The Oil Industry in Global Business Context - Coursework Example

Global Business Context-Oil Industry A: Outline of the scope of the product market - The global processes in oil industry include exploration, extraction, refining, transporting and marketing of petroleum and allied products. Fuel oil and gasoline are the largest volume products in this industry. Oil industry is the world’s largest industry in terms of dollar value. It is one of the important areas in world economy. The global economic scenario is facing challenges to meet fast growing oil demand with depleting oil reserves. (Oil Industry Statistics). The oil industry is showing higher growth rate due to the higher demand for energy in the industrialized world. The higher growth rate is expected to be continued in future also due to the increasing demand for energy in various industrial functions. In China and other South Asian countries like India, the utilization of oil fuel is rapidly increasing as a result of growth of industrialization in these countries. China has the fastest demand for oil products. The entry in the oil industry is a complex process requiring extensive investigation on different aspects of the industry. In this study, the investment opportunity in the oil industries of Russia and UAE are analyzed with the concept of PESTLE analysis and Porters’ Five force model. B: International scope of the company’s entry into the market. The entry in the oil industry needs huge initial capital investment on a long term basis. Capital investments in the oil industry are not capable of providing return within short term. Firms are required to sustain for a long term in the industry in order to acquire adequate return from capital investment. Support from government is a major requirement in this industry. Since oil industry is closely related to the economy, the entry in the industry has to meet complex legal requirements. Most of the oil exporting countries is adopting nationalization policy for controlling the foreign entry in the industry. In most of the oil exporting countries in the Middle East, no private participation is allowed in the oil industry. (Oil Industry and Global Politics – An Inevitably Explosive Mix). Up stream and down stream are the two major sectors within the oil industry. In upstream sector, extraction and refining process are involved. In the down stream sector, commercial activities relating to the product are involved. Investment in these two areas requires huge resources and manpower skill. Advanced technology is highly essential for reducing the operating cost and improving the operational efficiency. Thus existing firms have advantages of advanced technology and long term experienced manpower. In order to compete with these existing firms, new entrants have to adopt joint venture policies. Oil industry is highly influenced by the political and economic conditions in the operating region. Like in other commodity industries, the energy industry is also affected by the boom and bust conditions in the industry. Fluctuations in oil prices and demand strongly affect the related activities in the oil industry. Most of the firms in the global oil industry are seriously affected by lack of qualified manpower resources and availability of materials and other resources for the various operations. This creates increased competition for skilled manpower and resources. Thus the cost of manpower and resources increase at a higher level. New entry in the industry will be severely affected by lack of skilled manpower in the industry. In most of the oil exporting countries, the oil industry is dominated by the government itself and thus there is no investment opportunity for foreign firms. C: Opportunities and threats in the targeted oil industries The targeted oil industry for this study is oil industries of UAE and Russia. These are the two major oil exporting countries in the global oil market. It provides vast opportunity for firms with vast resources. In order to enter and sustain in the industry along with adequate resources, support from government and legal authority is also required. PESTLE analysis is applied for the analysis of opportunities and threats existing in these two countries. PESTLE analysis relating to Russia Oil industry: Political conditions: In Russia, government has no formal stakes in its national oil companies. The influence of government policy on the oil industry is only limited. Major oil exporters and their affiliates have powerful influence over the government. Hence they have the capacity to change the government policies for their interests. In the country, 51 per cent of the oil industry is under the direct ownership of the Gasprom which is a government company. It occupies major shares of the oil industry through acquisition of other firms in the industry. When compared to other oil exporting countries, there is only limited influence of government on the oil industry in Russia. (Amount of Oil Drilling & Gas Production in Russia Surpasses the Overall Demand in the, p.1). Economic Conditions: The Russian energy sector is targeting to expand its oil export by contracting with a number of countries across the world. Due to this, there is rapid increase in the oil production and exploration in Russia. This provides opportunity for new business firm to invest in the industry. Existing companies like Shell and Exxon, involved in major projects of Sakhalin 2 and Sakhalin 1, had signed deals with the government which limit their tax liability. But new entrants to the market, or existing ones involved in other new projects have no reduction in tax liability and this creates tax discrimination in the industry. (Aenlle). This indicates that existing major firms in the industry have higher influence on government and they get tax reduction and other subsidies from the government. Thus the new entrants in the industry will not have