The Rising Use of Petroleum Products - Coursework Example

Economies, Markets and Strategic Decisions Contents Task The Oil Industry 4 1. Demand and Supply in Oil Industry 4 2. Other factors affectingDemand and Supply of Oil 4 1.2.1. The Rising Popularity of Hybrid Vehicles 5 1.2.2. The Rising Use of Petroleum Products 5 1.2.3. Geopolitical and Economic Events 6 1.2.4. Financial Considerations 7 1.2.5. Demand for Oil in Non- OECD Countries 8 1.3. Reason behind Difficulties in Forecasting the Demand and Supply of Oil over the Next 50 Years 9 Task 2: Low Cost Airline Model 10 2.1. Production Function of Low Cost Airline Ryanair 10 2.1.1. Fuel Cost 10 2.1.2. Labour Cost 11 2.1.3. Technological Factors 11 2.2. SWOT Analysis of the Business Model for Rayanair Air Services 11 2.2.1. Strength 12 2.2.2. Weakness 12 2.2.3. Opportunities 13 2.2.4. Threats 14 Task 3: Price and Non- price Competition UK Supermarkets Industry 14 3.1. Price Competition 14 3.2. Non- Price Competition 15 Reference List 17 Task 1: The Oil Industry The oil market is considered to be one of the most important industries that plays great role in the functioning of global economy. Because of its huge importance in the world economy and as the supply is concentrated in the hands of few nations, the oil prices are denominated as “notoriously volatile” as a large number of factors affect the level of demand and supply of the oil industry. 1.1. Demand and Supply in Oil Industry According to the reports from International Energy Agency, since the oil crisis of 1973 the demand for oil has been increasing at an exponential rate, as a result of swift economic expansion, particularly in emerging nations like China and India. In fact, China has shown a uniform demand for 40% of the global oil- demand since last four years. Oil demand in India has increased by 75% within last 15years of time. Considering the supply side, a number of oil-producing countries such as Iraq and Venezuela have gone through turmoil that has affected their capability to produce and supply oils at their full capacity. In recent times, OPEC (The Organization of Petroleum Exporting Countries) which is an association of 13 countries mainly from Middle East has evolved as the single largest entity for supplying oil throughout the world. In fact, the consortium holds the power of increasing or reducing the oil price through altering the oil supply (Perry, 2013). Global oil inventories play an important role in balancing the global supply and demand for oil. If the quantity produced exceeds demand, the excess supplies are stored for future use and when the consumption surpasses the demand for oil, that inventories are used to satisfy the amounting demand. Though the OPEC countries are responsible for only 40% of the oil supply where 60% of the supplies are controlled by non-OPEC countries, the Non-OPEC suppliers are incapable to influence market price of oil due to insufficient reserves holding by them. Ability of OPEC to maintain the largest oil inventories in the world aids the consortium price of oil through adjusting the supply of oil, especially when the supply of oil by non-OPEC provinces declines further (U.S. Energy Information Administration, 2015). 1.2. Other factors affecting Demand and Supply of Oil The demand and supply of oil directly impacts the oil prices. If the demand for oil increases due to shortage in supply, the price of oil shots up. In contrast, if there is excess supply due to lack of demand, the oil price is likely to go down. However, the demand and supply of oil is instigated by multiple factors which in turn strive to modify the level of oil price. In the next segment, all such factors and their impression on determining the demand-supply equilibrium of oil will be discussed. 1.2.1. The Rising Popularity of Hybrid Vehicles In this contemporary era, sustainability of scarce economic resources such as crude and heavy oil has compelled the economists to innovate alternatives so that the exploitation of oil can be minimised, especially in those areas where such scope prevails. As the transportation sector is responsible for consuming more than 28% or the petroleum and crude oil, priority has been given to bring transformation in this sector. Therefore, innovation and use of various hybrid vehicles, functioning of which is dependent on solar or other alternative renewable energies (U.S. Energy Information Administration, 2015). (Campbell, 2014) As use of such alternative energies increase in such hybrid vehicles, the demand for oil decreases, shifting the demand curve parallely to the right side. As the quantity demanded reduces from Qe to Q2, the price of oil decreases from Pe to P2. 1.2.2. The Rising Use of Petroleum Products Plastic is becoming an inevitable factor in the daily lives of the global citizen. Polyethylene terephthalate is highly used in packaging of carbonated drink bottles and groceries, supermarket carry bags and for manufacturing of other lightweight home constriction equipments. Plastic is a by-product of crude oil. Apart from that, increasing use of other by-products of crude oil such as gasoline, asphalt base, kerosene, diesel oil, liquefied petroleum gas etc have also increased the demand for oil globally (U.S. Energy Information Administration, 2015). (Campbell, 2014) As the demand for oil increases, the demand curve shifts from D to D2. As an immediate response, the price of oil tends to increase from Pe to P2, the supply remaining constant. 