BP Hit by the Temporary Ban on the US Contracts - Essay Example

Microeconomic concepts BP Hit By The Temporary Ban On US Contracts On November 28th the Financial Times ran a story reporting the British Petroleum’s ban from winning any business tenders with the government of the United States of America. According to the story written by Guy Chazzan, the Environmental Protection Authority of the United States of America, which was the key source of the story, alleged that the ban followed the lack of business integrity they observed in the company’s conduct following the great oil spillage in the history of similar incidents. The environmental body reported a lack of commitment by the company in taking its responsibilities thereby recommending the cut of any business transaction between the company and all government agencies. However, the ban did not affect the existing contracts thereby applied only to any other new contract that the company would gain interest in. The company admitted knowledge of the ban and said that they were doing everything within their reach to redefine the relationship between them and the government thus lifts the ban. The 2010 deep water disaster arose after an undersea oil pipe burst thereby killing more than eleven Americans and resulting in the worst environmental disasters in the world. The British Petroleum thereafter pleaded guilty of all the accusations leveled against it by the American government after which it embarked on a massive environmental cleaning process and the compensation of all the victims of the accident. Apart from the human loss, the oil spillage resulted in the death of millions of aquatic life and the destruction of business for thousands of America investors as several beaches within the gulf filled with the oil sediments. On 15th November 2012, BP had reached a consensus with the justice department to pay four and a half billion dollars thereby ending all criminal charges leveled against it by the government. The company therefore reiterated their commitment to work closely with the American institutions to ensure that such an accident does not recur and that it settles all its obligation in relation to the accident. However, according to Charles Teifer, a government contracting specialist and a professor of law at Baltimore University, the ban served as a warning to the company and to other stakeholders in the oil drilling business. Teifer explained that such a ban communicated American commitment to protecting its territories especially after suffering the greatest loss because of the carelessness on the part of the company. On the other hand, the environmental authority explained that the ban arose from the lack of commitment that the British Petroleum showed when handling the accident. The company could have contained the spill from the beginning but laxity on their part despite the early identification of the spill resulted in the massive destruction and the inexcusable loss of lives. The authority said that the ban would be temporary and would be lifted once the company met all its moral and legal obligations. Teifer however explained that the ban had left a negative mark on the company’s relationship with the government and was therefore likely to affect its likelihood of winning any future federal contracts. The environmental body also said that they were drafting and would make available an agreement that would lift the ban. The company had, however, began suffering losses following the ban as its shares had fallen by one percent and were trading at 429.4 pence at the close of business on 25th November but dipped by an additional 2.9% following the ban. The above story gives a practical application scenario of a number of principles of microeconomics, a branch of economics that studies the behavior of individual households and firms in relation to the decision making process for the allocation of limited resources. Microeconomics therefore either applies to markets where goods are bought and sold. It thus determines how the behaviors affect the supply and demand of the products or services and how these thereafter affect both the quality and quantity of the services and products in the market. In doing this, microeconomics operates under a number of principles through which it defines and explains every behavior and how each of these affects business operations in relation to pricing, demand, quality and quantity (Amos, 1987). The BP story was quite an issue in the oil markets. British Petroleum is arguably the largest oil company in the world with presence in more than two hundred countries in the world. The oil spillage accident therefore destabilized the company directly. In trying to contain the spread, the company used more than a hundred million dollars after which the subsequent lawsuits from different lobby groups and the American government also resulted in the company losing more than six billion dollars. Such an amount of money was likely to affect the positioning of the company and its operation. As the story reports, the price of the company’s shares began losing value as he market started reacting differently to the company’s product. Every action of a company affects the consumption of its product thereby affecting its revenue collection. According to the principle of optimization, consumers maximize utility of either the products or services for which they spend their money while business organizations operate merely to maximize profitability subject to the existing technologies and conditions most of which determine productivity (Day, Athey & Zmud, 1988). The oil spill tragedy was therefore more likely to affect the pricing of the company’s product. In this case, the company was losing millions of liters of their products to the sea. This resulted in reduced level of oil at the pump resulting in a possible product scarcity. To cover up for the losses, the company readjusted its pricing resulting in an increased cost of oil either per liter or per barrel. The need to increase the prices is necessitated by the desire to cover up for the company’s loses elsewhere. However, most of the consumers had formed negative the media had succeeded in tainting the company negatively terming as less responsible. Such