity. In the case of demand the prices are fragile because at the current t moment there are less alternative sources of energy, thus an increase in demand will result in the shift of the supply curve thereby an increase in the price of oil (Kitous, Saveyn, Vandyck, Keramidas & Wojtowicz, 2016). Take note that in the short term period the prices of fuel are very volatile and are subject to changes in the supply and demand. One more financial theory suggests that high-interest rates give strength to the dollar in opposition to other nation's currencies.

When the almighty dollar is powerful, American oil enterprises can purchase more oil with every dollar used, finally transferring the savings to the consumers. In the same way, when the dollar goes down against other currencies will result in America buying less oil than previously ("OPEC Monthly Oil Market Report", 2017). As a result, the price of oil will be expensive in the USA which is a big consumer of oil in the world. There are various facets both political and financial that can cause the change to the prices of crude oil. The organization of petroleum exporting countries is the most powerful body that contributes heavily to the shifting of oil prices, but cardinal supply and demand elements, manufacturing costs, political instability, and even interest rates play important roles in the price of the black gold.

Companies dealing in oil and gas depend on small projects to balance the liability and the flow of cash in the industry. These small drilling projects can be conveyed much faster comprehensively than big projects. Having several of these small initiatives contributes immensely towards the stable manufacturing growth that will cancel out prolonged development cycles of big projects (Kitous, Saveyn, Vandyck, Keramidas & Wojtowicz, 2016). In order to make the best use of these investments, firms ensure that projects are up to date by rationalizing operational processes, management, and administration of the supply chain. These benefits can only be enjoyed when the contractors, team, and owners execute methods to reduce liability and exploit on lessons learned. This necessitates a detailed project management plan and powerful authority of the kind often linked to big investments. The benefits enjoyed by these companies due to the economies of scale are a reduction of liabilities, reduction of overall costs of production,

Conclusion

The future of the oil and gas industry is looking very dull. The world is progressing at a very fast rate towards a world where oil will no longer be in use (Clarke, 2017). There is the invention of the electric vehicle which uses electricity instead of gas as a source of energy. The move to a more clean type of energy will result in multinational oil and gas companies close down or adapt to the current market reality.

References

Biscardini, G., Morrison, R., Branson, D., & Del Maestro, A. (2017). 2017 Oil and Gas Trends-Adjusting business models to a period of recovery. Retrieved from https://www.strategyand.pwc.com/media/file/2017-Oil-and-Gas-Trends.pdf

Clarke, T. (2017). End of the "Oilocene": The Demise of the Global Oil Industry and of the Global Economic System as we know it - Resilience. Retrieved from https://www.resilience.org/stories/2017-01-31/end-of-the-oilocene-the-demise-of-the-global-oil-industry-and-of-the-global-economic-system-as-we-know-it/

Digital Transformation Initiative Oil and Gas Industry. (2017). Retrieved from http://reports.weforum.org/digital-transformation/wp-content/blogs.dir/94/mp/files/pages/files/dti-oil-and-gas-industry-white-paper.pdf

Kitous, A., Saveyn, B., Vandyck, T., Keramidas, K., & Wojtowicz, K. (2016). Impact of low oil prices on oil exporting countries. Retrieved from http://publications.jrc.ec.europa.eu/repository/bitstream/JRC101562/jrc101562_impact%20of%20low%20oil%20prices%2020160512.pdf

OPEC Monthly Oil Market Report. (2017). Retrieved from http://www.opec...