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Importance Of Oil Prices To The Global Economy Economics Essay

Oil prices have increased sharply over the past few years. Despite this rise in oil prices, growth of the global economy in all regions of the world is still strong and is expected to remain so for the next few years. The impact of oil price fluctuations on global economic growth has reduced as compared to previous decades. The global output lowered by approximately 1.5% when the oil prices shot up between 2003 and 2005 (EIA, 2008).
The impact that oil has on growth is quite striking. Many companies are forced to take up new oil prices, change the mode of using their factors of production and also do away with unprofitable sectors. This reduces the profitability of industries. It can also cause world wide recession due to reduction of real wealth as governments increase their protectionism on imports and exports. Major Price shifts may also occur especially in economies that have many monopolies. Various policies all over the world are unsuitable and fail to address the effects of oil prices. Governments from some developing countries have set up systems of control which protect consumers and businesses from the price increases. However, these controls only protect growth in the short-term; in the long run, it affects financial stability and leads a government into debt (Selim, 2008, 300). The governments should focus on both short-term and long-term oil market volatility.
There is a tendency of the players in the oil industry over investing or under investing in oil extraction projects and this leads to mixed cycles. The current high prices are as a result of the underinvestment during the 1990s when the prices were low. For instance, 1997-1999 was characterized by low oil prices which contributed to lowered expenditure in oil exploration. These low prices, however, led to the high prices in 1999 to 2000 (Wright, 2008, 750). .
In the near future, however, the oil prices may collapse again due to growth in emerging markets such as China and India among others. Most oil consuming countries have developed mechanisms to deal with the volatility of oil prices. However, poor global financial systems and rigidity in the economies and policies of oil producing countries has increased the concentration of risks in these producing countries. The producing countries should be assisted in managing oil price volatility and diversification of economic risks. This is the greatest problem that the global economy is expected to address in regards to oil. However, the task may be quite difficult because the oil producers prefer to maintain control over oil production. Non-oil production in the producing countries should be prevented from shocks by diversifying their economies. This could be achieved through improved risk sharing mechanisms in both production and financial markets. Increasing the flexibility of exchange rates could also assist in protecting non-oil production (Mabro, 2006).
Oil price shocks can make existing capital stock obsolete thus pausing production. This may lead to delays of both workers and capital especially in energy intensive industries. Poorer countries suffered considerably in the recent oil price shock. However, most oil consuming countries have become less vulnerable to these oil shocks than they were before. The reasons behind this lessened vulnerability include: Labor markets are more flexible, financial markets have become deeper, monetary policies have become better anchored, final demand in oil consumption has become greater and energy efficiency has also increased. As a matter of fact, the effects of oil supply shocks on global growth have reduced by almost half of what they previously were.
The volatility of oil prices greatly influences the movement of exchange rates. Oil price volatility, both long term and short term, remains a great problem to the oil producing countries despite its effects on the global economy. Buffer stock supplies in oil can be used to alleviate the short term volatility while the long term volatility can be reduced by increased industry transparency.
With the world population rapidly growing, we expect oil production to be on the rise otherwise some countries will loose in terms of per capita consumption. This will be so because countries will increase protectionism in a bid to keep oil demand more level. More oil will be required to maintain the lifestyles of the country’s workers. Countries with financial difficulties may also be kept out of the oil market and this will lead to a reduced aggregate world demand for oil (Morehouse, 1997).
It is possible that at some price, countries will bow down to recessionary pressures leading to a drop in demand for oil. A country’s debt situation will determine its oil price to a level which will enable it to sustain its economy’s growth. Countries that use hydro and coal energy are more likely to over exploit these natural resources.
Oil prices are likely to remain on the rise because of the rising extraction costs and the frequent unrest in the Middle East countries which are the major oil producers. With the growing global economy, demand will be high and this will make the oil prices to shoot upward as countries complete for a barely growing supply of oil (Maugeri, 2006).