1.2.3. Geopolitical and Economic Events Events in global economy and geopolitical circumference largely fluctuates the demand and supply of oil. For instance, the Iraq- Iran war between 1980 and 1988 had caused for huge fluctuation in the global demand for crude oil (U.S. Energy Information Administration, 2015). (Campbell, 2014) In recent times, 9/11 terrorist attack in 2001, the great recession and global financial crisis in 2008-2009 has also created severe economic and political unrest which in turn persuades the global demand for crude oil. 1.2.4. Financial Considerations (Campbell, 2014) Various financial considerations tend to affect the demand-supply equilibrium of oil. Rather than the present demand-supply condition, the price of oil is determined in the futures derivative markets. The buyer and sellers are obligated to transact in the predetermined price of agreement. Therefore, price of oil is largely dependent on speculations. Speculations of investors create volatility in oil market, which in turn impacts on the demand-supply equilibrium of the commodity (U.S. Energy Information Administration, 2015). 1.2.5. Demand for Oil in Non- OECD Countries (Campbell, 2014) Where the oil consumption in OECD countries are decreasing, the economic growth mainly in non- OECD (Organization of Economic Cooperation and Development) countries has raised oil consumption by 40% in recent years. Increasing consumption of China, India, and Saudi Arabia, has increased the demand of oil to a great extend (U.S. Energy Information Administration, 2015). Fig (a) Fig (b) (Campbell, 2014) Therefore, considering the various factors that tend to increase or decrease the demand for oil, the fig (a) indicates the demand-supply equilibrium position when the demand for oil increases and fig (b) indicates that equilibrium position when the supply of oil decreases. 1.3. Reason behind Difficulties in Forecasting the Demand and Supply of Oil over the Next 50 Years It is evident from the past incidents that responsiveness of oil prices is very high to the global demand and supply shocks. In fact, it is not possible to forecast what the oil price will be after 50 years because of a number of reasons. First, the oil price is determined in futures derivatives market, based on the speculations of institutional investors. However, predicting oil prices after 50 years based on such speculations will not be reliable. Moreover, due to high sustainability awareness among individuals, many countries such as North America and UK are trying to utilize alternative renewable energy resources such as solar energy in order to reduce exploitation of scarce resource such as crude and heavy oil. However, success of such energy utilization is still not established (Perry, 2013). In such circumstances, it is difficult to determine whether the demand for will oil increase or decrease after 50 years. Moreover, economic occurrences such as financial crisis or great recession and incidents of political unrest are impossible to predict well in advance. As these kinds of demand and supply shocks influence changes in oil price to a great extent, it is impossible to predict the oil prices 50 year from the present time as well (Campbell, 2014). Task 2: Low Cost Airline Model Low-cost airline model evolved as a counterpart of full-service carriers, the operating model of which offers air-tickets at a cheaper rate through eliminating all types of complexities in cost consideration. EasyJet and Ryanair are the examples of two most preferred low cost carriers in Europe (OConnor, 2001). In the next segment of the paper, the production function and business model of Ryanair will be analysed. 2.1. Production Function of Low Cost Airline Ryanair The production function indicates the unit requirement of inputs such as land, labour, capital and technology used in order to fabricate one unit of output. Considering the low cost airlines, the main cost considerations consist of three elements such as fuel cost, labour cost and the level of technology used. 2.1.1. Fuel Cost The price of fuel varies from one carrier to other, depending on the bargaining power of the company. The fuel cost accounts for more than 20% of the total cost for Rayanair. In spite of installation of fuel efficient technologies in the aircrafts, the fuel consumption of the fleets of Rayanair airlines is significantly high. Continuous fluctuation in the fuel and petroleum prices affects the budgetary allocation and frequently increases cost consideration for the airline. In fact, profitability of Rayanair experienced a big thrash due to increment in the fuel price recently in 2014 (The Guardian, 2015). Therefore, the company had hedged its cost of fuel at $50 a barrel for the next year. Such speculation has safeguarded Rayanair in case the fuel price touches $92 (£61) in the first quarter of 2016. It is also expected from such activity that the customers will experience a downward pressure on air fares in 2015 and 2016. 