How Globalization Has Affected the Oil Industry - Research Paper Example

ANALYSIS OF THE OIL INDUSTRY USING NEOLIBERAL AND DUNNING’S ECLECTIC APPROACH WITH RESPECT TO GLOBALIZATION by Date Despite the fact that globalization is heavily used today, its meaning remains obscure because it has a variety of definitions. Nevertheless, the various definitions of globalization have pointed out certain key aspects that relate to issues of territoriality, shifting authority from the state to supranational and sub-national units. Therefore, it could be stated that globalization is the term used to refer to fragmentation of activities between individual states politically, socially and economically to an international sphere. In the oil industry, globalization has been a key issue that has affected the industry both positively and negatively. The onset of international business growth and ease of access to information worldwide because of the improvement of technology, state boundaries became less important because geographic and social boundaries changed and became accommodative. The new era of globalization, which became popular particularly in the 1970s brought changes, opportunities and new considerations and challenges because it created a free market in the world compared to when globalization was an unknown phenomenon. Globalization has facilitated the formation of a common market all over the world based on a liberal exchange of goods, services and money. Therefore, economic globalization refers to the increase of integration of markets across political boundaries. The oil industry captures the aspect of globalization through the growth of MNEs and a free international market for oil products (Golove, 1996:135). Globalization has affected the oil industry in a variety of ways. Oil-exporting states occupy an inconsistent position in the international system because of several aspects. First, in terms of economy, these states are highly globalized and are highly dependent on international trade, labor and finance. All these states are the source of a commodity that is significantly vital to all sections of the world making them influential states in the world. However, these states are not politically globalized because they are not likely to sign major treaties or join intergovernmental organizations. Most of them defy the global norms of human rights in search of cheap labor (Mitchell, Marcel & Mitchell, 2012:23). All over the world, economic globalization is related to political globalization because economic globalization only works through international trade, business, and finance and labor exchanges. Political globalization also ensures that economic globalization grows because it opens local markets to international investors and customers and promotes international business standards and rules that all countries should observe. However, this has been a problem for oil exporting countries. The fact that they have a lot of oil to trade globally makes them highly integrated into the global economy whether they join interstate organizations or not, which is dependent on the export of oil, foreign workers and international finance that is attracted by these exchanges. These countries have a major impact on the global economy because they determine the use of oil products in addition to oil prices all over the world. Nine out of ten largest economies in the world rely on oil as a major contributor to their overall GDP. Despite their economic and political influence, they tend to remain politically unglobalized. They are less likely to sign major international treaties or preferential trade agreements because they prefer to protect their oil resources. Countries such as India have preferred to remain politically isolated despite the fact that they have a major economic influence worldwide. When looking at the oil industry all over the world, it is clear that there is an unbalanced globalization in terms of economic globalization and political globalization. The combination of features, which are characterized by high economic globalization and low political globalization, makes oil-exporting states a distinctive force in the international arena (Ross & Voeten, 2011:4). It shows that the oil industry is itself distinctive even in the globalized age because unlike other industries, the oil industry is not entirely affected by globalization but also affects how globalization occurs. The fact that oil-exporting countries are less politically globalized means that the oil industry plays a major role in terms of how globalization effects are felt in such countries especially politically. While globalization provides a free market for the oil industry to flourish, the oil industry itself determines how economic globalization occurs in the world. Economic globalization enables states to open their boundaries for the oil industry to operate worldwide. However, the oil industry does not allow economic globalization to rule how it is run because by controlling political globalization, it shows that it has the ability to determine the extent to which economic globalization occurs. International trade in oil products has expanded majorly in the last several decades especially from the 1970s because of globalization. It has seen the price of crude oil being determined at the global price level with slight differences coming from issues of oil transportation and exchange rates. Globalization is a phenomenon that contributes to the removal of all barriers created by states in the name of sovereignty towards a free movement of goods and international capital (Leonid, 2008:24). With globalization, the development of multinational companies worldwide