Countries differ in their ability to pay for high oil prices. Poor countries and more so third world countries will be pushed away from buying oil or they may be shunned by exporters either because of debts or due to recession. The world’s oil production is likely to decline in the near future with the decline of countries that can afford the high prices of oil. Oil consumption will then drop to very low levels because most countries will be unable to purchase the highly priced fuel and the oil producers will be unable to maintain their infrastructure for a limited oil supply. The leading oil exporters in the world are Saudi Arabia, Russia and the United States.
Oil price volatility will remain a major issue for consumers, policymakers and business people.

The role of Corporate Social Responsibility in British Petroleum’…

The last fifty years the world has seen a revolutionary force in the name of globalization. However not everyone in the society has benefited from this progress. A vast majority of the global population is still under the poverty line. The corporate world has grown so huge that it has the capabilities to take on the responsibility for improving the society in which they operate. These businesses have the power to turn the societal issues into economic opportunities for social as well as business strategic reasons. The petroleum refining sector has a huge responsibility in this regards. It is acting as a powerful catalyst in addressing the needs of the society through environmental compliance and economic opportunities. This obligation is given the name of corporate social responsibility (CSR) of firms towards the society. Corporate social responsibility or citizenship is a concept that has been given a lot of importance in the last few years as it is a powerful tool in eradicating global poverty, for a safe environment and maximizing value to multiple stakeholders “the activities of the poor and increase their productivity by increasing their access to market information or lowering the transaction costs of poor farmers and traders” (Viitanen A K, 2003).
This dissertation is a study and analysis of BP’s citizenship initiatives. The report starts with the background of how CSR has evolved in the last few years and highlights the relevant definitions that have come up till now. The report goes deeper into the field by illustrating the work of prominent researchers in the field as this provides a basis for this report. The discussion narrows down to petroleum refining industries are implementing CSR initiatives in UK region by taking the case of few companies in the sector. The main aim of this report is explained in the aims and objectives section 2.2 through which it is helpful to describe the CSR strategy of BP that lead to social, environment and economic development. It also analyze the BP’s current situation and see how the firm can improve on their practices by considering CSR as a strategic tool to create economic, social and environmental benefits not just for the firm but the society at large.
2.1 Introduction According to Thomas Berry, (20xx) “The universe is a communion of subjects, not a collection of objects”
CSR is about restructuring strategies so that companies have a basic responsibility for their society and the environment. George Frynas noted that CSR can remarkable financial assistance in time of need through environmental improvements (2010).
Generally CSR investments have many complications and difficulties such as environmental safety , human resource relation, health and safety, pollution control measure and the list goes on up to benefits of consumer. It indeed understands the necessary reasons and fundamental motivations of CSR. The main causes for a company to involve in CSR investments can be reflected in their outcomes.
Many industries are rising in manufacturing sector but very few are entering to refining of petroleum industry. When analyzing the reason that will end up at environmental issues.
Sustainability and social responsibility are two different issues but there exist many similarities between them. According to Manuel Castelo Branco and Lucia Lima Rodrigues(2006) at business level the possible minimization of environmental effects are recognized by three elements. They are economic sustainability, environmental responsibility and social responsibility. As for as petroleum industries concern environmental effect minimization is very much indeed worth research analysis for this study. For a petroleum industry like BP, investment plans in controlling air pollution, carcinogenic gases, effluents and most polluting residues are very important factors.
Eventually to create aware of socially responsible and environmentally friendly industries, basic strategies of organization is to be changed accordingly. Future continuity is more considerable and followed factor for corporate responsibility. So, futuristic CSR plans are also significant in the list of research questions which project current issues.
In accordance with such ideas it is chosen to study and suggest with the help of previous research and literatures.
Jessica Foote et al (2010) noticed that corporate social responsibility is the most debated and criticised topic in many corporations for many years and CSR distracts to make money from the fundamental economic role of business. Especially in petroleum industry, where environment and pollution a prominent constraint, CSR is a key factor.
2.2 Aims and Objectives The main aim of this research is to find how CSR does effectively create an impact in BP’s productivity and a complete analysis of finding the restricting factors of BP to involve in CSR.
