How Will a World Recession Affect Oil and Gas Investment Supply and Demand by Andrew Gould - Article Example

FOSSIL FUELS EXPERT ROUNDTABLE: HOW WILL A WORLD RECESSION AFFECT OIL AND GAS INVESTMENT, SUPPLY AND DEMAND? By; Andrew Gould, Chairman and CEO, Schlumberger 15 April 2009 The article talks about fall in prices of oil and natural gas as result of various courses and the ways to curb it. Table of Contents Reversing the impact of recession on the United Kingdom Oil and Gas Industry Table of Contents……………………………………………………………………………2 Terns of reference……………………………………………………………………………3 Procedure ……………………………………………………………………………………4 Findings I. The effects of recess on global demand and supply…………………………3 II. Price stability ………………………………………………………………..4 III. SWOT analysis ……………………………………………………………..5 Conclusions………………………………………………………………………………….6 Recommendations …………………………………………………………………………..6 Bibliography …………………………………………………………………………….…..7 Appendices ………………………………………………………………………………….8 Terms of reference This report looks at the effects of recession on the oil and gas industry in the United Kingdom and hence seeks to prescribe the measures and the strategies that should be put in place to avert these effects. The report was written by Andrew Gould who is the Chairman and the Chief executive officer of Schlumberger. The report is given to the audience in Chatham house (Royal Institute of International Affairs) as a speech by the author on 15th April 2009. The audience composed of various fossil fuels experts in a roundtable. Procedure Secondary source of information used was the internet report. These sources were readily available and could be easily accessed. Findings I. The effects of recess on global demand and supply Oil and natural gas are popular fuels because they hold large amounts of energy compared to other rechargeable batteries. Due to this factor, the demand of oil and natural gas has constantly increased over the years. In the early 1980s, the demand for these commodities was driven by the Organisation for Economic Co-operation and Development, OECD countries that had been used to cheap supplies. Enough supplies together with low production costs and low tax had slowly raised the demand without much concern of the production costs. The Organisation of Petroleum Exporting Countries raised the production rent that led to the need of curbing demand. The conservation and substation, together with recession led to the drop in demand by 8 million barrels per day. Introduction of other sources of fuel such as nuclear energy, higher taxes and other incentives contributed to the low demand. The oil and natural gas prices have recently increased due to the high demand that has cropped up as a result of growth in major world economies. However, the increase in prices had a direct effect on the consumer bahaviour even before the recession. Conservation and fuel substitution efforts in the OECD are expected to take longer in implementation and hence may suffer the law of diminishing returns if the oil and gas prices remain low. In 1980s the demand dropped by million barrels per day, however, it is projected that the demand was to decrease by 2.3 million barrels per day in 2009. In the 1970s, there was no shortage of oil in the market, meaning that the supply surpassed the demand. The price increments were driven by the changes in the producers attitudes to the share of the rent and the supply base. The prices were made high enough to maintain the development costs. The current consumption of oil is about 85 million barrels per day. The excess production capacity has reached about 8 million barrels per day, which is 8% of the total demand. The increase in demand made the supply more fragile, and this is true because from 1986 to 2004, there has been very low investment in new supplies. However, the high demand in 2004, led to increase of the prices. After 2004, the increase in supply came mainly from Saudi Arabia due to increased capital spending in exploration and production. Despite a huge increase in such spending (from $200 billion to $250 billion in 4 years), there was very little increase in production. May governments invested into the into the oil companies/products. This led to high inflation and much inefficiency. Large investments in the rents and production were increased by re opening of Libyan supply. The current recession has led to drop in oil prices that eventually had a negative effect on exploration and production expenditure. This made only the deepwater projects profitable. Several high cost projects on oil have been cancelled or procrastinated due to the recession and this has pushed out further the new supply. Oil is a commodity that is easily traded with by a large market mechanism because its infrastructure that includes transportation, refining and marketing are widely spread around the globe. Summarily, 1986 had high accumulation of low demand and high supply and 1997 to 1998 saw a drop in demand due to increased production II. Price stability From the trends observed above, it is of paramount importance that the oil industry should look into ways and means of stabilizing the price of petroleum products so that the demand and supply can be stabilized as well. Price stabilization is the transactions aimed at preventing retardation or decline in the market price of a commodity. The oil industry should put in place mechanisms that provide product flow into the market. Such mechanisms should include more exploration and storage of oil. Accurate forecast of the market trends should be done to understand the measures that should be used to maintain market flow. Privatization of these oil firms will increase efficiency in delivery of the commodity and hence creating