University of Chicago
Type of paper: Thesis/Dissertation Chapter
The Global Oil and Gas Industry
Oil industry is a very complicated industry. Oil is very valuable and needed in every aspect of life. The world economy depends on entirely. This industry has gone through many challenges in history. It began as early as 15th century. During early years, there were firms that specialized in producing, refining and selling the oil products. These firms enjoyed monopoly. Later on, states decided to take ownership of the oil fields. The oil supply chain is composed of three levels. There is upstream that is involved with the exploration and production of oil. There is midstream that is involved with storage and transport of the crude oil. Then there is downstream that is concerned with refining the crude oil into its constituents and then distributing them o the consumers. At all these levels, many actors are involved.The key actors are the government and the oil companies. The three main types of oil companies are the integrated oil companies, the national oil companies and the independent companies. Politics has a direct effect on the oil supply chain. Wars also impact the oil industry negatively.
Key words: Oil Industry, world economy, oil supply chain, actors in the oil industry, politics and war, Oil is a very crucial resource in the world (Inkpen, 2010, 1). Undoubtedly, it is the only resource that runs the world economy according to Inkpen (2010, 3). There is no economic activity that would run without it. Consider transporting of goods and services from one place to another. Oil must be available for the transport to take place. Consider the heavy machines that are used in factories in the process of manufacturing of products for sale. It is a fact that all these machines would stop running in the absence of oil. It is sensible to state that there is nothing that can remain stable in the absence of oil. In other words, the whole world would literally come to a standstill without oil. In other words, because of its importance, the entire world is affected by anything that concerns oil. In the oil supply chain, main actors play a part. These actors are encountered from the point of oil exploration to the point of oil processing and consumption. They control many aspects of the oil. Besides, they make important decisions regarding oil. Their decisions have far reaching consequences even at the level of the consumer. Historically, oil resource has been subjected to stringent control by these powerful actors. In this paper, the historical background that surrounds actors in the oil supply chain as well as the future of the oil industry is brought to light.
Oil has been used over a longlong time. It started being used in 15th century. Its management has undergone numerous changes over time. Initially, oil sector all the way from exploration to processing was done privately by companies. Slowly by slowly, the national government started getting engaged in the matters of the oil sector and taking a share of ownership of the sector. Presently, national governments have taken over the control of oil resource. Oil fields have been classified as sate resource and, therefore, should benefit the government. It is worth noting that the struggle to achieve the principle of state power over the oil resources has not been a simple one. In Mexico, the state managed to claim state ownership of oil fields in 1917. In addition, it was able to gain autonomous control over the same in 1938. The UK prepared an Act called Petroleum Act of 1934. It is this Act that provided the guidelines for reclaiming oil resources into state ownership.However, in the US, the process of converting oil fields into state owned resources has been slow. In the recent past, the state allowed private individuals to have absolute control over the oil fields if they were within their territory. The state only owned what was present in the federal land. Nevertheless, this has changed because as at present, the state has taken over the ownership of oil fields and converted them to state properties. Ownership of oil fields notwithstanding, transport, distribution and processing of oil has undergone tremendous changes. Strong organizations have come up to control the entire supply chain of the oils. In simple terms, production and supply of oil has created a very sophisticated network. Political shades also crown the industry. Powerful actors control this fundamental resource. Therefore, oil industry is a very dynamic industry (Inkpen, 2010, 1).
Actors in the Oil Industry
There are many actors in the oil industry. These actors are responsible for everything that happens in the oil industry. They are in charge of oil exploration, oil excavation, distribution and even refining before reaching the final consumer. It is important to state that the same actors also are involved in setting up prices for the oils. They control the volume of supply as well as its reliability. They dominate the upstream, the midstream and the downstream of the supply chain. At the upstream, the activities taking place are exploration and production of the oil. At the midstream level, the main activities taking place are storage and transportation of the oil. The downstream level of the supply chain is characterized by refining of the oil, distribution and consumption. The actors are mainly the states and powerful firms. These actors are powerful and the decisions that they make have far reaching consequences. They include the states that exercise their power as landlords of the oil resources in the nations that produce it, as champions and as regulators. They mostly dominate the upstream level of oil supply chain. Firms play a part in the integration of the oil resources. Usually, they are created by the oil producing state or states that are main importers of oil. They can also be formed by representatives from several states that share a common element such as oil production. Firms mostly dominate the midstream level of oil supply chain where they exercise their power on the storage and transport of crude oil. They also exercise power at the downstream level where they control refining processes, distribution and prices for the end consumer. In short, the oil supply chain is a very complicated network. This network has brought nations together because of shared common goals. In the subsequent paragraphs, each actor in the oil supply chain is analyzed and its impact in the supply chain assessed.