To analyse critically the increase of productivity for British Petroleum through corporate social responsibility
To review the most current situation from the business ethics of BP’s business strategy and construe the motivations behind
To analyse the reasons for investments in CSR
How effectively they handle it
To find the primary drivers
2.3 Structure of the dissertation 1
This dissertation starts with an executive summary so that readers can rapidly become acquainted with body of the material. Chapter 1: Introduction gives basic definitions about CSR and its role in petroleum industry. Analysis of the relevant and recent most researches and critical review of the previous studies has been juxtaposed in chapter 2.
The method of collection and the results and findings using those secondary data have been discussed in chapter 3 and chapter 4 respectively. Chapter 5 provides a complete justification to the research aims and finally chapter 6 explains conclusion, circumspection and proposing implications for further research and managerial implications.
3. Literature Review 3.1 CSR synopsis CSR is not an exclusively new concept in the largest parts of the world. Albeit frequently termed differently, there have been related approaches towards business responsibility in society in many different countries (George Frynas, 2005)
The term social responsibility (SR) was well known for societal betterment initiatives before the term CSR come into normal practice. SR later termed as corporate social responsibility and now it is also known as corporate responsibility. Now all the terms that related to SR is considered as same and it is being used interchangeably as the companies articulate their company’s vision and their role in society (BCCCC, 2008a). SR is defined as “the expectation that business or individuals will strive to improve the overall welfare of the society”. It is said to be the organization action, interest towards citizen and society and demand of stake holders for the overall welfare. Since 1990 SR has taken different forms and focused more on quality of the environment (Dess, 2004).
Corporate Social Performance (CSP) is also a form of CSR and defined as “a business organization’s configuration of principles of SR, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships”. Wood (1991)
Many studies on Corporate Social Responsibility (CSR) argue that social responsibility came into existence during 16th century. ‘We can trace active Social Responsibility as far back as Ancient Mesopotamia in around 1700 BC where King Hammurabi introduced a code in which builders, innkeepers or farmers could be put to death if their negligence caused the deaths of others, or any major inconvenience to local citizens’ (EMMA, n.d). The term came into common use only in the early 1970’s (Alice and Marlin, 2003). “CSR is a rapidly growing field in the academic and practitioner domains. Yet criticisms of CSR in its current form have been apparent, often related to the lack of value that it generates in the enterprise. This above mentioned fact is especially true for SMEs who often shy away from CSR practices due to the perceived costs” (MacGregor, 2007).
In the last few decades, corporate responsibility issues including the social obligations of corporations have attained prominence in political and business debate. This debate has motivated three interlinked movements, such as worldwide reforms on corporate governance, CSR (Corporate Social Responsibility) and corporate sustainability (Katsoulakos, T and Katsoulacos, Y, 2007). Corporate governance muses the way companies address legal responsibilities and therefore provides the foundations upon which CSR and corporate sustainability practices can be built to enhance responsible business process or operations. CSR and corporate sustainability represent the way companies achieve enhanced ethical standards and a balanced economic, environmental and social imperative addressing the concerns and expectations of their stakeholders.
3.2 What and whom is a business for? Most of the big corporations view CSR as an idea they should clinch. Though investors are widely accept it which finally means company should feature into their calculations phases other than profit maximization says an article published in the Oxford Analytica Daily Brief Service (May 2010). It continues that the centre of attention of a CSR report is the relationship between business and society. The consolidation of a CSR literally means occupying the attention in some kind of social or environmental-related actions. Not only large corporations, even small medium enterprises also maintain to have CSR related leading action while they face a low regulatory limitations but they also countenance market pressure to clinch CSR. The article concludes that the CSR likely to remain in the future of corporate agenda but it would be risky move for business (Oxford Analytica Daily Brief Service May 2010).
