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Structure And Organization Of The Petroleum Industry Economics Essay

From driving industries globally to heating our homes and fuelling our cars, oil plays a major role in our lives as consumers but most people are yet to ask themselves how the industry that produces this oil has evolved to what it is now. The petroleum industry has evolved overtime and the use of its products has also grown to become an essential part of today’s global economy (Business and Economic Research Advisor, 2006).
The petroleum industry is involved in the global business of discovering oil, extracting it from the subsurface, refining it into a variety of useable products, distributing it through pipelines and oil tankers, and finally marketing it for public use (Wikipedia, 2010). While some companies in the industry (integrated companies) perform all these functions, others only perform one or some of them (independents) (Davies, 1999).
The source of energy that currently provides most of the world’s energy demands as well as raw material that the petroleum and chemical industries refine into a variety of essential industrial and chemical products came with the development of the petroleum industry in the nineteenth and twentieth century. These products include amongst others fertilizers, pesticides, solvents, pharmaceuticals and plastics. Products derived from crude oil refining are grouped into gasoline (motor spirit/fuel), heating oil, middle distillates (jet fuel, diesel for vehicles and other motor engines), kerosene for cooking and fuel oil (boiler fuel for industry, power and shipping).
According to the American Petroleum Institute, the industry is divided into sectors that cover all the procedures involved in finding, producing, processing, transporting and marketing oil and gas. These include: upstream- involved in exploration and production of oil and gas using advanced geology to high-tech offshore drilling platforms; downstream- involved in refining and marketing. It also includes the transportation of products using tankers from local terminals to service stations and ownership and operations in retail outlets; pipeline- involved in the movement of oil from ocean platforms and wells on land to refineries and finally to terminals where they are released to retail outlets; marine- comprises all aspects of petroleum and its products movement by water, including port operations, maritime fighting and oil spill response; service and supply- includes companies that provide supplies, services, design and engineering support for exploration, drilling, refining and other operations.
Prior to oil being commercially discovered and drilled in 1859 in Titusville, Pennsylvania, which saw the birth of the modern petroleum industry, natural petroleum served the primary purpose of kerosene for lighting and heating. In the early twentieth century, the use of coal as the world’s primary energy source was eventually replaced by oil and as gasoline for the newly invented internal combustion engine (Jones, 2005). Oil and gas development has evolved overtime. Their use has also grown to become an essential part of today’s global economy. As oil and gas powers today’s economy, its availability and control was important in both world wars and it still remains the critical fuel source that powers industry and transportation (BERA, 2006).
With oil being commercially available in the US, the first major oil company, the Standard Oil Company was formed by J.D Rockefeller in 1870 and United States became the world’s giant in oil production until the end of World War two when the Middle East countries took the lead.
The post world war era witnessed the union of Anglo-Saxon companies called “the Seven Sisters” as coined by Enrico Mattei, an Italian entrepreneur. They included four companies and three others ( Standard Oil Companies of New Jersey- Esso, New York- SOCONY, and California- SOCAL) formed by the break-up of Standard Oil Company in 1911 by the U.S government when the Company’s operations were declared monopolistic and infringing the Country’s unique antitrust law as of then (Jones, 2005). The Seven sisters were vertically integrated international companies according to Jones (2005) that arose because of the need to ensure efficient operations of the refineries to assure and manage oil flows, secure outlets for crude oil and adjust to short-run changes in the demand for different products in different areas. They were involved at all stages in the industry from exploration and production of crude oil to marketing the products to its final consumers. They also diversified into fertilizers, petrochemicals and other industries that utilized petroleum derivatives as raw materials.
Except in North America and the communist countries, the seven sisters were responsible for 85% of gross crude oil production and 72% of refinery globally in the 1950s and they all made the list in the 1956 ranking of the world’s largest industrial firms by revenue (Jones, 2005).
