Globalization and International Trade - Essay Example

Advantages and challenges of International Trade

Executive Summary

Globalisation and international trade are likely to have a positive impact on the countries as there are exchange of goods and services between these countries. The report has focused on the crude oil production business and US was initially considered as the importer of crude oil. In the later years, the federal government has taken initiatives in order to produce oil domestically and had banned the export of crude oil. However, in order to take part in the international trade there were licenses granted to US to export little amount of refined oil such as petroleum so as to gain competitive advantage. On the other hand, there were issues in the OPEC countries such as Iran and Iraq that led to fluctuations in the oil prices. The oil investors had to regulate their investment options in order to maintain the production levels. The experiences gathered from the initiatives undertaken by Statoil suggest that sustainability needs to be considered during production and export of crude oil to other countries.

Table of Contents

Introduction4

Structure of the Crude oil business5

Oil production in US6

Production of crude oil in the OPEC countries7

Impact of international trade on the oil export9

Oil and Politics in the Middle Eastern countries11

Economic costs of the oil price swings in US12

Corporate strategy by an oil producing company13

Environmental attitudes towards the oil production and business ethics15

Conclusion16

Reference List18

• Introduction

Globalisation implies the growing interdependence between the countries for raising the integration of trade, people, finance and ideas in global marketplace (Chor and Manova, 2012). International trade and the cross-border investment flows are considered as the main elements of this integration (Lütkepohl and Netšunajev, 2014). International trade has an impact on the economic growth positively by facilitating the capital accumulation, technological progress and institutional advancement. Active participating in the international trade through promotion of exports results in healthy competition as well as improvement in terms of productivity (Manova, 2013). There are several advantages that international trade has on the businesses such as it reduces the wastage of natural resources and enables the countries to make use of the resources optimally (Manova, 2013).

The countries that have specialisation in production of any particular good can take part in international trade and there occurs division of labour as the workers are assigned with the tasks that are well performed by them. Moreover, the international business leads to exchange of culture and ideas between the countries where there is diversity in culture (Steen-Olsen, et al., 2012). On the other hand, there are some disadvantages such as the international trade increases the number of exports and discourages the domestic production of goods and services. The competition among countries to export more goods leads to competitive rivalry among the nations and as a result, the international peace is affected (Lenzen, et al., 2012). Different laws followed in different countries affect the import and export of goods and services between the nations. The report aims at discussing the impacts of international trade on the oil production and export business and the experiences gathered from it.

• Structure of the Crude oil business

Oil is considered as the economy’s most important source of energy and thereby contributing to the economic growth of the oil producing and exporting countries. Oil production has also enabled the countries to participate in the international trade (Kehoe and Ruhl, 2013). The products that are derived from oil such as motor gasoline, diesel fuel and jet fuel are used for various purposes and are exported to other countries (Lütkepohl and Netšunajev, 2014). The international market also responds to the shift in the crude oil production and there are varying consumer demands in the geographical areas. Moreover, the activities in the physical market for crude oil are supported by the futures contract that enables the buyers and sellers to insure themselves of the risks that may take place during the international trade (Di Giovanni and Levchenko, 2012).

The global oil market involves thousands of participants responsible for the transfer of oil from the producers to the consumers. Oil production is mostly common in the US and OPEC countries that participate in the international trade (Jackson, 2016). The US oil production has been introduced on the basis of unconventional shale and tight oil resources. Moreover, the growing production in North America has resulted in the decline of import of crude oil from the other oil exporting countries (Jackson, 2016). Further, there are various attributes of crude oil that makes the refiners more or less attractive. The US refiners have invested in the refinery units in order to produce large amount of crude oil. Oil pipelines are important in order to deliver the major amount of crude oil from the domestic oil refineries in the US (Kilian and Murphy, 2014). With the slow development of the new pipeline capacity, large amount of oil is transported through rail or truck. Oil production in the US has grown in the recent years and the domestic oil consumption has declined. US Department of Commerce has granted license to different oil companies to export small amount of crude oil. The export of crude oil from US has become economically attractive to the energy sector and it has been considered as one of the world’s largest exporter of refined oil products such as diesel and gasoline (Wang, Wu and Yang, 2013).

• Oil production in US

The oil and natural gas industry in the US involves tight oil production which is produced from the low permeability sandstones, shale formation and carbonates. The production of oil and natural gas has been increasing in early 2015 (Jackson, 2016). The US is considered as third largest oil producer after Saudi Arabia and Russia that are engaged in production of 8.5 million barrels of oil and natural gas liquids per day. In 2014, the oil production in the US was recorded as 8.72 million barrels of oil per day which increased by 74% as compared to 2008 production of 5 million barrels (Jackson, 2016). There is rise in Gulf oil production because of the massive oil fields in the US that contributes to the world production of crude oil (Xiu and Shahbazi, 2012). The shale revolution has led to tremendous production in oil and natural gas in the US and a new technology is used such as horizontal drilling and hydraulic fracturing. However, the oil and natural gas industry in the US has faced the ups and downs of the world oil prices. The rise in the production of oil and natural gas became the most important factor in 2008 (Baumeister and Peersman, 2013). However, there are restrictions imposed on the export of crude oil that in turn affects the US oil economy.