enough capacity to compete with the existing firms and major firms. Transport and communication facility in the country is not well standardized. Local suppliers have great influence on the government. Sociological conditions: “In Russia like other transition economies, contracts are hard to verify and enforce. In a word, private property rights are not secure or credible. The lack of efficient methods to resolve commercial disputes substantially increase the cost of entry.” (Broadman, p.5). The issues relating to business are usually resolved outside the court by mutual agreement. Corruption in all levels is affecting successful entry of business firms in Russia. Due to this new entrants are subjected to manipulation by local authorities. Threat of violence against new entrants also exists in the country. Technological conditions: Technological innovation is necessary to increase the efficiency of oil production and to reduce operating cost. In the oil industry of Russia, high technology methods of oil recovery are developed and employed and it provides greater advantage to the industry. Russia is focusing on development of the nation through innovative strategies for realizing human potential and efficient use of human skills and knowledge. The oil and gas industry provide greater importance and innovative technologies are employed by firms. “In 2002, a wave impulse oil recovery laboratory was set up on the initiative of Academicians Mikhail Kurleni and Andrey Alexeyev at the Mining Institute of the Siberian Branch of the Russian Academy of Sciences for the purpose of research into the effect of wave fields on oil rocks and developing physical technologies of oil and gas recovery intensification.” (Igorev). Legal conditions: Even though competition law in Russia insists on international standards, it does not ensure implementation and enforcement responsibilities and it leads to excessive discretion in the oil industry. The duties and tax rate in Russia is higher than international standards. Small business enterprises are highly affected by tax burden. Due to the taxation at various levels of operation, operating cost for firms is much higher. This affects the survival of new entrants in the industry. The compensation for successful plaintiffs in industrial disputes is only nominal. The burden of debt collection is upon the plaintiff and he has to pay proceed fee equivalent to 10 per cent of the suit. This weakens the legal system in the country as most of the issues relating to business are solved out of the court. (Broadman). Environmental conditions: Russia is occupying 13 per cent of the world’s oil and gas reserves. The mineral reserves in Russia are worth $ 30 trillion. The amount of oil drilling and gas production in Russia surpasses the overall demand in the domestic market. Thus export opportunity exists in the oil industry. This will help firms in the industry to earn higher revenue from export to other countries. In the industry, 55 per cent of the total crude oil production is exported to other countries. “Russia is the worlds second largest oil exporter after Saudi Arabia, and its subsoil contains 33 percent of the worlds gas reserves. It already supplies 30 percent of Europes gas needs. In the future, Russias oil and gas industry will become even more important, as no other sector can be as internationally competitive, grow as rapidly, or be as profitable.” (Naim). This provides great opportunity for foreign firms to enter in the industry. PESTLE Analysis relating to UAE oil industry: Political conditions: The prevailing political conditions of UAE are adequate for firms in oil industry as it is stable. In the central government, each emirate has its own political and financial influential power. Due to the stable political conditions in UAE, the government policies are also stable to certain extent and thus there is no need to firms to change their business policies corresponding to the changing government policies like in other countries. (USA International, p.25). Government policies relating to the oil industry are very favorable for new entrants in the industry. Government is intending to increase the oil production for attaining maximum economic growth. This provides opportunity for new firms to enter in the industry. Economic conditions: The UAE is a major player in the world energy markets and it has third rank in world’s largest conventional oil reserves and fifth rank in largest natural gas reserves. It is the Middle East’s second largest economy after Saudi Arabia. The UAE economy is relying on its huge oil and gas reserves and it contributes 1/3 of country’s GDP and 40 per cent of exports. The source of state revenue is largely from oil exports. The income from oil exports contributes to the entire economic development of the country. (United Arab Emirates Country Brief). The financial outcomes from oil exports are channeled to new economic development projects and to develop new sectors for attracting foreign business investment. In recent years, the country has achieved impressive economic growth through the export of oil and natural gas resources. Major economic challenge of the UAE is its oil export based economy. The fluctuating oil prices with a diminishing trend in current period restrict further economic growth of the country. A stable economic growth cannot be predicted for a longer period. Dominant part of country’s investment fund is from oil and gas revenues and thus significant downturns in oil price would affect industrial development in the country. (Executive Summary). Sociological conditions: Political risk existing in the Middle East has an impact on the capacity expansion in the Middle East. UAE is a member of OPEC and thus the oil industry in the country is influenced by rules and regulations of OPEC. Technological conditions: As major oil exporting country, technological innovations are carried