Intra-firm trades and the vertically integrated status of the multinationals had began to decline at the beginning of the 1950s as host governments’ policies to increase ownership and control over resources did not favour them. This was the period of nationalization with the majors, who had been strong players in the Middle East and other OPEC (Organization of Petroleum Exporting Countries) countries, being dealt massive blows by the nationalization of assets in the Middle East and other countries (Davies, 1999). From the late 1960s, this trend led to the expropriation of foreign assets (nationalization without compensation) and the formation of national cartels intended to enhance the bargaining power of host countries against the seven sisters. A typical case was the formation of OPEC in 1960 by Iraq, Kuwait, Iran, Venezuela and Saudi Arabia. They were involved in product pricing and quota sharing but overtime their influence was no more successful than the seven sisters in price regulation in the long-run (Jones, 2005). The state owned national oil companies sprung up as a result of the nationalization during this period and foreign ownership of resources declined.
Significant in the industry’s development in the 70s and 80s was a change in the corporate structure of the industry and the policies of the host governments’. New entrants emerged as the industry became more global in nature. Other world markets in Europe, Asia and Russia and began to play a much greater role and the seven sisters now had competitors. Amongst these were the U.S European State-owned oil companies like ENI, Italy’s AGIP and France’s CFP. Others who joined the competition for concession and market were independents like the U.S Occidental, Getty Oil, Continental and Amerada. Their involvement, increased the bargaining power of producer governments, weakened the control of multinationals over world oil prices and made the industry highly competitive forcing the incumbent multinationals to diversify into other industries but this was hardly successful (Jones, 2005).
Despite the extensive global changes in the technology, markets and geopolitics, the structure of the industry had remained fairly intact some few years ago but in 1998/99 a period of corporate consolidation was introduced bring an abrupt end to this era of fair constancy (Davies,1999).
From a series of mergers and acquisition between 1998 and 2002 in response to a severe deflation in oil prices was the emergence of the “super majors” in the industry. They included non-state owned companies like British Petroleum (BP), Total, ConocoPhilips, Royal Dutch Shell, ExxonMobil and Chevron. In an attempt to hedge against oil price volatility, improve economies of scale and reduce large cash reserves through reinvestment, they began merging in the nineties. BP acquired Amoco in 1998. From a merger of Esso and Mobil, ExxonMobil arose in 1999. Total Fina Elf arose from the merger between Total, Petrofina and Elf Aquitaine in 2000. A merger of Chevron and Texaco in 2001 created Chevron Texaco and finally in 2002 Conoco Inc. and Philips Petroleum Company became ConocoPhilips (Wikipedia, 2010). In some cases, these mergers at the micro-level increased profit but they were insufficient at having a major impact upon corporate level returns and profitability (Davie, 1999).
Presently, the only survivors of the seven sisters are BP, Shell, ExxonMobil and Chevron contributing only 10% of the world’s oil and gas production and they hold only 3% of reserves with the states from developing countries owning the remainder. This notwithstanding, their integrated nature pushes their revenue higher than those of the new entrants (Jones, 2005).
An interesting development as reported by the financial times of March 11, 2007 is the existence of the “new seven sisters”. They have become the most influential state-owned companies controlling nearly a third of the world’s oil and gas production. They include Gazprom (Russia), National Iranian Oil Company (Iran), Saudi Aramco (Saudi Arabia), Petroliam Nasional Berhad (Malaysia), China National Petroleum Company (CNPC), Petroleos de Venezuela, (Venezuela) and Petroleo Brasileiro, Brazil (Wikipedia, 2010).
From current trend of events, the industry is still evolving and further change is anticipated by some factors discussed herein. Firstly, oil reserves will decline because of the increased demand for petroleum resources globally. This will prove the Peak oil theory propounded by M. Hubbert in 1965. Regrettably, this has been unsubstantiated because of the continuous oil finds being made in other parts of the world and technological advancement which has allowed old oilfields once thought as depleted to be produced.
