Supply Chain of the Petroleum Retail Market - Case Study Example

Oil and Gas Management Insert Name Institution Date Oil and Gas Management Crude oil remains a significant source of fuel to this date, and as such its contribution to the economy is quite enormous given its ability to cripple the economy when it’s not available. The production, distribution and the consumption of crude oil products have different players, each with a different contribution to the market. This paper analyzes the consequences of the recent changes in the supply chain of the petroleum retail market. The essay evaluates the different stakeholders that are involved in the supply of petroleum fuel to the UK fuel market. Initially, UK refineries were structured to meet the product demand of the United Kingdom when they were developed. In essence, they were designed to produce petrol that was to be used in the transport sector and fuel oil that was to be used in the generation of power. However, the original market for transport fuels and power generation has become more dependent on natural gas than on oil fuels. Consequently, the UK oil refineries became misaligned from the initial UK market and, therefore, most refineries had to close in the 1990s. Despite some of the refineries being shut down, the quantity of fuel exports from the United Kingdom increased from the year 2006 to 2011. The closing down of oil refineries has various implications, the most significant being that there is a likelihood that the companies may not be compelled to ensure that the product moves through the retail network. Rather, the companies may be interested in structuring their networks to suit the fuel demand in the United Kingdom. The introduction of imports into the United Kingdom has the implication that there will be increased quality and security in the supply because of diversity in the supply if the import capacity is adequate (LACALLE& PARRILLA 2015, p. 94). The market for road transport fuels in the United Kingdom currently stands at an approximated forty-four billion liters annually. The daily estimates for petroleum alone stand at an approximated 46 million liters while those for diesel are 74million liters. Out of these estimates, the retail market for transport fuels that are sold through the forecourt constitutes 38% of petroleum and 62% of diesel.The UK is a net exporter of petrol and a net importer of diesel; with most of the imports coming from European countries (GREAT BRITAIN, MACLEAY, I., HARRIS & ANNUT 2010, p. 67). The United States and Russia also make up a significant proportion of the fuel imports to the United Kingdom. The retail market has witnessed major changes from the 1990’s that have seen the number of filling stations drop from 19,000sites to 8,494 in 2015. The drop has been contributed to by some factors that include the introduction of supermarket stores to the market. The retail fuel market, therefore, faces increased competition that has forced the venture to transform into a high volume and low margin entity.Despite the effect of the introduction of supermarket stores to the market, the retreat of oil markets from frontline retailing had a positive effect on independent retailers. The stiff competition has compelled a high percentage of the fuel retailers to focus on increased volume by setting up sites (BARET et al. 2013, p. 81). The numbers of retail fuel outlets that are including food to go franchises are increasing and as such it will ensure that most clients would prefer a one-stop shop for fuel and food/snacks. It is expected that the rate of decline in the number of fuel retailers is likely to stagnate despite the possibility of the competition being as fierce. Consequently, it is expected that there will be increased consolidation of fuel retailers and an increase in withdrawals from the market because of the competitiveness. Other changes that have been witnessed increased the global decline in crude oil prices, economic growth in the United Kingdom, and the increase in the number of vehicles on the roads to 34 million vehicles (RAC FOUNDATION 2012, p. 2). The activities of notable players in the retail fuel markets especially in the mid-2015 had various financial implications. The decision by Shell to sell close to 250 of its sites so s to increase its coverage by ensuring that the company owned forecourts are complemented by dealer owned forecourts. As a consequence, the number of independent fuel retailer groups increased in size. Another key player in the UK retail market that has the same strategy is BP that has three-quarters of its forecourts being dealer owned. The brand presence is determined by ensuring that there is an increased coverage and as such ensuring brand power. The decline in Oil Company owned forecourts has seen a proportional increase in the number of forecourts in the independent sector.The increase in the number of independent-owned retail fuel outlets was witnessed despite some outlets being shut down because of financial difficulties and better prospects for property owners as witnessed in London in 2014 (HIRSCH & HIRSCH 2012, p. 85).. The last five year period has witnessed the close of an approximated 900 independent-owned outlets as a result of financial constraints, better investment prospects for property owners among other reasons. However, the decline is expected to be countered by an increase that results from company-owned retail forecourts exiting frontline retailing for independent-owned forecourts that present better coverage and brand presence. The disintegration in the supply chain of the fuel companies that were initially vertically integrated has resulted in an increased efficiency which has significantly reduced the costs of transport fuels to the final consumers in the forecourts. The improved efficiency of the distribution system has, however, had the effect of reducing the storage capacity in the distribution channel which has resulted in a reduction in the resilience of the channel. The emergence of