Majority of the country’s rapidly growing crude oil production are coming from the areas of lower quality crude oil. The export of crude oil from US has been considered as illegal as it has affected the domestic production. The technique of horizontal drilling and hydraulic fracturing has squeezed large amount of oil from the Shale rock and thus the ban on oil production was gradually lifted (Hesary, et al., 2013). There was a decision taken by the law makers in America to lift the 40 year old ban on oil production and it is likely to have a little impact on the US oil industry. The current oil production in the US is around 9.2 million barrels per day and imported 7 million barrels (Peersman and Van Robays, 2012). Exporting crude oil from the US may prove to be highly competitive for the Organisation of Petroleum Exporting Countries that sets the prices of oil. The domestic crude oil production can be absorbed in case if it rises beyond the permissible level by adding new domestic distillation capacity to process the additional volumes of crude oil into petroleum products (Lütkepohl and Netšunajev, 2014). The prices of crude oil can be lowered in order to control the domestic production. With the restrictions in the production of crude oil there would be further decline in the domestic crude oil prices in the US as compared to that in the global market. Due to removal of the restrictions, there is an increase in the US crude oil production and narrower Brent-West Texas Intermediate price spread (Zhang, et al., 2012).

• Production of crude oil in the OPEC countries

The crude oil production in the OPEC countries has increased to 31.5 million barrels per day in 2015 which has increased by 0.8 million barrels per day from 2014 (Jackson, 2016). The member countries of OPEC are known to produce about 40% of oil and the oil exports from OPEC represent around 60% of the total petroleum production traded internationally (Chang, McAleer and Tansuchat, 2013). Saudi Arabia is the largest oil producer among the member countries of OPEC and is also considered as the world’s largest oil exporter. It usually manages 1.5 million to 2 million barrels of crude oil as spare capacity (Ou, Zhang and Wang, 2012).

Figure 1: OPEC share of world crude oil, 2014

(Source: Organisation of Petroleum Exporting Countries, 2016)

Despite the efforts made by OPEC to manage the productions levels and maintain the targeted oil price levels, the member countries do not always follow the actual level of production that is to be reached in the global market (Chang, McAleer and Tansuchat, 2013). The oil prices also depend on the demand and supply of oil and the member countries of OPEC adjust to the production targets (Ayoub and Abdullah, 2012). The price differentials in the Middle Eastern countries were affected by the strong demand as the refiners benefitted from the low oil prices and they have made efforts in order to secure the cargoes. The fluctuations in the international crude oil prices have a huge impact on the economic output, stock market, inflation and unemployment (Brandt, 2012). There is a political risk factor that affects the oil prices set by the OPEC member countries.

• Impact of international trade on the oil export

The dynamics of oil market have the tendency to change as a result of the technological changes and the political changes that take place which in turn results in the price fluctuations. A change in any of the factors affects the cost of production in and the disposable income of that country (Cashin, et al., 2014). Moreover, it also has an impact on the exchange rate and creates an overall uncertainty within the economy. As per the study, where labour capital and energy are parts of the production, a sudden rise in the oil prices is likely to be compensated by labour adjustments.

Figure 2: Changes in world liquid fuels production and GDP, price of WTI crude oil

(Source: US Energy Information Administration, 2016)

Furthermore, there are devaluations in the exchange rates due to fall in the oil prices. A change in the oil prices poses challenges as the government and the institutions face difficulties in predicting the oil prices and have made efforts to hedge themselves from the variability in the oil prices (An, et al., 2014). As per the study, a sharp decline in the oil prices has led to macroeconomic shock for the net oil exporters. According to the Central Bureau Data, the international trade has an impact on the crude oil prices as the average price of crude oil rose by 39% in 2008. The prices of oil import varied between $90 and $108 per barrel in the years 2012 to 2014 and after which there was a sharp drop in the oil prices. In 2015, there was a fall in the oil prices from $58.96 per barrel to $36.60 per barrel (Jackson, 2016).