became a reality because the relevance of national barriers and boundaries were eliminated. In the oil industry, multinational corporations, an aspect of globalization became common phenomena and contributed to the elimination of national boundaries to aid in the exploration, production and transportation of oil products. In many oil-producing states, multinational oil companies dominate oil operations. An example of a multinational company that is present in many oil-producing countries is Shell Petroleum Development Company (Smith, 2009:147). The exploration and production of oil requires a highly developed technology resources and expertise. Most oil-producing nations do not have these resources and expertise at their disposal. Moreover, oil exploration, production and transportation are expensive ventures that require a lot of capital. Therefore, to ensure that oil is extracted and traded internationally, oil-producing countries seek foreign technology, capital and expatriates to help with the above activities. It has been enabled by the demand for oil products, better communications technology, highly trained personnel and improved transportation systems. Without globalization, this would be a difficult process because of the national boundaries and barriers (Chima, 2011:28). One effect of globalization has been the ever-expanding world economy that has seen an increase in the demand for oil products worldwide. As such, the oil industry has had to respond to this demand. For example, worldwide consumption of oil has been predicted to be at 115 barrels of oil per day worldwide by the year 2030. This means that the consumption of oil in the year 2030 will have surpassed the current consumption rates by a huge margin and will definitely affect the oil industry especially because the effects of globalization are realized every day (Finley, 2012:25). According to neoliberalism, a largely unregulated capital system embodies the ideal of free choice and optimum economic performance because of issues such as economic growth, efficiency, distributional justice and technical progress (Fasenfest, 2010:627). Neoliberalism emphasizes that a free market is good because it promoted efficiency through abolishing national barriers and boundaries to enable economic growth to occur. In neoliberal thought, the state has a little role to play in the international arena, which includes regulating money supply and the rights of its citizens. In the international arena, neoliberal thought emphasizes on a free movement of goods, capital and services across national boundaries. It calls for the abolishment of national boundaries to ensure that international business and trading occurs smoothly. This means that it promotes and international market where multinational corporations, individual investors and workers can move across national boundaries to trade. Neoliberalism, therefore, is a body of economic theory and political stance that replaced the old liberalism thought that was dominant in the US during the 1930s. The fact that neoliberal thought emphasizes on a free market economy reflects its support for globalization. Just as it advocates for the abolishment of state barriers and boundaries, so does globalization that creates a unified world economic system where national boundaries play a minor role. Therefore, neoliberalism can be used to explain globalization especially because the two concepts were dominant starting from the 1970s. Neoliberalism supports the oil industry and its mode of operation. The oil industry is important in the whole world irrespective of where oil is produced because all states in the world need it. Therefore, states either buy or sell oil products (Kotz, 2002:65). It means that oil exploration, production and trading goes beyond national boundaries because states have to cooperate in developing the oil industry worldwide. Despite the fact that oil producers control the market to a certain extent, the oil trade does not respect boundaries and operates in a globalized system and this can be clearly explained by the setting of oil prices internationally, which is done by price per barrel of crude oil in terms of a certain amount of dollars. Crude oil especially petroleum is one of the most demanded commodities all over the world and is an essential factor in the economy of all countries because it either aids business or transportation in the world. The demand for oil and its by-products keeps increasing and all countries that do not produce oil are always ready to import oil to meet their domestic needs. It has helped oil-producing countries to earn highly in terms of foreign income (Bina, 2006:5). Over the last five decades, international trade has occurred at a faster rate compared to any other time in world history, merchandise exports grew by 6 percent. It means that states trade more than they did before World War II and the world economy has become more integrated than it was at that period. The openness of the Indian economy to the rest of the world has helped them sell their greatest source of income, which is oil and buy consumer goods, labor services and capital goods from the rest of the world. Free trade an aspect of globalization has been a crucial aspect of the oil industry. The Indian petroleum industry has also experienced effects of globalization and showed aspects of neoliberal thought. For instance, the Indian petroleum industry experienced a payment crisis in 1991 and the government of India had to seek the help of the International Monetary Fund (IMF) and the World Bank advice to save its ailing economy (Narula, 2014:3). It had to undergo a liberalization process that had been accelerated by the