Oil Prices Impact on Your Country Economy - Essay Example

Oil Prices Impact on Your Country Economy

Introduction

The plunge in oil prices has affected a variety of nations, and this is no exception to our country. Regardless, this does not mean that the oil industry is about to collapse. Changes in prices are normal in a way, but their effect on our country must be mitigated. The changes in oil prices affect a variety of industries, and several measures must be adopted to ensure that this change is understood and mitigated. Evidently, countless issues are associated with the development of a better industry. Several theories have been proposed to control the effect of such changes on the industrial prices. For this exercise, the one theory that is mostly applicable is the Competitive Advantage of Nations (NCA) by Michael Porter.

Nation’s Competitive Advantage

The theory entails the boiling down of the various affecting factors into four main categories, which Porter represented as a diamond shaped graphical representation showing the four main areas that influence the competitive advantage of a nation. Every nation participates in both the local and global market. For a country to be more competitive than the rest of the countries selling the same product in the international markets, it has to offer some value or some difference that makes the buyers more inclined to making purchases from the country. For our case, oil is the main product being sold (Quick MBA, 2016). Oil producing nations are largely affected by changes in prices which thus make it necessary for the country to develop sound strategies that are meant to improve an organization’s competitive position.

The Diamond of National Advantage is classified into four main categories. The first category is firm structure, strategy and rivalry. The second classification is the factor conditions or the factors of production. The third category is related and supporting industry whereas the fourth category is demand conditions within the domestic and international markets. Arguably, there have been multiple issues associated with the development of a better competitive advantage for the country as will be described in this paper. This theory is applicable to our case and can assist our nation to come up with sound recommendations to help improve the competitive edge of the country in international markets (Porter, 1990). Each of these categories is instrumental to the development of a better competitive position for the country.

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Firstly, the firm structure, strategy and rivalry in local markets appear to be a significant factor that contributes to the overall success of the industry. When firms have great rivalry within them, they are more likely to use competitive strategies that are of much benefit to the consumers. In most cases, the oil industry is run by international companies working within the domestic market. In our case, there are a few local firms whose competitive strategies are also vital and must be reviewed to improve our country’s competitive position. In cases whereby the companies have a minimal rivalry, the prices are almost similar and competitive pricing is absent in such a market. Nonetheless, it is essential to evaluate the firms within a country and their overall influence on the competitive position.

Secondly, evaluating the factors of production within the country is also instrumental. In the oil industry, the various factors that facilitate production and their effect on the price and the competitive position must be evaluated. In some cases, the factors influencing production might work against the industry. Evaluating ways to make these factors more relevant to improving the pricing and sale of oil is vital when trying to improve a country’s competitive position. Often, the control of these factors is a significant determinant of their effect on a country’s productivity. When the factors are controlled by a single body, the pricing might be affected. Besides control, the consideration of innovation rates within a country is also vital when deciding how to improve the performance of the industry.

The third factor is the demand conditions. Comparing the demand within the domestic market to that in the international market is crucial in our case. When the domestic market is doing well, the international market is also likely to be doing well. Most firms within the industry produce for the local market. Therefore, according to this theory, it is vital that country evaluates some of the strategies that can assist in improving the industry performance. Additionally, it is vital to assess the causes of changes in demand and develop solutions to these changes (Pegels, 2005, p.25). Improving the domestic demand is vital as it will foster more innovation and further improve the products sold in the international market which would automatically improve the competitive position of our country.

Finally, it is always crucial to determine the influence of the related and supporting industries. The effect of the prices has not only affected the oil industry but also affected all related and supporting industries. For instance, a reduction in demand for oil will affect the transport industry, affecting all organizations that offer services for the oil companies. It also affects the human resource industry in our country bearing in mind that many HR consultancies benefit from the oil industry. In addition to these factors also largely affects the organization. The success of the oil industry will generally improve the performance of all our intertwined industries. As such, this issue needs to be addressed as early as now, to ensure that our country does not suffer any long-term implications of this price change.

Recommendations

Recommendation #1: Improve Domestic Market

The first recommendation that can be implemented by the organization is improving the domestic market. Primarily, now that oil prices have slumped, improving the production and consumption back at home is probably the best approach to deal with the reduction in oil prices. Although back at home we cannot improve the prices, we can improve the consumption to offset the balance lost by the increase in prices and the slump in demand. Therefore, improving competitiveness locally and making sure that the local consumption is in excess would help revive the industry. More local consumption is the only proposed strategy that can help improve the current industry.

Recommendation #2: New International Markets

Besides focusing on the domestic market, implementing strategies aimed at looking for new international markets is also another proposed approach that would work out excellently. Currently, the slump in oil prices has not affected demand in a negative way, but it has badly affected the revenues. There are multiple approaches that can be used to ensure that the reduction in prices is offset by an increase in consumption. The country should invest more in marketing our products to some of the countries to whom we do not sell oil. Looking for new international markets should be made a priority for the country if it, in anyway hopes to achieve a restoration of the industry.

Recommendation #3: Improving Innovation

Besides focusing on the consumption, another approach is to focus on the factors of production. As advised by Nitisha (2016), factors of production might impact the industry in a great way. Primarily, the reduction in oil prices has largely affected the production costs. Currently, the reduction in prices has affected our profitability. To ensure that as a nation we are more competitive than our neighbouring competitors, the best approach entails reducing the costs of production. If the costs of production were reduced significantly to ensure profitability despite the slump in oil prices, the country might enjoy some degree of autonomy in controlling the negative effects of the drop in prices. This means that the country must heavily invest in research and development to come up with innovative ways to reduce the cost of production.

Innovation can further be facilitated by using cheap and yet quality factors of production. Also, the use of innovations that improve the quality of our oil can be another approach. For instance, it would be crucial to use fuel-saving technologies to ensure that our fuel is more competitive than that offered by our competition. For instance, some technological advancement can be used to make our oil less pollutant. Bearing in mind the contemporary consumers are more inclined to saving the environment, producing less toxic oil can help make our oil more attractive to both external and domestic markets. However, this might take time before we develop an innovation that makes our oil less toxic to the environment. Nonetheless, such an innovation would solve our crisis to a great extent.

Recommendation #4: Fostering Healthy Competition among local Firms

Fostering healthy competition and unison between companies will be required. A government department can be developed to improve the relationships between rival companies to help offset the current challenge collectively. If all firms within our country came together and established some viable solutions to the menace using their individual resources collectively, this menace can be overcome easily. Although we want the companies to remain competitive for better production to be realized and for the country to improve its industry, we must ensure a certain level of collaboration between them to develop a better solution to this issue. Bearing in mind that these companies have been performing exceptionally well in the past, their experience in the oil industry can shed light on some very highly effective strategies that would help improve the industry (International Relations Online, 2016). However, these firms have to work together for them to achieve this goal.

Conclusion

To conclude, several strategies that have been employed in other countries have worked greatly. It is crucial for our country to learn from these nations and borrow some of the solutions they had for their industry. Regardless, we need to empower the local companies by improving the domestic market through whatever means possible, including government subsidies. Fostering innovation will also be instrumental as it will bring with it a number of solutions that we can enact in our country. Thirdly, we have to foster the domestic market for our oil to seem attractive to other countries. Alternatively, it will be crucial to ensure that our local companies work together to develop long-term solutions. Regardless, innovation and collaboration seem to be the best choices for this undertaking to work. For our country’s oil industry to revive, much investment in research, development and marketing must be made, and it is up to our government to facilitate these factors.