2.1.2. Labour Cost The labour cost accounts for one third of the total cost of Rayanair. Currently, the company is holding 9,501 technical and operational staffs, remuneration and other facilities of which consists of huge cost for the company. The labour cost in Rayanair depends on the bargaining strength of labour union in the airline industry in UK and the penalties that the company becomes liable to pay in case it deviates from the labour laws prevailing in the industry. For example, in 2013 the company had to pay £6.7m for violating French labour laws in relation to the flight crew operators (The Telegraph, 2013). 2.1.3. Technological Factors Rayanair, being one of the leading airline industries in the low-cost segment, always strive to incorporate the latest technologies in order to maintain its ranking in current aviation market. Implementation of two dimensional bar technology, Google earth, e-ticketing, online check-in, fuel efficient engines, smartwatch application using the watches provided by Apple Inc and infusing ground-breaking kiosk technology through collaboration with IBM increases the cost consideration under the production function of Rayanair Air Services (Sabre Airline Solutions, 2010).. The over variable cost constituents in the production function of the company are as follows: (Sabre Airline Solutions, 2010) 2.2. SWOT Analysis of the Business Model for Rayanair Air Services SWOT analysis is a strategic management technique that helps to evaluate the underlying strength and opportunities that a company enjoys in its internal and external environment as well as the weaknesses and threats that the company is currently exposed to. 2.2.1. Strength Low Cost: Cost per passenger is lowest among all other European low-cost carriers. In fact, it is 1/3rd of its biggest competitor easyJet. Excluding the fuel cost, the unit cost is 67% lower because of very low airport and handling charges (CAPA Centre for Aviation, 2014) Low Fare: Low cost enables Rayanair to keep the ticket prices low, without hindering profitability of the company. In fact, in the short hauls, the fare charged by Rayanair hold the capability of giving tough competition to full-service carriers in Europe as well. Network: The wide dispersed network of Rayanair includes 1,500 routes across 28 nations of Europe and North Africa. Touching 178 airports and integrating 80 million passengers, the company has grown one of the largest networks, competing with long establish market player Lufthansa. Fleet: The single aircraft type of fleet, Boeing 737-800 is only 4 years old, ensuring the fuel efficiency, low maintenance cost and positive customer performance towards the company. Innovation: Starting of short haul air travel is conceptualised by Rayanair only through a series of innovative ideas. Internet check-ins and ticket sale, installation of non-reclining seats etc are some of the innovative ideas that have provided Rayanair a competitive edge (CAPA Centre for Aviation, 2014). 2.2.2. Weakness Seasonal Earning: The profitability of Rayanair in the 1st and 2nd quarter, especially when summer approaches tend to be higher than in winter season. In fact, the company has made losses consistently during winters in 2008-2009, in contrast to the past 10 years’ financial performance that has shown profit throughout the year. (CAPA Centre for Aviation, 2014) EU Sensitivity: The business of Rayanair Air Services is highly affected by the harsh treatment of European Commission through imposing restrictive legislations, specifically on the company. Poor Brand Perception: During various surveys, opinion polls and awards, the brand is always projected negative perceptions under European aviation industry. This kind of rising perception of uncaring and money-grabbing airline company among passengers may impact the sales of the company in upcoming future (CAPA Centre for Aviation, 2014). 2.2.3. Opportunities Gaining Market Share: In the low cost airline segment, Ryanair continues to be the market leader through capturing 120 million passengers annually, since last decade. Though the growth of the company became sluggish during 2008-2009, Ryanair has been able to regain its lost market share in recent times. Improved Customer Service: Noticing the negative brand image and customer response, the company has put considerable effort to rectify its public image through improving customer service in terms of launching a more user friendly website, mobile app, relaxation in baggage restrictions and e-checking facilities. New Aircrafts: Ryanair has recently ordered 100 Boeing 737 MAX200 aircraft which will contain 197 seats as compared to the facilities of 189 seats on its old fleet. Such fuel efficient aircraft will provide an added advantage to the company (CAPA Centre for Aviation, 2014). 2.2.4. Threats Accidents: Though the airline company has maintained a strong safety track record till date, the passengers fear of accidents due to the low-cost approach of the airline. Loss of Focus: While concentrating on its core competence, the company to provide short hauls at a fare as low as possible, the management frequently neglects the safety and security concerns. Competitive Response: Ryanair gives excessive emphasis on procuring airline services at the most competitive cost in whole Europe. However, the company should also keep it mind that the passengers do not always give importance to the price concern. The competitor brands can outnumber Ryanair at any point of time, on the basis of their customer service, quality of airport network, travel comfort provided to the passengers etc (CAPA Centre for Aviation, 2014). Task 3: Price and Non- price Competition UK Supermarkets Industry The UK Supermarket industry is characterised by existence of a small number of all retail supermarkets such as Tesco Plc, Asda, Wiatrose, Morrisions and Sainsbury’s. Therefore, such companies are highly exposed to aggressive price and non-price competition. In the next segment, the price and non-price competition between two large supermarkets, Tesco and Saisaburry’s will be analysed. 