Successful Industry in Saudi Arabia - Assignment Example

Successful Industry in Saudi Arabia April 11, Introduction The petroleum industry in Saudi Arabia generates high cash inflows. The local oil revenues generate cash inflows. Similarly, revenues from petroleum products sold to other countries generate higher cash inflows to the Saudi Arabia government. Saudi Arabia’s ARAMCO manages the search, production, and sale of Saudi Arabia oil well outputs. The Saudi Arabia petroleum industry is a successful local industry. Question no. 1 Human resources. During the 1980s, the Saudi Arabia Government acquired the United States entity, ARAMCO. The United States entity, ARAMCO, set up its drilling equipments within Saudi Arabia. The equipments extracted petroleum from within Saudi Arabia’s territory. Consequently, the Saudi Government hired employees from the other countries. The Saudi government targeted employees from countries plagued with high unemployment rates. The countries include India, and other Asian countries. As expected, huge groups of job applicants flocked into Saudi Arabia to get high paying petroleum industry jobs (Kane 2). Employees of the petroleum companies enjoy comfortable working conditions in Saudi Arabia. Saudi Arabia’s labor law article 146 and article 147 clearly requires the employer to exert extra efforts to comply with the benefits prescribed in the Saudi Arable labor law. The benefits include housing, camping, suitable healthcare facilities, and free meals. The schools are set up in order to fill the school needs of the petroleum workers and the school needs of the children. Saudi Arabia hires laborers to extract and export the Saudi Petroleum products. The oil field employees include low skilled oil labors. In addition, the Saudi Government hires engineers who will ensure smooth oil production (Kane 14). Knowledge resources. Saudi Arabia hired the expertise of engineers from other countries to help ensure smooth petroleum productions. With the expertise of the Saudi ARAMCO engineers and other labor employees, Saudi ARAMCO continues to successfully extract petroleum from within Saudi Arabia’s borders. Similarly, the expertise of the Saudi ARAMCO engineers and experienced petroleum employees contributed to the successful export of the country’s petroleum products to other countries (Wynbrandt 200). Saudi Arabia hired the petroleum research knowledge expertise of the United States firm, Standard Oil Company of California (SOCAL) to find petroleum. Consequently, the hired American company discovered oil in Saudi Arabia in 1932 in Bahrain. An entity, Iraq Petroleum Company, was formed that included petroleum research experts from United States , France, Holland and SOCAL team led to the discovery of oil during 1938 (Wagner 65). The government’s Saudi ARAMCO entity uses its more than 60 years of actual oil drilling experience to retain its huge oil exports to other countries. ARAMCO hires petroleum experts, including engineers, to continue the tradition of extracting and exporting Saudi Arabia’s main gross domestic produce, oil (Wynbrandt 200). As of 2012, Saudi Arabia is the top investor in the petroleum industry. Saudi Arabia invested an estimated $164 billion in its oil production and export industry for the next five years, 2012 to 2017. Saudi Arabia invested the amount in its government-owned Saudi Arabian Oil Company and its Saudi Basic Industries Corporation or SABIC. Next, United Arab Emirates pledged to invest an estimated $106 billion into its own local oil extraction and export industry from 2012 to 2017. Third, Algeria will invest $an estimated $ 70 billion in its own oil research, extraction, and export industry (Mahdi 1). Infrastructure. Saudi Arabia’s petroleum based infrastructure facilities are equipped with advanced communication systems. The systems help in the reporting of accidents or incidents that will slow, damage, or cause unnecessary havoc on the smooth extraction and export of the petroleum products, including the petroleum pipelines. The Abqaiq Area Emergency Control Center is the communications headquarters office that immediately relates the current status of all oil infrastructure facilities, including reports of delays and other incidents. Next, Saudi ARAMCO office includes 14 workstations that contribute to the fast delivery of messages to the concerned oil petroleum production and export units. The Saudi Royal Navy and the Coast Guard detect and prevent external threats coming from the coastline entry points (Cordesman 281). Question no. 2 The Saudi Arabia residents’ demand for oil products is pegged at 100 percent (Asmar 713). The domestic buyers of the Saudi oil and other petroleum products include those who are vehicle owners. Vehicle owners buy gasoline to run their cars, motorcycles, jeeps, trucks, vans, and other modes of transportation. Many of the Saudi Arabia local residents buy liquefied petroleum gas (LPG) to cook their food. The restaurants and other food establishments use the same liquefied petroleum gas to prepare the customer’s chosen menu prerogative. As the population of Saudi Arabia increases, there is a corresponding increase for the Saudi Arabia oil and other petroleum products. More people will use Liquefied Petroleum Gas to cook food. The businesses buy gasoline to run factory equipments. There is a high demand for the Saudi Arabia oil and other petroleum products within the Saudi Arabia