lobby groups as environmentalists termed the tragedy as the worst environmental disaster in the history of the country. Alongside such articles, were the claims of the company’s reluctance in taking responsibility thereby containing the spill in time (Peterson & Tenenbaum, 1986). This coupled with the death of the eleven workers drew the wrath of both humanitarians and environmentalists both of whom began evading the company’s product and showing preference to other oil companies. In maximizing utility, consumers consider a number of factors most of which vary from a person to another. Others will therefore consider such pertinent issues as the role a company plays in helping the society. Environmental degradation is one great concern for such people, thereby justifying their deliberate aversion of the company’s products. The government is the greatest consumer of the BP’s product. Through the tenders the company wins, the government pays the company millions of dollars while accessing both its services and products. However, the government has a huge responsibility, which is to consider the interest of all the citizens in the country. The government as a consumer maximizes utility by showing concern to the citizen, the fact that the British Petroleum shows lack of commitment in the environmental detoxification program translates in a massive dissatisfaction of the government thereby necessitating the ban. The company therefore finds itself in a precarious situation which compels it to incur losses. Some of these include the fact that there are other stakeholders in the market. Even though the British Petroleum is the greatest company, the American oil industry has several stakeholders. This has affected the company’s revenue since when the consumers express dislike to its products as is the case; they still have alternatives some of which offered better deals than the British Petroleum, given its situation following the accident (Nicholson & Snyder, 2012). A number of factors influence the pricing of either a product or service in the market key among which is the production cost. Producers consider the production costs coupled with the transportation costs on which they add their preferred profit to determine the selling price of any product. In addition to these, the producer considers the level of competition in the market. Competitors are other similar product or service dispensers operating in the same market. Effective competition eliminates monopoly, which refers to a kind of market in which only one stakeholder dominates. Such a market is always subject to exploitation since competitions provide the consumer with alternatives in case of dissatisfaction. The numerous oil producing firms in the American market therefore prevent the British Petroleum from exploiting its customers. It thus has to restrict its pricing to the pre-established market values by most of its competitors. This makes it difficult for the company to make profit owing to the massive loss of its products through the spillage and the actual loss of its finances through the numerous court fines and settlement agreements. The company’s shares lose value immediately following both the tragedy and the subsequent ban. Shares are means to ownership to which holders gain annual dividends as profits. However, the share market relies on speculation. The massive oil spillage gave rise to the future of the company; most investors risked losing their investments and opted to sell their shares. The rush to sell the company shares resulted in the one percent loss of share values on the 25th of November a day on which the company closed the day while trading at 429. 4 Pence. The subsequent ban from the government agencies made more investors more apprehensive about the future of the company; this resulted in even more shareholders trading shares. However, the principle of market demands in microeconomics states that when the supply outweighs the demand, the price goes down. As more shareholders opt to sell their shares, the more the prices of the shares dwindle thereby explaining the 2.9% loss of share value on the inception of the ban (Curtis, 1984). From the above discussion, it becomes evident that the reputation of the business organization in the market is essential in determining its profitability. A business reputation makes more sense to the public who constitute the market for business organization. The oil spill overwhelms the British Petroleum who thereafter fails to regulate it. Through this action of incapacitation, the environmentalist interprets a lack of commitment while the public observes a less integral employer who does not show great concern to its employees following the death of the eleven workers. The negative reputation hinders business for the company and results in massive losses both in the petroleum market and in the stock market. The company therefore uses billions of dollars in an attempt to compensate for the losses its cause and reclaim its previous prestigious reputation (Goodwin, 2009). The market structure also influences the behavior of consumers in every market. Market structure in economics refers to the number of companies producing identical products or trading on similar services and or the number of buyers of a specific product. There are different market structures key among which are monopolistic, oligopolistic, monopsony, and oligopsony. A monopolistic market has one business organization, which produces the product. This company, therefore, dominates the market and determines the rate of supply thereby in a way determining the demand. The company is the sole regulator of the price, which it mostly overcharges the poor consumers. The oligopolistic market on the other hand has a small number of operators who communally dominate the market. The American oil market on the other hand has a structure referred to monopolistic competition in which there are many companies competing for the consumers thereby each having a competitive advantage over the other. In terms of consumers, the market is either a monopsony, which has only one consumer, or an oligospony in which there exist several consumers. The later structure therefore gives the business organizations the power