superstores is considered one of the greatest challenges to the survival of retail fuel outlets because of their pricing policies. The recent shift in shopping behaviors of the clients towards online shopping has caused a reduction in the clientele who go to the superstores. Moreover, mega stores were heavily invested on; the increase in the number of online shoppers to approximately 20% has placed the megastores in financial difficulties. A decline in the investment on super stores will imply that there is an ease in the constraint that had been placed on retail fuel outlets by the superstores. The reduced investment in superstores because of a shift in the trend of client shopping to online shopping has led to an increase in the market share of independent fuel retailers (ORSZULIK 2016, p. 18). In a bid to increase the profit margins and increase efficiency in the distribution of fuels, the functions of fuel suppliers have overlapped with the roles of road haulers. Consequently, this has resulted in labor disputes between the suppliers and the haulers. Also, the fact that the suppliers have to reduce the costs at each stage in the supply chain at the possible minimum has the implication possible conflicts are likely to increase. The reduction in the prices of crude oil was because there was unfavorable information on the demand in the supplier countries of crude oil which when coupled with Poor economic data in the European Union resulted in reduced demand in the market which forced the prices down. Also, an increase in the supply of crude oil was caused by a surge in oil production in Canada and Midwest USA. OPEC was, as such, not in a position to regulate the supply so as to increase the demand because of the other players who were not willing to reduce the supply (INKPEN & MOFFETT 2011, p. 67). The implications of the reduction in the price of crude fuel on the fuel retailers are that there was reduced prices and as such better competition against alternative energy sources like hydrogen. Consequently, a halt in the production of crude oil could only be halted by reduced profit margins that could result from high extraction costs and reduced fuel prices (ROBERTS 2005, p. 170). There are several factors apart from crude oil prices that affect the fuel prices in the United Kingdom. The most outstanding of these factors is tax and the cost of refining crude oil to fuel. Despite the fact that profits to the retailers will also affect the price of fuel, the forces of demand and supply will keep the retailers from exploiting the consumers. Also, the consumers are well informed on the prices of fuel and most commodities because of the easy spread of information in this era. Therefore, it is difficult for retailers or any other players in the fuel market to conceal information on fuel prices. Nonetheless, duty and VAT has been taking the greatest percentage of the United Kingdom petroleum product prices in the recent years.The variables in fuel prices will, as such, be crude oil prices, and tax. On the other hand, crude oil refining costs and the profits to the retailers and other players in the market will remain somewhat constant (GILARDONI et al. 2008, p. 129). To conclude, there has been several changes in the supply chain of the United Kingdom petroleum industry. Some of these changes include; the emergence of superstores which is considered one of the greatest challenges to the survival of retail fuel outlets because of their pricing policies. Secondly, there has been a shift in shopping behaviors of the clients towards online shopping has seen a decline in the number of customers who go to the superstores. Thirdly, the sale of company owned forecourts so as to increase its coverage and brand presence by ensuring that the company owned forecourts are complemented by dealer owned. The increase in the number of vehicles sold in the United Kingdom by close to 34,000 cars has had the implications that there will be a proportionate increase in the demand for transport fuel. Nonetheless, there has been technological changes that have resulted in the manufacture of more fuel-efficient cars and as a result fuel consumption has relatively reduced (PEITZ & SPIEGEL 2014, p. 81).Also, there has been a decline in the number of independent-owned retail fuel stations because of stiff competition from super markets. Also, the business model of independent-owned filling stations has been questioned because of its inability to counter competition and its susceptibility to financial constraints. Other changes include the withdrawal of major oil companies from company forecourts to independent forecourts and the downfall of crude oil prices worldwide (PETROL RETAILERS ASSOCIATION 2015, p. 4). These changes have different implications on the supply chain of fuel retailers, and the implications include; the likelihood that the companies may not be compelled to ensure that the product moves through the retail network because of the closing down of oil refineries. There is also the implications that the companies may be interested in structuring their networks to suit the fuel demand in the United Kingdom. Moreover, the introduction of imports into the United Kingdom has the implication that there will be increased quality and security in the supply because of diversity in the supply if the import capacity is adequate. The disintegration in the supply chain of the fuel companies that were initially vertically integrated has resulted in an increased efficiency which has significantly reduced the costs of transport fuels to the final consumers in the forecourts (GREAT BRITAIN 2011, p. 75). Bibliography BARET, C., LEHNDORFF, S., & SPARKS, L. (2013) Flexible Working in Food Retailing: A Comparison between France, German, Great Britain and Japan. London, Routledge. GILARDONI, A., ANTONIOLI, B., & CARTA, M. (2008).The world market for natural gas: implications for Europe. The World Market for Natural Gas. Berlin, Springer. 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