George Frynas effectively roaring at the oil industries for their spontaneous campaign about CSR but they are failed to improve their progress. Companies characterize CSR in different ways and countries define in different ways but essentially it is beyond of legal compliances. There are many awards and honours to BP but at the same time there are several complaints and worst criticism as well started to shower. Those complaints and criticism made BP to rethink about their real involvement in the society. BP realized and started reacting to it. The progress and the impact of the realization is the answer to all the criticism about BP (George Frynas 2010). For the energy companies like BP, CSR is not only projecting possible criticism but also to reap business. In view of the fact that from the beginning of mid 1990s oil companies have joined a range of global proposals aspired at improving sustainable developments which include Global reporting Initiative (1997), UN Global compact (1999), Voluntary principles on Security and Human Rights (2000), Extractive Industries Transparency Initiative (2003) and Combat climate Change initiative (3C initiative – 2007)
CSR has been took on erratically across the oil and gas sector, companies in these industries have most likely made more than the other sectors, because they have had to deal with the exceedingly noticeable negative effects of their operations (Petroleum Economist March 2010).
Most often CSR viewed by the corporations as a complementary rather than fundamental to the center strategy of organization (Jonathan Ledwidge, 2007). This results in a multiple identities to the organizations. A study conducted by Jonathan Ledwidge says that CSR has brought threats and chances for HR managers and professionals. BP had a great CSR program in Texas but it sounds as if did not pay adequate concentration to the maintenance of its refinery. Texas refinery explosion was a public-relations disaster for the company as death, injury and destruction of plant and equipment. The reach of CSR has been certainly uneven (George Frynas, 2010). CSR has become a catch phrase to oil firms and BP failed to translate their principles on the BTC pipelines (Vavro, Caroline 2007). The findings of the Caroline Vavro thesis says as follows
“…because CSR is not a priority for firms, and as such it has been relegated to a fundamentally window-dressing exercise divorced from the core pipeline operations, the previously accepted idea that firms can be trusted to regulate themselves through CSR needs to be called into question”. (Vavro, Caroline 2007)
This clearly explains operations that oil companies involve and the campaign about the social responsibilities are entirely different or not mutually exclusive.
3.3 CSR and Stakeholder Stakeholders are those who impacted by an organization’s activities, was used to describe corporate owners beyond shareholders from around 1989′ (Alice and J.T Marlin 2003). While defining CSR as including “the openness or transparency of companies as well as taking into consideration the will and expectations of their stakeholders” Juholin (2004) suggests that the relationship between companies and their stakeholders is critical for business success. Stakeholders play the key role in any business plan of the organization. The ultimate success depends on them as affect or affected by the organization (Freeman, 1984; Clarkson 1995). Other than investors major stakeholders could be employees (managers, employees, families, retirees), customers (direct and indirect), business partners (suppliers, joint ventures, alliances, investors or share holders), communities (regional, national, local), environment (eco-efficiency, sustainable development), trade associations and government/other groups (regulatory bodies, complementary CSR institutions, NGO’s, NPO’s, environmental activists, political groups, CSR policy advocates (Donaldson and Preston, 1995).
Adding to the list, there are various groups, associations, agencies and individuals as stakeholders (for each firm), who should be engaged in all levels of the firm’s strategy for the benefit of firm and the society (Donaldson and Preston, 1995). Stakeholder theory is recognised for introducing collective responsibility, especially in emergent network relationships (Freeman, 1984) so that sustainability initiatives and actions that may be adopted represent their responsibilities to all stakeholders for mutual benefit or even purely on ethical and moral grounds. According to Dato’ Sri Najib Tun Abdul Razak (2004) the participation of multiple stakeholders is very much essential to bringing about an environment where CSR can thrive.
3.4 Strengths and Limitations of CSR An empirical investigation of a 416 explanatory case studies published by corporate constituents of UN Global Compact done by Ralf Barkemeyer, results show there is a role to play the state in order to create a better fit between the CSR agenda and the actual developmental needs (Barkemeyer, Ralf 2009). CSR mobilize business for advantage. The present economic catastrophe should make the socially responsible business even more significant than ever before. The United Nation’s Global Compact intends to dealing with various socio -economic problems such as human rights, labour exploitation, the environment and corruption. In addition to the Global Compact, Global reporting Initiative has lead the way to sustainability reporting guidelines and limitations which act as structure for economic, social and environmental reporting ( Leipziger, 2003). Gary Lynch-Wood, David Williamson and Wyn Jenkinsn (2009) say that companies will benefit from being socially and environmentally responsible.