to manipulate their products and take charge of the small groupings in the market. In terms of consumers, the American market is an oligopsony, however the government is the greatest buyer. The structure of the oil industry thus made it impossible for the company to exploit the consumers by increasing the price. In a competitive market, the competition between the different companies acts as a price control tool thereby cushioning the consumers from exploitation (Bahreini, Willis & Primack, 1988). The oil spill results in the destruction of the company’s product, a fact which resulted scarcity of the product. The scarcity could justify any price increment in the company’s product. However, because of the existence of other players in the market such as Chevron Corporation, ExxonMobil Corporation and the Royal Dutch Shell Corporation, the company could not increase its pricing (Wessels, 1997). An increase in price could result in the immediate loss of its market share to its competitors most of who were wishing for such an occurrence. The competition had their oil reserves filled with the commodity, BP could not therefore justify any price increase since instead of remorse, and the market had blamed the company for laxity and poor labor policies. The American government on the other hand takes advantage of the monopolistic competition and the fact that it is the sole greatest market to compel British Petroleum to take responsibility of the oil spill. It imposes sanctions and manipulates its right to choice to deny the company of any new tenders. It succeeds in doing this since the oil industry has a number of players from where it chooses its next service provider. Such a market makes the service providers more considerate in their marketing strategies. For any company to hold a monopoly manipulation of its market share, which is also never guaranteed, the company has to develop a specific feature to act as its competitive advantage. The British Petroleum for example prides itself in high quality product and great level of product diversity. Through the diversity, the company cushion itself from unnecessary losses. In this case, while it lost its oil, its other liquefied petroleum products continued to earn its profits at competitive market prices. British Petroleum had a bigger share of the oil market in the country. This justifies the fact that the government had a previous contract with the company. Government contracts follow a strict code of application to safeguard the taxpayers from exorbitant traders. This therefore implies that the company had an effective pricing among other marketing strategies, which met the government requirements in the previous tendering processes. The United States of America is a big country with millions of people and other non-governmental organizations. The market is therefore highly efficient and other players in the oil industry have their own specific market besides the government. Such a market puts more authority on the consumer who makes the decision to choose from a variety of the service and product providers. The creation of smaller monopolies makes the companies develop their own smaller financial kingdoms. British Petroleum for example has made enough profit to enable it settle all the legal tussles it faces because of the tragedy and clear its name thereby making it suitable for consideration for government contracts. The company maintains operations at an optimum level but does not record any other loss apart from the share prices (Boyes & Melvin, 2012). Finally, the game theory also the interactive behavior theory is another behavior analysis tool in economics, which asserts that one person’s gains equals net losses of the other participants. The company lost billions of dollars’ worth of investment; the same amount of money that its competitors made in total. A monopolistic competition scenario just as explained earlier gives the consumer the right to choose among the numerous players in the market. The American oil industry has a number of other companies of the stature of the British Petroleum. While the company therefore lost because of the poor publicity, its major competitors gained owing to the gap created by the loss. In brief, the new article does not only report the ban imposed on British Petroleum by the government but further states the activities that result in the ban. In essence, the news article justifies the ban a process that analytically reveals a number of behavior traits and other business factors that aid the decision making process of both the consumers and the business organizations (Hall & Lieberman, 2008).. The news article through the contributions of the law professor explains the role of reputation in influencing consumption and behavior patterns of consumers. In so doing, it justifies the billions of dollars that the company is later spent in an attempt to clear it from the societal blame and to reclaim its previously tainted reputation the success of strategies is a test of time. Bibliography AMOS, O. M. (1987). Microeconomics: concepts, analysis, and applications. Belmont, Calif, Wadsworth Pub. Co. BAHREINI, M. H., WILLIS, J. F., & PRIMACK, M. L. (1988). Microeconomics: concepts, analysis, and applications. Redding, Calif, CAT Pub. Co. BOYES, W. J., & MELVIN, M. (2012). Microeconomics. Mason, OH, South-Western Cengage Learning. CURTIS, W. C. (1984). Microeconomic concepts for attorneys: a reference guide. Westport (Conn.), Quorum books. DAY, J. C., ATHEY, T. H., & ZMUD, R. W. (1988). Microcomputers and applications. Glenview, Ill, Scott, Foresman. GOODWIN, N. R. (2009). Microeconomics in context. Armonk, N.Y., M.E. Sharpe. GUY, C. (November 28th 2012). BP hit by temporary ban on US contracts. New York, Financial Times. HALL, R. E., & LIEBERMAN, M. (2008). Microeconomics: principles and applications. Mason, OH, Thomson/South-Western. NICHOLSON, W., & SNYDER, C. (2012). Microeconomic theory: basic principles and extensions. Mason, Ohio, South-Western/Cengage Learning. PETERSON, S. K., & TENENBAUM, H. A. (1986). Behavior management: strategies and techniques. Lanham, MD, University Press of America. WESSELS, W. J. (1997). Microeconomics the easy way. Hauppauge, NY, Barrons Educational Series. Read More