domestic market. Further, the production of the nation’s own petroleum products generates lower oil prices. The prices of imported petroleum prices from other countries would normally be priced at an amount that is higher than the locally produced Saudi oil products. The higher priced imported oil products would include the cost of transporting the oil from the country of origin to Saudi Arabia. In fact, the Saudi Government charges lower petroleum prices (discounted prices) to its citizens compared to the prices of oil sold to the global customers. The discounted prices were introduced in order to persuade the Saudi Arabia residents to consume more gasoline and other oil prices. Consequently, the citizens may be thinking that they will generate more discounts from buying more gasoline and other oil products (Asmar 713). Compared to the local oil and petroleum consumption of residents in other countries, the Saudi Arabia residents spend the most quantities of local oil and petroleum consumptions. Specifically, the 2008 United States CIA data shows that Saudi Arabia local oil and other petroleum consumption amounted to 2,380,000 bpd. Second in rank in terms of volume of local oil and petroleum consumption, the same 2008 United States CIA data shows that Egypt local oil and other petroleum consumption amounted to the lower 696,89,000 bpd. Third in rank in terms of volume of local oil and petroleum consumption, the same 2008 United States CIA data shows that Iraq local oil and other petroleum consumption amounted to the lower 637,660 bpd. 4th in rank, the same 2008 United States CIA data shows that United Arab Emirates local oil and other petroleum consumption amounted to the lower 463,010 bpd (Asmar 713). Further, it is the standard operation strategy of petroleum exporting countries to subsidize the local residents’ gasoline and other petroleum needs. Subsidizing includes offering the oil and other petroleum products to its residents at prices lower than the prices sold to buyers from other countries. Indonesia, Yemen and Iran allocate the subsidy in each nation’s national budget. Other countries including Saudi Arabia, subsidize the local residents’ oil and other petroleum needs by selling at discounted prices (Medas 18). Furthermore, Saudi Arabia’s 2010 estimated oil reserve volume is estimated to be 265 billion barrels. At the present rate of petroleum extraction, there is enough extraction and exporting of Saudi Arabia’s petroleum supply that will fill the world’s demands for the next estimate 66 years. Saudi Arabia will be able to fill the local residents’ petroleum needs for the next 66 more years. This is bigger than the United States nation’s current 21 billion oil barrels capacity (McGuigan 426). The local residents will prefer purchasing the lower priced local oil and other petroleum alternatives over the higher priced imported energy alternatives (McGuigan, 426). Question no. 3 There are several related and supporting industries within the Saudi Arabia petroleum industry. Saudi Arabia’s monopoly of the local oil and petroleum industry market requires the continuing support of suppliers. Restaurants sell food to the Petroleum employees. The hungry petroleum employees take their lunch, dinner, and snacks within the nearby restaurants or food establishments. Computer stores sell personal computers to the line and staff petroleum employees (Samuelson 238). The employees purchase the computers for their personal use. Other stores sell mobile phones and other communication devices to the line and staff employees. First, the Saudi Arabia local education industry produces top notch graduates. The graduates are trained to fill the increasing demand for petroleum experts. The government coordinates the education programs of the nation’s technical training high schools towards producing a huge pool of possible petroleum industry workers. From the promising high school student hopefuls, the best and the brightest are given petroleum industry related scholarships. They are trained to fill the top management positions of the local Saudi Arabia ARAMCO Company’s oil extraction, refinery, and exporting departments or facilities. The top graduates are given huge on the job training incentives. The incentives include both morale boosting incentives and financial benefits (USA International Business 140). Consequently, the employees of Petroleum entity, Saudi ARAMCO, are composed of an estimated 85 percent local residents. The remaining 15 percent are workers coming from more than 48 countries. During the Iraqi invasion of Kuwait during 1990, the locally trained Saudi Arabia employees were able to increase petroleum production. The increased production covered up for the stoppage in Kuwait’s oil production during the Kuwait invasion. During 1991, the locally trained Saudi ARAMCO employees (residents) successfully stopped a huge oil spill. The oil spill occurred in Arabian Gulf’s coastlines (USA International Business 140). Second, the Saudi Arabia research centers focus on improving the processing of petroleum products. The research centers include Saudi Arabia’s selected universities. The research centers include the King Abd Al Aziz City for Science and Technology or KACST. The government allocates funds for petroleum research and development activities. The activities include finding new oil and petroleum resources. The research focuses on replacing the depleting oil wells