Figure 3: US import price of crude oil

(Source: Jackson, 2016)

Therefore, the total value of US crude oil imports depend on price per barrel times the number of barrels of crude oil on an annual basis increased by three times between 1990 and 2015 (Jackson, 2016). However, there was uncertainty in predicting the future oil prices as the social turmoil in the Middle East affected the oil markets. There was slower economic growth in various regions in the past that also reduced the demand for oil (Naifar and Al Dohaiman, 2013). Congress has played a key role in lowering the cost of oil that is to be imported and affects the nation’s merchandise trade deficit. It is engaged in formulating the economic policy and it has also led to sluggish economic growth, falling prices, stagnant tax revenues and deflation in the US (Chang, McAleer and Tansuchat, 2013). The large shift in the physical trade volume in the US has resulted in financial impacts on billions of dollars. A rise in the US crude oil production was linked to the consumption that led to decline in imports of crude oil in 2012 (Kadafa, 2012). This has saved $180 billion import cost. However, the increased oil production in the US has led to rise in competitiveness and further participation in the international trade.

Rising oil prices in the early years had led to increase in the profits and wages of the oil exporting nations. The economies of many of the oil exporting nations increased rapidly with the rising oil prices in 2004 (Murray and King, 2012). There is a shift in the wealth from the oil importing nations to the oil exporting nations and the purchasing power in the oil importing nations have diminished.

• Oil and Politics in the Middle Eastern countries

The politics in the Middle Eastern countries have led to the rise in the high oil prices. The religious and territorial disagreements between the Arab Gulf nations and Iran led to the conflict over rising oil prices. The Arab-Iranian conflicts often led to the regional conflicts that resulted in Arab Civil War and affected the international trade between the nations. The aggressive nationalism in Iran was due to the regional politics and the country is expected to export its revolution to the other Islamic states (El-Houjeiri, Brandt and Duffy, 2013). On the other hand, Iraq was successful in its economic development policies as compared to Iran and its growing political strength that it is able to force a settlement with Iran regarding the dispute that took place. The monetary policy in the US during 1985 affected the exchange rate that maintained high value of dollar and it is the currency for which the crude oil was sold (Chang, McAleer and Tansuchat, 2013).

Higher dollar value kept the oil prices high even after the OPEC price cut. However, the dollar economy in the US enjoyed the full effects of the price reduction and the customers in the US bought more oil. The economic problems in Iraq included huge war debts to foreign banks and the government in Kuwait and other oil exporting countries suffered huge losses (Kilian and Hicks, 2013). The end of second Gulf War had an impact on oil markets which in turn resulted in a state of uncertainty. The Iraqi invasion of Kuwait led to the rapid increase in the oil prices but the political effects prevented International Energy Agency from releasing oil shocks. Moreover, the concerns among the customers related to the global warming and other effects of oil pollution prompted them to choose other sources of energy (Chang, McAleer and Tansuchat, 2013).

• Economic costs of the oil price swings in US

US government takes various strategies in order to overcome the impacts of price shocks as the military expenditures were controlled in order to protect the oil assets from disruption (Ma, et al., 2012). The price risks that generally occur in the US are of three categories such as a large rise in the oil prices of short or long duration, increased price variability over a long period and a gradual sustained rise in the price of oil (Ma, et al., 2012). There are long traditions of the recessions as a result of the oil price shocks that affected the monetary policy within the economy. The unexpected reduction in the monetary aggregates has led to the reduction in the availability of credit within the economy and the changes in policy. In the early 1970s, US was heavily dependent on the export of crude oil from the Middle East but later on, the country domestically produced crude oil (Ghannam, et al., 2012). However, the economic fluctuations in US are due to the domestic shocks in the total factor productivity and these oil shocks have stagflationary effect in US.

The traditional approach of the dynamic stochastic general equilibrium (DSGE) models led to the transmission of the exogenous oil price shocks when oil is treated as an intermediate input in order to ignore the demand channel of transmission. An exogenous oil price shock is likely to have an adverse shift in the aggregate supply curves leading to the rise in oil prices still further. The positive oil price shocks result in large recessions in the US; whereas, the negative oil price shock has little effect on the economy. The oil price shocks are blamed for the recessions in the US economy and slowdown in productivity (Coleman, 2012). The US government is known to control the oil price shocks as it initiated domestic production of oil within the country.

• Corporate strategy by an oil producing company

An oil producing company in Norway named Statoil aims to grow on the basis of its technology focused upstream strategy. The company aims at producing 2.5 million barrels of oil per day by 2020 (Chatrath, Miao and Ramchander, 2012). In order to achieve this, there is a need to maintain the annual growth rate. According to the managers of the company, the world economy would grow by 3.1% annually in next 10 years. The growth in the non-OECD (Organisation for Economic Co-Operation and Development) countries is expected to support the demand for energy that is rising gradually. The corporate strategies that were adopted by the managers of the company involved reorganisation at the beginning of the year 2011 and the company also has focused on conducting reliable operations with zero harm to the environment (Pieschacón, 2012). The company is emphasizing on the different factors such as revitalising legacy position of Statoil on the Norwegian Continental Shelf (NCS) and developing into a leading exploration company. The managers of the company also ensure portfolio management in order to enhance the value creation within the nation (Statoil, 2016).