CSR has the power to improve the financial and non – financial performance of a company and improves the social respects as well (Gopal K. Kanjia and Parvesh K. Chopra, 2010). Barkemeyer considered the huge variety of issues is not sufficiently addressed in the CSR agenda (Jenkins 2005 cited in Barkemeyer, Ralf 2009). Friedman says it is a shift that takes corporations to goods and services to the society (Fried man 1962 cited in Gary Lynch-Wood, DavidWilliamson and Wyn Jenkinsn, 2009)
3.5 The UN Global Compact: Impact The UN Global Compact is an initiative created by UN Secretary General, Kofi Annan. The Global Compact is the first initiative on corporate responsibility aspired at companies to come forward (Leipziger, 2003). Through good corporate citizenship Global Compact promotes development and thus this initiative differs from all other corporate responsibility (CR) initiatives. While looking at the strengths of this Global Compact initiative the reach around the world through networks is vast. Active networks from the developing countries and majority of the participating companies especially from the South is the succeeding factor. The global compact better suits to the corporations for making their first step towards Corporate Responsibility. For the well established companies can further proceed to enhance their progress by joining Global Compact. It has the facility to summon the CEOs from around the world to encourage corporate responsibility and development of social and environmental actions (Leipziger, 2003). George Kell of the UN secretary -General’s Office says that “the Global Compact us not about sinners and saints. There will always be companies that lead and companies that follow. We want to keep the door open. But we needs some safeguards” (quoted in United Nations 2003:8)
This is also considered as a challenge to Global Compact. According to Lepziger (2003), when corporate responsibility is more spread in companies the connection between the corporate governance and corporate responsibility is also getting deeper. What effectively explains the so called corporate governance? The following two questions will answer to this question. What are the responsibilities do companies and their board of directors to be examined by means of social and environmental issues? How can the company develop reporting that makes it more accountable?
Leipziger (2003) added that both corporate responsibility and corporate governance allocate a common terms which are very often indicates to accountability, transparency and disclosure. The greatest challenge according to Leipziger (2003) is to enhance or to develop the connections between corporate responsibility and corporate governance. While talking about corporate governance the International Business Leaders’ Forum (IBLF) creates six points accountability, Responsibility, ‘Globality’, Standard-setting, Monitoring and disclosure and Enforcement (IBLF undated cited in Leipziger, 2003).
3.6 CSR in British Petroleum Academics, government officials and business leaders focus prominent attention on the concept of CSR, specifically in the special province of environmental protection. British Petroleum (BP) has won acclaims and awards for CSR. But Swaminathan S Anklesaria Aiyar (Times of India, Bangalore edition 2010) argued in his article that BP has created the greatest environmental disaster in history which includes its out-of-control Macondo deep-sea well. Gulf of Mexico oil leak is another big historical issue. BP has created a huge image building campaign of ‘beyond petroleum’ critics say that BP has now spindling with ‘beyond problems’ (NJ Watson, Petroleum Economist, 2009). BP states that it recognizes the significant environmental and social challenges faced by the world in the 21st century. It believes strongly it can achieve in the manner of sustainable development. BP’s policy statement commits the company to the safety and development of their people and the communities and societies in which they operate. Its sustainable review says BP is responsible for their operations and is accountable for setting high standards within them. It also elaborates BP support relevant external standards. Particularly BP supports the UN Global Compact, which sets out series of principles for corporate responsibility (BP-Sustainability Review, 2009). The UN Global Compact is an initiative of UN Secretary-General, Kofi Annan to give a human face to globalization (Annan 1999 cited in Leipziger 2003).
In 2005, Christina L. Anderson