with newly discovered oil wells (USA International Business 140). Further, the Saudi Arabia technology industry suppliers provide the required high technology communication requirements of Saudi Arabia’s petroleum industry. Saudi Arabia’s petroleum extracting and exporting entity, Saudi ARAMCO, uses high technology communication and information technology equipments to support its high quality management of all transactions related to the production and sale of the oil and other petroleum products. The high technology communication equipments are used to monitor the current status of petroleum storage facilities. The same communication equipments are used to determine the current global demand for Saudi Arabia’s petroleum products (USA International Business 140). The Organization of Petroleum Exporting Countries or OPEC entity supports Saudi Arabia’s petroleum industry. As a member of the OPEC, Saudi Arabia abides by the policies of the entity. The entity decides on the maximum or minimum barrel outputs of the petroleum producing countries. The same entity contributes to the standardization of the petroleum prices (Cordesman 4). The suppliers of Saudi Arabia’s petroleum extraction companies support the continuing exportation of the Saudi Government’s oil and other petroleum products. Yemeni delivers supplies and equipments, food items, and food items to stores within Saudi Arabia (Etheredge 94). The stores fill the food needs of the petroleum employees (Samuelson 238). The stores sell the grocery and other personal needs of the petroleum line and staff employees. The suppliers include the petroleum extraction and export equipment competitors. Question no. 4 Saudi Arabia’s local petroleum industry evolved around its government entity, Saudi ARAMCO. ARAMCO engages in drilling its current and future oil wells. The company exports its oil and petroleum products to local and international customers. The company delves in the research for new oil well locations. Next, ARAMCO prioritizes the development of the newly discovered oil wells into producing commercial level quantities. ARAMCO also engages in the refinery business. One of the refineries is located in Jeddah. Another refinery is located in Riyadh. A third refinery is stationed in Yanbu. Initially established as an American Company in Saudi Arabia in 1948, the Saudi Arabia government owns Saudi Arabia Oil Company (ARAMCO), an oil exploration and export company. Originally, United States investors owned a significant share of ARAMCO. After observing the profitability of the oil extraction business, the Saudi Arabia government became interested in the company. Consequently, the Saudi Arabia government acquired the entire assets of ARAMCO Company during 1980 (Oxford Business Group 129). Strategy. The strategy of Saudi Arabia’s ARAMCO is to continue as the exclusive local seller of oil and other petroleum products. Like most monopolies, the monopoly can raise prices as high as possible. This is possible because the current and future customers cannot buy the same product or service from another competing company. However, ARAMCO offers the oil and petroleum products at discounted prices. In order to generate profits, ARAMCO focuses its income generating marketing plans to selling its products in the global market. The Saudi Arabia petroleum exporting entity’s strategy includes setting up the Organization of Oil Exporting Countries entity (Yergin 2). The members of the entity includes other petroleum exporters one the petroleum exporters is Iraq. Another member of the entity is Kuwait. A third member is Venezuela. The purpose of the OPEC is to ensure a steady supply of petroleum products to the world’s petroleum country customers. The entity envisioned helping the poor members of OPEC to generate their own share of petroleum profits. To fill the needs of the domestic Saudi Arabia petroleum customers, the government offers discounted retail prices. The lower petroleum prices allowed the residents to allocate the saved petroleum money for other more important expenses. The more important expenses include medicine, food, clothing, and home expenses. Shifting the saved petroleum money to buying food increases the food stores’ profits. Consequently, the profitable food store can continue selling its food products to its current and future customers, including the Saudi Arabia petroleum entity’s line and staff employees. In response to the lower local oil and petroleum prices, the local residents had the capacity to buy more oil and petroleum products. Consequently, local Saudi residents were able to travel more. Travelling more means engaging in more business activities. Structure. The Saudi Arabia oil and Petroleum Industry is structured as a monopoly. Consequently, the lone government entity, ARAMCO, supplies the oil and petroleum needs of all its citizens who are living within the borders of Saudi Arabia. The government generates profits from the ARAMCO operations. As a monopoly the government has a hand in the hiring of employees. Similarly, the government has a hand in hiring the best of the brightest local Saudi Arabia residents to management the affairs of ARAMCO. Rivalry. In the local Saudi Arabia petroleum industry, monopoly is in place. A monopoly occurs when there is only one company selling in one market segment. As a monopoly, ARAMCO has no rivals or competitors within the same Saudi Arabia petroleum market