The international production of oil and gas has increased from 1,00,000 to 5,00,000 barrels of oil per day by Statoil and it is known to operate in 41 countries (Statoil, 2016). This indicates that the company has been able to take part in the international trade as it has the expertise to meet the requirements in the global market. The company aims at further enhancing the portfolio in order to create more value for the customers and earn a huge profit. The strategic focus of the companies on the unconventional reserves, building cluster positions, managing asset maturity and also demonstrate the intrinsic value of the portfolio (Statoil, 2016).

The capabilities of Statoil enable them to use the Carbon Capture and Storage Technology (CCS) in order to reduce the carbon emissions. Statoil has gained control in the development and implementation of Carbon Capture and Storage Technology. Moreover, the company has also set up its reputation in handling subsurface production and multiphase pipeline transportation (Statoil, 2016). The technology strategy of the company is based on different principles such as prioritising the business critical technologies and expanding further capabilities. The managers of Statoil believe that surviving in a highly competitive environment will require heavy investments to be made and the ability to build competitive advantage and take a long term view on the selected potential high impact technology (Statoil, 2016). Furthermore, the employees are also encouraged to deliver better performance in order to overcome the risks that are faced by the company in the global market.

Furthermore, the initiatives taken by the company related to the sustainability involves meeting the growing energy needs in economically and socially responsible ways. The low oil prices have considered being a blessing for many of the oil producing companies as the demands for oil products have increased in the global market (Lütkepohl and Netšunajev, 2014). There are other advantages of the low oil prices such as the increased operational flexibility that enables the company to engage in the crude oil arbitrage. The environment where there is abundant oil supply would enable the refiners to save on the feedstock costs by capitalizing distressed cargoes. Moreover, the companies have significant trading opportunities as the low prices have led to higher market volatility. As per the study, the years 2015 and 2016 are considered as the years for recording the trading activities and the companies are likely to use this advantage in order to create brand reputation in the global market (Jackson, 2016).

• Environmental attitudes towards the oil production and business ethics

There has been huge fluctuation in the oil prices in the recent years with the two most important oil price indices such as Brent and WTI (West Texas Intermediate) that rose from average $99 per barrel in 2014 to $53 in 2015 and later on it reduced to $28 in 2016 (Jackson, 2016). The drop in the oil price affected the international trade and there were several reasons for this drop such as flat oil consumption in the OECD countries, the slower rise in the oil demand in China and the massive increase in the oil and gas production of US (Filis and Chatziantoniou, 2014). The decision of Saudi Arabia to retain its high output level have led US unconventional oil and gas production out of business in order to make successful re-entry of Iran after sanctions. Moreover, the technological advancement in the US has also led to positive attitude towards oil production that enables the US producers to enhance their production cost efficiency. In case there is a future rise in the prices, some of the producers such as Iran and Venezuela are still in the less competitive zone because the rise in prices is likely to lead to more unconventional situation (Ma, et al., 2012). However, the positive attitude towards the oil production also raises the expectation that the oil prices will increase slightly and the companies would be able to make new investments in the exploration of new oil and gas fields (Borenstein and Kellogg, 2014).

In the near future, it is expected that the demand for crude oil would be directed towards the production of high quality crude oil in order to meet the growing transportation requirements (Ma, et al., 2012). The future price development depends on the extent to which OPEC will exercise the market power. With the rise in the global demand and the flexibility of the non-OPEC supply there is rise in production (Ma, et al., 2012). Therefore, the OECD economy functions on the energy price shock with relative ease and there are further adjustments to be made. Moreover, the transfer of the purchasing power from the households to the oil producers creates domestic demand to the extent of which the saving fails to absorb the price shock within the economy (Ma, et al., 2012). The relative changes in the prices leads to investment in the production capacity in the energy sector and affect the patterns in consumption.

• Conclusion

International trade has enabled the countries to export goods and services on which they have competitive advantages. This in turn has contributed to the growth of the countries in the international market. The production and export of oil is one such business that helps the oil exporting countries to take part in the international trade. The report has discussed the oil export business of the US and OPEC countries that have contributed to the global oil production. The environmental and legal attitude of US indicated that the country was an importer of oil in the early years but later on, it started producing crude oil and petroleum products. The Federal Government also granted licenses for the export of oil refineries to other countries. The politics in the OPEC countries has also affected the production and export of crude oil as there were fluctuations in the price of crude oil. The rise in price in the years has led to the fall in demand for crude oil in the global market and the oil exporting countries were running at a loss. The technology adopted by Statoil, an oil producing company in Norway has indicated that heavy investments are to be made in order to survive in the competitive environment. Therefore, international trade brings in opportunities as well as challenges for both oil producers and exporters.

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