Secondly, exploring in some parts of the world where finds has been made will require complex and cutting-edge technology making exploration difficult, expensive and highly risky. This may only favour the large companies as they will be equipped financially and technologically.
Thirdly, the future petroleum industry will be increasingly competitive for oil prospect which may favour the super majors as they possess more technical know-how, finance and popularity. Nevertheless, the nationally-owned companies (NOCs) may be a strong match for them as they are supported by their state governments and also have the wherewithal to seek for concession.
Fourthly, the wish of some countries to create their own oil companies and the concern about energy security is likely to increase resource nationalism in the near future. Unfortunately, this will be a minus for the super majors but a plus for the NOCs.
As aftermaths of these possible future changes, there are likely to be more mergers and acquisitions, drop in the quota contributed by the individually-owned multinationals, shift of investment from petroleum to alternative energy forms and complete diversification of the majors from production to become companies servicing the NOCs.
In conclusion, the petroleum industry plays a vital role in driving worldwide economy because its resources are considered amongst the world’s most important. This importance attached to petroleum would be reduced if the world diversified to alternative energy forms, some of which are renewable. This will not only reduce the influence of the industry’s giant but it will also prolong the life of petroleum reserves, encourage the use of alternative energy such as natural gas, wind and nuclear power, and make our environments safe by reducing air pollution, global warming, acid rain and other environmental issues.
Despite participation by the NOCs in international oil markets, the industry’s boundaries have widened. There are potentials for the “majors” to improve their profitability but they will not have the unique advantages that could allow them dominate the industry (Davies, 1999).
From the popular saying, “change is the only constant thing in nature”, the petroleum industry has had its fair share of structural and organizational changes over the past years, which has resulted in the industry having the state-owned companies, five supermajors, over a dozen large independents (e.g Amerada Hess, Marathon etc) and small independents (e.g Anadarko, Talisman, Lasco, British Borneo etc) and the specialist firms (e.g Schlumberger, Weatherford, Halliburton etc) as its current structure.

The History Of Indian Financial Sector Economics Essay

Illustrate the history of Indian financial sector, and highlight what were the major changes that took place in liberalization policies of 1991-92 in India’s financial sector?
Financial sector of any country depicts the growth and development of the entire economy. It shows the economic prosperity and wealth of the nation and how it matches alongside other countries. “The foundation of credible national security is based on the level of economic prosperity and well-being of the population of any country. This is especially so for developing countries like India. The attainment of sustained high economic growth is a necessary condition for improving the national security and the quality of life of the people throughout the country.” [1]
Today Indian economy is developing at a rapid pace of which its financial system forms an indispensible part. India’s economy is second only to china in Asia whereas it is among the four fastest developing nations in the world namely Brazil, Russia, China and India (BRIC). It has the largest private equity inflow within Asian Countries. But this was not the case always. The process of transformation has taken its due course and time and the result is what we see today. The liberalization policy adopted by the Government set loose the economy which was waiting to be utilized to the fullest as per its efficiency. Liberalization as per online encyclopedia means ‘The process of making policies less constraining of economic activity’. This paper tries to illustrate the transformation in the Indian financial system amidst economic reforms of 1991-1992 and its effect on the system.