States as oil landlords
It has already been stated that national governments are in control of oil resources. These states are especially those which are principle producers of oil. Some of the states that have autonomy in the oil sector are UK, Kuwait, Saudi Arabia and Mexico among others. These states are interested in generating revenues for the government. They set conditions under which the firms that will operate within their territory abide to. For instance, in the UK, the national government, through the Crown, issues licenses to firms that are interested in the search and production of oil and gas. The state has absolute power in deciding who to access the oil resources with regard to domestic and foreign firms. Political dimensions and considerations have a great role to play. The state also gives directions on which resources are available and which should not be accessed. In addition, the state determines the impact of resource extraction to the environment and gives an appropriate direction. It has the power to halt a process that has already begun if it is deemed that the negative impact in the environment cannot be controlled. It is also the role of the state to determine what the government stands to gain in any deal with a firm. It also champions local employment. In a nutshell, oil resources in the world within national territories are subjected to national political considerations in that nation. Therefore, oil firms have to contend and sing to the tune of the oil-producing states. Similarly, states that import the oil must create a good rapport with the exporting state in the political sense.
States as national champions
States also participate in National Oil Corporations as investors. Most of the top class oil companies are owned by state. These national oil companies dominate the world oil reserves and production. They are involved in determining the volume of oil production by the state. States opted to getting involved in the oil companies in order to make their oil companies have a superior bargaining power internationally. For example, in the Middle East, the government found it necessary to participate actively in the oil companies in order to survive in the international competition by the international companies. In 1972, Iraq made Iraq oil company a national company. Moreover, OPEC ruled that the governments in Kuwait, Saudi Arabia, Qatar and UAE should have at least 25% share in the oil companies. With time, the shares rose and by around 1980, they were 100% (meaning that the national government had taken over the oil company). These are just a few examples to show how states have decided to dominate the oil sector at all points. As far as exporting is concerned, national oil companies have a greater bargaining power. They can also access a wider market than private companies. Thus, it is to the benefit of the exporting country to consider nationalizing oil companies. In addition, states that import oil have national oil companies. Nations like South Korea, India and China have expanded their national oil companies overseas so that they can have access to the oil reserves easily. It is important to note that national oil companies in the importing states have an upper hand when it comes to striking deals with the exporting states. Hence, there is every need for these national oil companies. The deals that are struck at the level of national oil companies are very strong. Furthermore, nationalizing oil companies has helped stop unhealthy competitions among the oil companies.
States as regulators
States also play a role as regulators in the oil sector. They set and impose conditions regarding oil production as well as consumption. It is the duty of the government to ensure that oil production does not compromise the environment to the extent that the lives of the people are endangered. For instance, pollution should be kept in check at all cost in the course of production. Furthermore, the rights of the consumer should not be compromised. The government should not watch passively as consumers get exploited by the business people. Moreover, the state imposes taxation on the oil products hence influencing the prices of these products. This way, the government can get revenue from the sales of the oil products. Through taxation, the state regulates the rate of oil consumption. The state also sets regulations and conditions that are meant to protect the rights of the workers. This is a fundamental role of any caring government. Its people should be respected. These conditions are imposed on the firms that are operating within the borders of the state. In short, the government sets out conditions on whether a firm will set out to explore for oil and under which conditions. This influence on the production of oil gives the state an upper hand in as far as its oil resources are concerned. Coupled with political objectives, the state can impose restrictions on the oil companies operating both within the boundaries and overseas. For instance, the US government suspended all dealings with Libya until 2004 over allegations to links to terrorism. Therefore, oil companies in the US could not operate at all in Libya. Similarly, the US government has restricted any of its companies from dealing with Sudan.