market stability. Price adjustment schemes such as establishment of price bands. Appraisals, such as subsidized private storage can be used effectively to stabilize market prices. Finally, the governments of oil producing companies should as well put in place deficiency payment schemes so as to cushion these industries from the adverse effects of recession. III. SWOT analysis SWOT analysis is a business analysis technique that is used by organizations to identify the strengths, weaknesses, opportunities and the threats present in a market. The oil industry has major strengths in that it still has large consumer base all over the world. It is also one of the highest profit making industries and hence it has resources for further investments and thus securing more production. The overall body that manages oil producing industries can be used as a collective market bargaining tool. Lack of proper management of the oil producing firms has made it easier for entry by non professionals, thus flooding the market and thus introducing unhealthy competition. The oil industries have a large market and discoveries of more oil in some new areas provide more opportunities for further development of this industry. The increased advancement in technology will foster more exploration of new oilfields at cheaper costs. The international organizations are coming up with measures that will enable reduced use of petroleum products due to their environmental effects. Climate change has raised issues in Montreal Protocol, Earth Summit, Kyoto Protocol and other treaties that discourage the use of these products. This is the main threat to the oil and petroleum industries. Conclusions There has been fluctuating prices of oil and natural gas from the year 1968, and this has been brought about by, among other factors, recession and demand and supply. ( see appendix 1). The fluctuations in the price are as a result of market instability and lack of proper management of these industries. Several drastic measures should be put in place to ensure that this commodity is constantly available as per the demand, and that its prices are made stable and predictable. Recommendations According to the author, the following measures should be put in lace to help obtain greater stability of price and security of supply: 1. Much investment in more expensive resources 2. Accommodate a new producer- supplier dialogue. 3. Legislation to be put in place to govern management of the Oil industry. Bibliography Andrew Gould. (2009). Fossil Fuels Expert Roundtable: How will a World Recession Affect Oil and Gas Investment, Supply and Demand? Speech presented at the Chatham House, 15 April 2009 Cadle, J,. Paul, D and Turner, P. (2010). Business Analysis Techniques, 72 Essential tools for Success, BSC The Chattered Institute for IT Liu, Huawen & Tan, Liwen. (2008). New Trend of Overseas Strategy Management Study. Science & Technology Progress and Policy, January, 191-195. World bank. (1997), Comodity Price Stabilisation and Developing Countries: the problem of choice, by E. M. R. Grilli, and J. Waelbrock. Staff working paper no. 262. APPENDICES Appendix 1 Demand destruction of gasoline in the US. % drop 2 -2 5.5 5 -1 -3 -7.5 Year 2002 2003 2004 2005 2006 2007 2008 Appendix 2 Work Plan. Statement of problem: Decline in pries of oil products due to fluctuating demand and supply, as well as recession. Statement of the purpose (including expansions or restrictions): To propose ways and methods of price stabilization and method of managing the effects of recession. Research Strategy Source 1 Article (speech) Harvard citation (as appears in your list of References) Andrew Gould. (2009). Fossil Fuels Expert Roundtable: How will a World Recession Affect Oil and Gas Investment, Supply and Demand? Speech presented at the Chatham House, 15 April 2009 Contribution to argument (i.e. why this source was used) The article argues that proper management practices and investment in the oil industry will cushion it from the effects of recession and price instability. Copy/Screenshots of the relevant pages from which information was taken Place screenshots here Source 2 Book Harvard citation (as appears in your list of References) Cadle, J,. Paul, D and Turner, P. (2010). Business Analysis Techniques, 72 Essential tools for Success, BSC The Chattered Institute for IT. Contribution to argument (i.e. why this source was used) The elements of SWOT analysis are derived from this book Copy/Screenshots of the relevant pages from which information was taken Place screenshots here Source 3 Journal Harvard citation (as appears in your list of References) World bank. (1997), Comodity Price Stabilisation and Developing Countries: the problem of choice, by E. M. R. Grilli, and J. Waelbrock. Staff working paper no. 262. Contribution to argument (i.e. why this source was used) The journal talks about the methods of stabilizing prices of commodities Copy/Screenshots of the relevant pages from which information was taken Place screenshots here Source 4 Journal Harvard citation (as appears in your list of References) Liu, Huawen & Tan, Liwen. (2008). New Trend of Overseas Strategy Management Study. Science & Technology Progress and Policy, January, 191-195. Contribution to argument (i.e. why this source was used) The journal gave information on management practices. Copy/Screenshots of the relevant pages from which information was taken Place screenshots here Source 5 Indicate type here (e.g. book, journal, website, etc.) Harvard citation (as appears in your list of References) Citation here Contribution to argument (i.e. why this source was used) Reason here Copy/Screenshots of the relevant pages from which information was taken Place screenshots here Read More