segment. A rivalry occurs when other companies are allowed to compete for the same market segment’s current and future customers. Question no. 5 The Saudi Arabia government plays an important role in supporting the local oil and other petroleum products industry. During 2009, the Saudi Government invested $ 3 billion to dig and discover if oil is hidden beneath Saudi Arabia’s Khurais oil field (USA International Business 136). Further, the government institutes laws that will ensure greater business and other economic activities will flourish within the Saudi Arabia territory (Termeer 11). In the Arabian petroleum market segment, the government controls the petroleum industry. The government owns the Saudi ARAMCO oil entity. Saudi ARAMCO is responsible for the extraction and export of the Saudi petroleum products 14. To increase the current oil well outputs of its ARAMCO –owned oil wells, the Saudi Government infuses additional investments to increase its current petroleum production. The nation’s increased production will generate higher exports of its petroleum products (Mahdi 1). The Saudi Arabia government affirmed that it will invest an additional from 2012 to 2017. Saudi Arabia will invest $165 billion in two of its investment priority areas. The two priority areas are Saudi Arabian Oil Company and Saudi Basic Industries Corp or SABIC. As owner of the ARAMCO petroleum oilfields, the Saudi Government of House of Saud uses the cash inflows generated from the oil and petroleum exports to hold the entire Saudi Arabia nation firmly under the Saudi king’s leadership. The King Abd Al-Aziz ibn Saud government used oil cash inflows to fill the needs of the residents had solidified peace, cooperation, and unity among the previously warring tribes of Saudi Arabia. The current residents live more comfortable lives in a country that was previous discarded as a tourist destination due to the harsh environment conditions, especially within the Nejd Central Saudi Arabia community. Because of the oil riches of Saudi Arabia, the government is able to construct very attractive buildings, roads, and other infrastructure (Mikesell 234). The Saudi Government prioritizes investments in the oil related industry. The investments contribute to increasing the current cash inflow generated from oil revenues. The Saudi Government continuing investments in the oil sector generates high cash inflows to into the government coffers. The oil cash inflows come from both local and international customers. During 2007, Saudi Arabia’s oil exports generated an estimated 89 percent of the nation’s export revenues. During the same year, Saudi Arabia’s oil exports represent an estimated 69 percent of the Saudi Government’s total revenues (USA International Business 211). To ensure profitably continuing high oil revenues, Saudi Arabia contributed to higher oil prices of ARAMCO. Saudi Arabia was instrumental in forming the OPEC. The OPEC pegged the global price of oil as well as quota system. The equilibrium (pegged) price of oil served as the exchange rate or standard rate among oil buyers and sellers. The pegged priced prevented the members of OPEC to lower their prices below the prescribed peg price. Lowering the price below the peg price would unfavorably drive the cost-conscious buyers to shift to the lower priced oil and petroleum products (Termeer 11). Recommendation There are recommended changes to the current Saudi Arabia government support (Termeer 11). First, the government can transfer its oil exploration strategies to other countries. Using prior decades of oil expertise, the government can set up its oil searches in other countries. The government can invest funds in countries with high probability of finding new oil fields. Next, the Saudi Government leaders can reduce taxes. The reduced taxes increase the Saudi Arabia residents’ gasoline, oil, and other petroleum purchases. Third, the government can increase its research and development budgets. The increase will hasten the discovery of more new oil wells. Conclusion The Saudi Arabia petroleum industry significantly increases the nation’s cash inflows. The Saudi Arabia’s government owned ARAMCO prioritizes the search, production, and sale of oil and petroleum products. The Saudi Arabia residents prefer the lower-priced local oil and petroleum products. The nation has many related and supporting petroleum market segments. The Saudi Arabia government prioritizes supporting the domestic oil and other petroleum product industries. It is highly recommended that Saudi Arabia’s ARAMCO set up production and sales of petroleum products in other countries with high oil well find potentials. Evidently, the Saudi Arabia petroleum industry is a successful local industry. Works Cited Asmar, Basil. Fossil Fuel in the Arab World. New York: Lulu Press, 2010. Cordesman, Anthony. Saudi Arabia: National Security in a Troubled Region. New York: ABC CLIO Press, 2009. Etheredge, Laura. Saudi Arabia and Yemen. New York: Rosen Press, 2011. Group, Oxford Business. Emerging Saudi Arabia. Oxford: Oxford Business Press, 2007. Kane, Michael O. Saudi Arabia Labor Law . New York: Michael O Kane Press, 2013. Mahdi, Wael. "Saudi Arabia to Lad $740 Billion Oil Spending Through 2017." Bloomberg 6 October 2012: 1. Medas, Paulo. A Primer on Fiscal Analysis of Oil Producing Countries. New York: International Monetary Fund, 2009. 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