3.1. Price Competition Price competition is a strategy obtained by oligopoly firms where the companies attempt to capture a larger chunk of consumers from their competitors through lowering the price of the good and services provided by them. As the products sold by such firms are identical, they engage into such pricing competition in order to take over the market share. Such competition is very common among Tesco and Sainsbury’s as well. Tesco Plc is the market leader in this industry segment with a market share of 28.7%, whereas, the total market shares of Sainsbury’s as on 2015 is 16.8%. Naturally, Sainsbury’s drives for more aggressive pricing strategies. The price war between these two companies became prominent in 2012. In 2012, Tesco Plc announced Big Price Drop sale that costs for £500million through cutting off the prices of 3000 products including fruits, milk and vegetables. In response, Sainsbury’s had installed a price comparison system across its branches in the UK that instantly provided a comparative price to the branded goods and services which are also accessible in Tesco. In this way, a part of the consumer segment understood the underlying value of the discount provided by Tesco which did not make huge differences in price concern. In fact, if the price comparison system showed that the basket of a particular customer is cheaper at Tesco, Sainsbury’s facilitated such customer with discount coupon which was valid for the upcoming 2 weeks. However, in such price competition, Sainsbury’s gained a competitive advantage over Tesco Plc. Tesco Plc announced the big price drop in order to draw attention to the consumers from all segments. However, lack of cost and benefit analysis had caused the company to experience huge loss out of such discounts in spite of having a huge increment in sales. Conversely, the pricing decision of Sainsbury’s proved to be efficient because the supermarket gained more consumer confidence as it showed a comparative analysis of product prices in front of the consumers. Moreover, in order to avail the discount coupon of Sainsbury’s, the company put a requirement for minimum purchase of £20 (Mail Online, 2011). In this way, Sainsbury’s gained a competitive advantage over Tesco Plc through price competition. 3.2. Non- Price Competition Companies in oligopoly markets involve in non-price competition when they fear of losing profitability due to extensive price- war. Rather, the companies find it relevant to conduct promotional strategies explicitly in order to attract more consumers and enhance their customer base. The promotional strategies of Tesco Plc involve organizing various events, distributing free samples of products etc. Advertisement both in physical and through social media are extensively used by the company as well. Apart from that, point of sales promotion, distribution of gifts and efficient after-sales services are some of the non-price strategies used by Tesco Plc. However, in this segment also Sainsbury’s outnumbered Tesco Plc. Along with all such non-price and promotional strategies, the company provides huge emphasis on corporate social responsibilities in order to highlight their brand capital. In this way, Sainsbury’s projects a better brand image as compared to Tesco Plc. In fact, considering the current strategies it can also be inferred that if Sainsbury’s can continue such efficient price and non-price strategies, in future also, the third largest company in the UK supermarket industry will easily surpass the largest supermarket Tesco Plc (Manchester Evening News, 2012). Reference List Campbell, C. J., 2014. Forecasting Global Oil Supply 2000-2050. [PDf] Available at: [Accessed 23 April 2015]. CAPA Centre for Aviation, 2014. Ryanair SWOT: low costs remain the key strength, even as customer service enhancements take root. [Online] Available at: [Accessed 23 April 2015]. Mail Online, 2011. Supermarket price war hots up as Sainsburys declares it will match Tesco and Asda cuts. [Online] Available at: [Accessed 23 April 2015]. Manchester Evening News, 2012. Tesco v. Sainsburys in trading update battle. [Online] Available at: [Accessed 23 April 2015]. OConnor, W. E., 2001. An Introduction to Airline Economics. California: Greenwood Publishing Group. Perry, G. L., 2013. Why Is the Price of Oil So Hard to Predict? [Online] Available at: [Accessed 23 April 2015]. Sabre Airline Solutions, 2010. The Evolution Of The Airline Business Model. [PDf] Available at: [Accessed 23 April 2015]. The Guardian, 2015. Ryanair warns plunging oil price will hurt profits. [Online] Available at: [Accessed 23 April 2015]. The Telegraph, 2013. Ryanair to appeal £6.7m fine for breaking French labour laws. [Online] Available at: [Accessed 23 April 2015]. U.S. Energy Information Administration, 2015. What drives crude oil prices? [Online] Available at: [Accessed 23 April 2015]. Read More