The Major Industry Players
Integrated Oil Companies
Integration is very important in the oil sector. One of its key benefits is to ensure uninterrupted oil supply (Inkpen, 2010, 5). Also integration reduces price fluctuations. The reason for this is that integration helps companies achieve economies of scale and attain geographical diversification. The economy of scale is achieved since there is less competition. Also the market is favorable. In addition, there are fewer fluctuations in prices and this makes the firms stable. They can make better predictions and forecasts in the market. Without the integration, there would be stiff competition that would drive some companies out of market. Geographical diversification is looked at in two aspects. First, the sources of oil are diverse. That means that there are numerous geographical locations where oil is sourced. Integration makes it easy to aces all the locations. Secondly, the consumers of the oil are diversified in terms of geographical location. Integration makes it easy to reach all these customers. Firms like Exxon, Shell and Total have made their mark in the world. Others are BP, Chevron, ConocoPhilips and ENI. Together, they are referred to as the “Seven Sister”. They are among the largest world’s companies. They are the largest in terms of both capitalization and array of products that they produce. These firms have direct control at the upstream level and the downstream level of the oil supply chain. They have too much of influence regarding the oil prices. Nationalization of the upstream sectors of oil supply chain curtailed their influence at that level. However, their dominance downstream has not been shaken. Besides these giants in the oil industry, state-owned companies also play a part in the network. They are large companies that are involved with the production, refinery and sales. Their strength is measured in terms of the refinery capacity and the volume of sales. These firms are, therefore, critical in the oil supply chain.
National Oil Companies
These are new in the industry according to Inkpen (2010, 7). They have taken over the oil market and grown in leaps and bounds. They are ranking in top ten in the oil sector. These companies have the support of the government. They are not affected by the local politics. In addition, they are getting priority when it comes to carrying out explorations, production and distribution of oil products in the country. They also enjoy an upper hand in negotiations.
This is another category of actors that are involved in the oil industry as part of the oil supply chain. They are referred to as upstream independents because they do not own any assets downstream (Inkpen, 2010, 8). They are concentrated at the production level and their work ends there. These actors have helped remove the monopoly of the oil industry giants. In addition, due to their activeness, they have led to increased oil production. They have explored more and more sources of oil. These are actors that are actively involved in exploration of oil in Africa. For example, Tullow Oil is one of the largest oil companies that is independent working in Africa. The US government is strongly encouraging these independent companies to continue with their work because they are helping increase the world oil capacity. With the increase in the oil volume, the prices of the oil products remain low and the consumer can access it affordably. It is important to state that the independent oil companies are gaining ground so fast at the upstream level. It appears that in the near future, explorations and production of the oil may be their domain. The consumer will benefit with an increase in the oil production because not only will it be affordable, both frequent oil crisis will be a thing of the past. Oil crisis causes escalation of the prices of all other products even those which are basic for human survival. However, the independent oil companies may not compete favorably with the state-owned companies due to capital restrictions. Nevertheless, their impact is being felt. Their contribution in the oil industry cannot be underestimated.
Problems facing the giant oil companies
There are two major problems facing the giant oil firms. First, they are finding it difficult to survive in the prevailing conditions. The emergence of companies that are owned by the state has been a great blow to them. These companies that are owned by the state are given exclusive rights by the state in terms of exploration and production of oil as well as getting support to carry out downstream activities which include refinery and distribution. They are financially stable. They are not affected adversely by the political objectives. The second problem is that the giant firms are losing grounds to the independent companies’ oil production. Since these firms had heavily invested in the oil production sector, they are presently running into losses.