Since historic time period India has always been an agrarian country which is mainly because of its geographic conditions and its resources which has been the interests of various people who have tried to take hold of it. The financial sector India dates back with the establishment of British rule in India. The first stock exchange was established in Mumbai in 1875, then in Ahmedabad in 1894, Calcutta 1908 and then in Madras in 1937. Though Britishers looted our country and left us in a miserable state, they established a financial system which had “clearly defined rules governing listing, trading and settlements, a well-developed equity culture if only among the urban rich, a banking system with clear lending norms and recovery procedures, and better corporate laws than most other erstwhile colonies. The 1956 Indian Companies Act, as well as other corporate laws and laws protecting the investors’ rights, were built on this foundation.” [2]
Though the above mentioned positives stand true the aforementioned negatives share the same spotlight. “A semi organized and narrow industrial securities market, devoid of issuing institutions and the virtual absence of participation by intermediary financial institutions in the long term financing of the industry, was the state of financial system prior to independence. As a result, the industry had very restricted access to outside savings. It simply means that the financial system was not responsive to opportunities for industrial investment. Such a financial system was clearly incapable of sustaining a high rate of industrial growth, particularly growth of new and innovating enterprises.” [3]
After the independence the policy makers adopted for a ‘socialist’ economy to be practiced in order to drive India to the path of development. ‘Socialist’ economy meant that though the private sector will be present but public sector will be the major player in the economy. “The Indian ¬nancial system remained a relatively free but unsophisticated market system till the seventies. This included a private banking sector, fragmented but active stock markets, active commodity spot and futures markets. The ¬rst milestone of India’s socialism was in the 1950s with the closing of the capital account. More changes came in the 1960s and 1970s, with the nationalization of ¬nancial service providers. This changed the structure of the ¬nancial services industry from a fairly competitive sector to one dominated by large public sector monopolies. This period also saw the closure of commodity derivatives markets. This took place in the latter part of the 1960s, when these markets saw a large number of trader defaults during a period of three consecutive drought years. At the end of the seventies, the equity market was the only component of Indian ¬nance that retained a relatively private sector character. Even here, the State is believed to have used UTI, the only mutual fund in the country, to in¬‚uence stock prices. Also, while secondary market price discovery was relatively free, the Controller of Capital Issues (CCI) dictated whether, and at what price, ¬rms could sell shares to the public.” [4]
Due to the presence of stringencies in the system the cross-check or self-adjustment mechanism which could have been provided by global capital markets was absent. The regulatory norms did not provide any room for such measures. There were huge flaws in the financial system at that point of time. “Most banks were state owned and had negligible equity capital. Basic concepts of accounting, asset classi¬cation, and provisioning were absent. The largest of the local stock exchanges, Bombay Stock Exchange (BSE), was a closed market. The exchange focused on the interests of broker members, did not have outreach across the country, and did not have appropriate structures for governance and regulation. Financial transactions were controlled by the RBI (setting interest rates on various products) and the Ministry of Finance (controlling the price at which securities were issued), with a plethora of price and quantity restrictions. The ¬nancial industry was riddled with entry barriers in every sub-industry. It was extremely di¬ƒcult to start a bank, a mutual fund, a brokerage ¬rm, an insurance company, a pension fund, a securities exchange or a broking ¬rm. Apart from banking, foreign ¬rms could not operate in any of these areas. A comprehensive system of capital controls was in place, which ensured that domestic households and domestic ¬rms had to go to the domestic ¬nancial system, in order to access ¬nancial services. Few areas of the Indian economy were as dominated by the State as was ¬nance.” [5] Trying to raise capital through the means of financial market was not at all feasible due to the complexities involved.
Apart from the financial sector other sector seemed to be equally constrained due to the economic policies. The public sector grew very large and the irony was that it couldn’t generate enough income to meet the requirements of the country as a result we had large borrowings. By the time the people in the power came to know about the implication of their decisions, it was too late. The deficits were huge, the public sector industries were turning out to be unprofitable and at a point of time the foreign reserves of the country were so less that it could only have supported countries needs for near about 2 more weeks. In this case the ‘lender of the last resort’, World bank and IMF were approached which granted 7 billion dollars as a loan but on the terms that India would reforms its stringent economic policies and liberalize its economy.
The much needed and awaited reform-
The new economic policy was adopted which focused on three main aspects: liberalization, privatization and globalization. From being a more socialist than capitalists it tilted to being majorly capitalists and less socialists. There was a complete drift in economic policies i.e. basis on which the economic policies were earlier drafted were no longer in existence and liberal policies were adopted. This also brought about a sea change in the financial system of the country. Narsimhan committee was also established which looked at the major areas in the financial sector which needed reforms such as; reduction in statutory liquidity ratio and cash reserve ratio (they were astoundingly high which was also one of the major reasons that few commercial banks were in existence), the determination of interests rate should be according to the market forces, the public sector banks should have autonomy.