on with support from government to improve the production capacity of oil firms. Advanced technologies are implemented by firms to attain maximum productivity. The availability of local technical personnel for the oil industry is only limited in UAE. Most of the firms are utilizing the services of hired employees. Environmental conditions: UAE oil industry is subjected to the directions of Kyoto Protocol. Hence the industrial firms need to adopt scientific tools for reducing the emission of carbon and allied gases to the environment. D: Possible barriers to entry. In the global oil industry, companies face strong barriers to entry and opening up markets. The potential barriers to entry in the oil industry in targeted countries can be analyzed with the concept of Porters’ five force model. Economic/political barriers: Economic and political conditions of the country have great influence on its oil industry. In recession period, the consumption of energy will be decreased due to the reduced rate of manufacturing process and other allied utilities. The variable factors in economy will influence the demand for energy. Existing political conditions and government policies in the energy sector may act as barriers against the entry of foreign firms in the industry. The trend in the energy price also will affect the performance of energy companies. Supply and demand barriers: The oil price is affected by many factors and it is highly fluctuating in nature. The basic factor influencing the oil price is the difference between demand and supply of oil in the global market. The demand for energy is showing gradual growth except in recession period. In recession time, the demand for oil is reduced and thus the firms have to reduce the supply of oil energy and it will affect their business growth. OPEC is the main agency that determines the level of global supply of oil. Thus long term trend in the oil price has to be considered for making investment decisions in the oil industry. Threat of new entrants: In the global oil industry there exist plenty of oil and oil service companies. The threat of new entrants in the industry is very limited due to the very huge initial investment requirement in the industry. The cost of equipments for the extraction process is very high. All of the areas of the oil business require highly specialized workers for the various operation processes. People with good talent are required for taking key decisions in the oil industry. Thus only serious companies can enter in the industry. Bargaining power of suppliers: Major oil exporting countries in the world are organized through formation of OPEC. This provides strong bargaining power to the suppliers in the oil industry. There are plenty of oil companies in the world. Though the industry is dominated by a few powerful companies, they have strong influence on governments of various countries. Bargaining power of buyers: In the oil industry, buyers also have potential power of bargaining. There is large number of suppliers of oil products in the global market. As a commodity, there is no significant difference between oil of one company from another. Hence the basis of the purchase decision will be lower prices and better contract terms. Availability of substitutes: There are various substitutes for the oil energy available in the energy markets which include alternative fuels like coal, gas, solar power, wind power, hydro electricity and nuclear energy. In the energy market cost of energy is a major factor. Thus oil companies are required to overcome the threat of substitute products by supplying products at lower rate than the substitute ones. Competitive rivalry: Rivalry of competitive firms in the oil industry is not stronger. Slow industry growth rate and high exit barriers in the oil industry reduce the competition in the industry. (The Industry Handbook : The Oil Services Industry). Conclusion: The increasing demand for oil products in the global industry provides opportunities for new firms to enter in the industry and attain profitable growth. Oil industry is highly influenced by economic and political conditions and the changes in the environment will result in fluctuation of oil price. Thus investment decision in oil industry requires deep knowledge about the factors affecting the industry. The entry in the oil industry will be subjected to economic, political and environmental barriers in the respective countries. The competition from existing firms relating to procurement of manpower and resources also restricts the successful entry of business firm. While selecting the oil industry for investment purpose these factors have to be considered by the investors. Works Cited Aenlle, Conrad De. Business: Russia’s Oil Industry Caught in a Tug of War. The New York Times. 2009. 15 Jan. 2009. . Amount of Oil Drilling & Gas Production in Russia Surpasses the Overall Demand in the. All Business: A D & B Company. 2006. 15 Jan. 2009. . Broadman, Harry G. Competition and Entry in Russian Industry. 15 Jan. 2009. . Broadman, Harry G. Competition and Entry in Russian Industry: Dispute Resolution. 15 Jan. 2009. . Executive Summary. 15 Jan. 2009. . Igorev, Vladimir. Wave Wave Vibration Oil Recovery Stimulation Technology: Wave impulse innovations on LUKOIL fields. Oil of Russia. 2008. 15 Jan. 2009. . Naim, Moses. Russia’s Oily Future. FP Foreign.2004. 15 Jan. 2009. . Oil Industry and Global Politics – An Inevitably Explosive Mix. Global Conditions. 2007. 15 Jan. 2009. . Oil Industry Statistics. Ecocnomy Watch. 2003. 15 Jan. 2009. . The Industry Handbook : The Oil Services Industry. Investopedia: A Forbes Digital Company. 2009. 15 Jan. 2009. . United Arab Emirates Country Brief. Australian Government: Department of Foreign Affairs and Trade. 2008. 15 Jan. 2009. . USA International. Political Conditions. Doing Business and Investing in United Arab Emirates Guide. 15 Jan. 2009. . Read More