structural adjustment process that emphasized on privatization and opening up the market to foreign companies. Anglo-American companies historically ran the Indian petroleum industry. However, after India’s independence in 1947, the national government nationalized all foreign companies in the oil industry. However, this move was a problem in the oil industry in India and led to the issues that led to the payment difficulties in the 1990s. Even after nationalizing the foreign companies, India still needed the help of foreign companies in exploration and refining oil products. The Indian government still sought the help of the Soviet Union but with time US companies and multilateral organizations such as the World Bank and IMF played significant roles in the oil industry in India emphasizing the role that globalization plays in the oil industry. Globalization has also played a key role in US oil and gas industry. The production of oil and gas in the U.S has overtaken the production of traditional powers such as Saudi Arabia and Russia. It is now expected that the US and Canada could produce about 4.9 billion barrels of oil a day by the year 2018. The US oil industry has been characterized by reorientation through global merger and acquisition activity, which has helped the industry to remain stable since the year 2007. Foreign investors have become interested in the US oil sector, especially the US Shale that has attracted international companies and individual investors (Bayulgen, 2010:93). Asian countries have shown an interest in investing in US oil and energy industry as those economies experience exponential growth and demand for oil that increases as economic growth is improved. For instance, China has shown interest in investing in the vast shale reserves. However, foreign companies are not interested in acquiring the US oil and energy companies wholesomely. Rather, they have preferred joint ventures that allow international investors to gain access to the oil and gas sectors in US without taking full ownership of the risks and liabilities associated with the oil industry. In 2013, a report on environmental impact assessment (EIA) acknowledged that US shale companies had agreed to enter into 21 joint ventures with international organizations and investors. The shale revolution and acceptance of foreign investment has contributed to the boom in the US economy. The growth of foreign investors in US oil industry shows the significance of the industry to the global energy industry and underscores the importance of globalization in the industry (Markus, 2015:336). The above case study emphasizes John Dunning’s eclectic approach to explaining multinational enterprise (MNE) activity is a theory that explains the formation and role of MNEs in the international arena and highlights the globalization phenomena (Dunning, 2000:163). Dunning’s eclectic paradigm provides a holistic framework that investigates the significance of factors that affect the expansion of multinational enterprises (MNEs) through foreign production and the growth of their activities (Buckley & Hashai, 2009:58). The basic assumption of eclectic paradigm is that the returns on foreign direct investment can be explained through ownership advantages of firms (O), the locational factors that affect where to produce (L) and the internalization factor (I) all of which give rise to the OLI framework. The important argument in this theory is that modern MNEs trace their roots to the massive movement of issues that took place in the 19th century such as the industrial revolution. The theory emphasizes that a successful MNE is that which has firm-specific advantages that allow it to overcome the cost of operating in a foreign country (Buckley & Hashai, 2009:60). In the oil industry, MNEs benefit through foreign direct investment and achieve profitability by striking trade agreements with different governments that allow them to explore and produce oil on their behalf. Through the instrumentality of financial institutions and multinational companies, globalization creates foreign direct investment and international portfolios. In conclusion, the influence that international organizations have had in the oil industry has reduced the importance of national boundaries to oil exploration and production. Globalization has significantly affected the oil industry all over the world mostly by enabling exploration, production and transportation of fuel, which has helped to raise sustainability issues because the activities of multinational oil companies, the demand for oil products and dependence of oil throughout the world have increased issues of exploration, production and distribution of oil. The main sides of globalization discussed in the paper include the operations of international or multinational organizations, increased demand for oil products, dependence of states on oil from other states and the need to achieve energy security through oil trade in a free market. These issues have underscored the effect of globalization in the oil industry. Reference List Bayulgen, O 2010, Foreign investments and political regimes: The oil sector in Azerbaijan, Russia, and Norway. Cambridge: Cambridge University Press. Bina, C 2006, The globalization of oil: A prelude to a critical political economy. International Journal of Political Economy, 35(2), 4-34. Buckley, P. J., & Hashai, N. (2009). Formalizing internationalization in the eclectic paradigm. Journal of International Business Studies, 40(1), 58-70. Chima, C M 2011, Supply-chain management issues in the oil and gas industry. Journal of Business & Economics Research (JBER), 5(6). 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