Oil industrial analysis

Oil industrial analysis

Introduction

Since the discovery of oil, it has become one of the most lucrative and vital industries in the world. Decades away, crude oil was a local industry, but today it a world industry that brings together different people across all cultures. The sector is diverse and complex and affects everyone due to the politics in the industry. The major oil producers include Iraq, Russia, Saudi Arabia, Mexico, Nigeria, Norway, and Venezuela. Oil is considered one of the most valuable resources in the global market as it has multiple uses, regulates inflation, and acts as a defense against economic shocks. According to market research, total revenues from the oil and gas sector are about $2 trillion, GDP of between $75 trillion, and $87.5 trillion. The oil and drilling sector makes about 2-3% of the global market. The industry has companies involved in crude petroleum production, recovery of hydrocarbons, and extract oil from shale. The companies are producing oil measure production in barrels, where one barrel is equal to 42 U.S. gallons. Some of the economic factors that influence the prices of oil include; demand and supply, market sentiment, inflation, taxes, and exchange rates. The importance of this industry analysis is to help understand all the dynamics of the industry by reviewing all the dimensions involved. The top-performing companies as of 2018 December includes; B.P. Sasol Limited, Eni S .P.A, Royal Dutch Shell, Enbridge Inc, and Total S.A.

Characteristics of demand and supply

Price elasticity of demand is an economic measure of the quantity demanded changes with changes in price. Due to the system of cooperation and profit-making, the oil companies are abusing the helplessness of customers, and they sell it at whatever prices they want. An analysis of the oil demand in an in-depth industry analysis indicates that there are several characteristics of its elasticity;

To begin with, the demand for oil is relatively inelastic with respect to price since oil has few substitutes.

Secondly, the demand is relatively inelastic with respect to the income for economies with a low population, but for highly populated economies like China and India, the income elasticity of demand is close to 1. The demand for advanced countries is increasing, which makes 66% of the total world demand. In the long run, oil is elastic for every barrel produced is awaited for consumption; this is because no matter the price, oil is a significant influence of the market forces.

Further analysis indicates that there are well over hundreds of millions of consumers of oil, who independently are unable to influence prices, but together provides unparalleled consumers for crude oil and its products such as gasoline, petroleum, diesel, and gas. On the other hand there are only a few countries that produce oil first among them being Saudi Arabia. The United States comes in second with a production of over 11.11 million barrels a day, a level estimated to be 95% of Saudi Arabia’s overall production. Russia follows the United States, with China coming in at a distant fourth. The description shows beyond a reasonable doubt that the demand for oil is high, with the entire continent dependent on a couple of countries that solely control the prices of the scarce commodity.

However, a twist may be evident as a puzzle is presented over why the nations that are highly associated with oil, and those who produce it are not the same. It is therefore worth of note that the countries that who have significant oil reserves play a significant role in price regulation regardless of their production capability. Saudi Arabia tops the list of countries with the largest oil reserves, with an estimated 267 billion barrels. The United States, though ranking second in terms of production has an estimated 26.5 billion barrels, which pushes the country to position twelve globally behind Canada, Venezuela, Iran, Iraq, and Kuwait. Other ahead of the U.S. in terms of oil reserves include antagonistic Russia (60 billion), the United Arab Emirates, with 98 billion), and Libya with an estimated 47 billion.

Although the demand and supply theory correctly describes that the price should automatically fall with the increased supply of a commodity, the oil industry has since decades ago avoided such a scenario. The largest oil producers, combined with those countries with enormous reserves ensure that the demand for oil is higher than the supply, making it easier for them to control the market prices. Another challenge that stands in the way of the demand and supply theory is the lack of balance between production, refinement, and distribution factors. In the oil industry, an increase in production does not necessarily increase refinement or better distribution for that matter. Most oil producers have a few refineries with the best of reaching only 61 % of their full potential. Since oil is a competitive product that influences stocks, regulates inflation, and acts as a security against economic shocks, excess refined oil is kept for either of the explained reasons.

Cartels in the Oil industry

Another force that influences market prices is the presence of cartels in the business. Founded in the 1960s, The Organization of the Petroleum Exporting Countries (OPEC), although denying direct involvement in setting the market prices, is a great force in the oil industry. OPEC has been severally accused of restricting production to intentionally increase the market prices, although they denied involvement on all accounts.