For any oil company to stand firm in the oil industry, it must have ability to locate new oil reserves. New oil reserves serve to replace the exhausted oil reserves that have been used in the previous production. The ability of the company, whether integrated or independent, to acquire new reserves is a measure of its commercial strength. For the integrated firms, this ability has diminished. The fact that there are restrictions imposed by the states on foreign firms accessing their oil reserves makesit even harder for the integrated oil firms to replace their reserves. If the problem persists, it can reach a point that the firms can run out of business. Political dimensions also limit the ability of the integrated firms in acquiring new reserves. It is within the mandateof the state to control the firm’s activities within its territory. Therefore, state control, coupled with the domestic political atmosphere reduces the ability of the foreign integrated oil firms to grow. These problems are likely to persist into the future and these giant oil firms are likely to surrender.
The role of politics in the oil sector
Accessing oil reserves in another country is not an easy task. The National Oil Corporations, the integrated firms as well as the independent firm need to negotiate with the state from which they want to access the oil resources. The negotiations are to do with the terms and conditions of the access. Politics is at the core in these negotiations. Economic power of the firm is assessed in order to gauge the negotiation atmosphere. The state that has the resource plays hard to grant access to the foreign firms. Politics surrounds the negotiations. As the states restrict equity participation by firms that are foreign, the integrated firms and the National Oil Corporations are left with no choice but surrender.
Oil sector and wars
Oil is a very precious commodity. It is an expensive commodity by the same measure. The reason why this is so is its scarcity. It is limited to some areas and absent in others. Those that are privileged to have this resource enjoy its benefits. Those that lack it remain to covet. Judging by its value, oil runs the economy of the world. There has been a series of wars intimated to be due to oil resources. In Nigeria, there was a civil war that was threatening to tear the country apart. The reason for the war was emanating from the poor management of the oil resources by this country. Sudan has already split into two nations. Currently, there is South Sudan and Sudan. The split resulted from an unending war due to oil resource that is in the country. Surprisingly, even after the split, the two nations are in quarrels. In Nigeria, the civil war that broke out in 1967 disrupted oil production greatly. The struggle was aimed at forcing Nigeria to acquire equity stakes in the foreign companies, such as Shell, that operated in Nigeria. Nigeria has achieved this goal but has not gained absolute control of the operations (Frynas and Mellahi, 2003, 8-11). These are a few illustrations to demonstrate that oil has been the cause of both civil and even international wars.
Future of the Oil Industry
There are advancements that are taking place in the oil sector. New discoveries of oil reserves are making the sector thrive. However, as many oil reserves become available, the prices of the oil products will be going down. This will benefit the consumers. The producers of the oil will suffer losses due to low prices. It is a bitter truth on the side of the nations that rely on oil but good news to the consumers. There are negotiations that are being carried out between states. These negotiations are among the members of OPEC. They are looking for a solution to the decreasing oil prices. One of the options they are thinking of using is decreasing the amount of oil being produced in their countries. However, this is unlikely to happen because not all countries can agree to limit the quantity of oil produced. In addition, mergers and acquisitions are taking shape in the oil industry (Inkpen, 2010, 15).increased advancements in the technology make exploration and production of oil easier and faster according to Inkpen (2010, 15). Finally, advent of new and alternative sources on energy may reduce the dependence that is put on the oil as a source of energy. The national oil companies are likely to expand more. As the reserves get exhausted, it is likely to be harder in the future to do exploration (Inkpen, 2010, 17).
Oil supply chain is a very sophisticated network. Many actors are involved in the activities that regard oil supply chain. The supply chain has three levels which include the upstream, the midstream and the downstream. At each level, there are many actors in charge. For a long time, integrated firms had had absolute control on all the aspects of the oil sector. Lately, National Oil Corporations that are supported by the states have emerged. These are becoming stronger than the integrated firms in the control of the oil production, refinery and distribution to the consumers. Besides, states have come out strongly to control this valuable commodity. First, the states have emerged as landlords and, therefore, owners of the oil resources. Secondly, they have emerged as the champions in the business taking part in the production and distribution of the oil products through National Oil Corporations. Thirdly, they have come out as regulators of the oil firms. They make conditions to be followed by the firms that work within their boundaries. The future of the oil sector is encouraging as more oil fields are being discovered by independent firms.
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