Due to ease of operation more private players entered the market. There was no more ‘license raj’ which acted as a stimulus for foreign direct investment. More and more commercial banks and asset management institutions started emerging and also utilized the opportunity to raise debt with the backing of insurance sector. And due to stiff competition in the market there was check and balance mechanism prevailing with relation to the interests rates. “In addition, foreign institutional investors (FIIs) were allowed, beginning in 1992; and Indian firms were allowed to issue global depository rights (GDRs) offshore. These additional resources provided finance for India’s private sector-led growth in the mid-1990s, and contributed to a stock market boom.” [6]
MRTP act was abolished which increased the net quantity of imports and exports. “Reforms in the stock market were accelerated by a stock market scam in 1992 that revealed serious weaknesses in the regulatory mechanism. Reforms implemented include establishment of a statutory regulator; promulgation of rules and regulations governing various types of participants in the capital market and also activities like insider trading and takeover bids; introduction of electronic trading to improve transparency in establishing prices; and dematerialization of shares to eliminate the need for physical movement and storage of paper securities. Effective regulation of stock markets requires the development of institutional expertise, which necessarily requires time, but a good start has been made and India’s stock market is much better regulated today than in the past. This is to some extent reflected in the fact that foreign institutional investors have invested a cumulative $21 billion in Indian stocks since 1993, when this avenue for investment was opened.” [7]
To keep a check on the functioning of the stock market and also due to the scam of 1992, in 1992 SEBI (securities exchange board of India) was established. Though it was established in 1988 but in 1992 it became a separate body. Establishment of SEBI had put a check on illicit activities such as insider trading etc. and also provided a sense of security among investors. It provided a uniform code of discipline to be followed by the exchanges. It was a major transformation that took place because of the reform. SEBI also abolished ‘badla’ system which was unique to Indian stock market which was a way of settlement among traders.
The establishment of SEBI was not welcomed by BSE (Bombay stock exchange) which was a sort of monopoly, went against the policy changes introduced by SEBI. Owning to such monopoly led to the creation of NSE (national stock exchange) which eliminated to basic flaws of BSE i.e. there would be no restrictions on new entrants in the equity market and there shall be transparency in the working of the exchange.
1. “National platform that o¬€ered equal access to traders from all corners of a widespread geographical area,
2. A competitive market in securities intermediation, with a steady pace of entry and exit,
3. Orders matched electronically, on the basis of price-time priority,
4. Anonymous trading followed by guaranteed settlement,
5. Demutualized governance structure, as opposed of being an association of brokers, with a professional management team running the operations of the exchange.” [8]
The success of NSE was evident from the fact that the trading volume increased tremendously and BSE mended its trading ways as per the norms.
“The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70,000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular.” [9] Prior to this UTI was the sole player in the mutual fund market.
Insurance sector also transformed accordingly. Similar to the banking sector, insurance had mainly public establishment such as LIC and GIC. Due to liberalization there no. of private companies competing in the market which has provided option to the consumers but the industry still suffers from discrepancies such as “great deal of sale of “insurance” products is merely tax arbitrage, where a fund management product is given preferential tax treatment under the garb of a minimal insurance character.” [10] Even the establishment of IRDA (insurance regulatory and development authority) has been inefficient with relation to such flaws.
With the arguments mentioned above, it can be suitably drawn that Indian Financial system has been refurbished by the 1991-1992 reforms. The practices prior to 1991 were archaic and required modifications as per the need of the growing countries economy. In my view even if the crisis of 1991 didn’t happen the changes that took place should have been incorporated in the system so as to compete with other economies which is evident from the current status of the Indian economy.