BP (British Petroleum) is one of the largest oil and petrochemical companies in the world by undergoing integrative recombination of enterprises Amoco, Arco/AMPM, Castrol and Aral. The company's main businesses conclude finding, extracting and moving oil and gas, as well as making and selling fuels and products (BP). The exploration and production are active in 29 countries and proved reserves achieved 18.1 billion barrels of oil equivalent (BP Annual Report and Accounts, 2008). The headquarters of BP's entire business is located in UK, the exploration and production of which makes up about 10% of company's global production (BP in UK). First founded in Iran and then spread to be an international enterprise (Mira Wilkins, 1995, p195-196), BP gradually became world famous for its high quality of provision of retail services and petrochemicals products for everyday items.
The essay analyzed several aspects in microeconomics and macroeconomics to assess the performance of BP's businesses and to give some recommendations of feasible strategies based on the analysis. In real life, many factors contribute to the demand and supply of crude oil, influencing the volatile price of oil. Therefore, the correlation between the price and demand/supply is not simply linear. Various statistics, derived from different issues, suggest that the price elasticity of crude oil is very low in both short term and long term (John C.B Cooper, 2003), which is an indicator that guides companies to maximize profit. Oil, not like the fast moving consumer goods, is traded in an imperfectly competitive market (Guillaume Chevillon, Christine Rifflart, 2007). The consumers are far more than suppliers, which situation leads to the oligopolistic oil market structure (Guillaume Chevillon, Christine Rifflart, 2007). Besides these microeconomic factors, some other ones, which are in the macro-level, also impact the oil market and BP's businesses. GDP growth to some extent influences the robustness in industry, which relies heavily on the consumption of crude oil. Government takes advantage of oil taxes to generate fiscal revenues, resulting in an impact that cannot be overlooked on oil price. Besides, exchange rate also affects oil demand and supply to alter the price.#p#分页标题#e#
2. Microeconomic analysis 微观经济分析
Crude oil is the most common while most significant source of energy, accounting for approximately 40.6% of primary energy consumption (John C.B Cooper, 2003). Through refining crude oil, we can gain gasoline, diesel, lubrication oil, asphalt etc. Oil is indispensible in our everyday life as it can be used as raw material for manufacturing, fuel for transportation and energy for heat and light.
2.1 demand of oil
We can see the consumption of various energies in six consecutive years from 2002 to 2007 (Fig 1). The demand of oil kept constant increment by small margin. However, global oil consumption declined by 0.6% in 2008, which was the first decline since 1993 (BP Annual Review, 2008).
2.1.1 major determinants of demand
Population. With worldwide growing population and faster process of urbanization, the need to expand economic output will inevitably lead to enormous demand of environmental resources (M. Asif, T. Muneer, 2007). In average 30 years, the double economic output is always accompanied by the increasing demand of natural resource (M. Asif, T. Muneer, 2007).
Change of season. The demand of oil usually varies each quarter because of impacts of different seasons. For instances, in summer people are more willing to driving out and therefore consume more gasoline; while in winter, people may demand more fuel for heating system. The seasonal consumption is especially obvious in the Northern Hemisphere, which is reflected in the increasing oil consumption during first and forth quarters of each year (Guillaume Chevillon, Christine Rifflart, 2007).
Substitutes and complements
Fig 2. Global energy demand by type
(millions tonnes of oil equivalent)
Some other available types of energy can substitute oil, such as coal, gas, wind, solar, biofuels etc. The demand of these energies can effectively reduce the pressure on enormous demand of oil. As shown in Fig 2, the demand of oil still accounts for a large proportion in the short to medium term. Coal is an efficient fuel, but it produces much
Source: Adapted from World Energy Outlook 2008. © OECD/IEA 2008. emissions that are harmful to the environment. The supply of gas is concentrated in a few regions. Alternatives of other renewables such as wind, solar and biofuels, together with geothermal, are more limited in quantity of energy supply (BP Annual Review, 2008). However, increasing need for more clean and renewable energies can explain the decline in demand of oil.
Demands of complements also influence the demand of oil. In the whole of 2008, overall UK car production was down by 5.7% (CarsUK, 2009). Since the automobiles are the largest consumers of oil products (Karl Storchmann, 2005), the decline in car production more or less contributed to the decline in demand of oil.#p#分页标题#e#
2.1.2 price elasticity of demand
Table 1 shows the price elasticity of worldwide demand for crude oil, together with the figures for the G7 group of countries, all of which are negative. With rising prices, the demand of oil reduces. The values of price elasticity in short-term are near zero, demonstrating that the price of demand is inelastic in short-term as there are few readily available substitutes to crude oil (Guillaume Chevillon, Christine Rifflart, 2007). Nevertheless, energy companies, especially those ones in the developed countries, are seeking for feasible clean and renewable energies to take place of the essential role of crude oil, reducing dependence on the unitary use structure of diversified energies. The process can substantially explain that the absolute values of price elasticity in long-term, though less than 1, are larger than those in short-term, as well as the figures for G7 group of countries larger than that for worldwide.
2.2 supply of oil
While demand of oil declined by 0.6%, the oil production increased by 0.4% (BP Statistical Review of World Energy, 2009).
2.2.1 determinates of supply
One major factor is the change in OPEC (Organization of Petroleum Exporting Countries) capacity (Stephane Dees, Pavlos Karadelogloua, Robert K. Kaufmannb, Marcelo Sanchez, 2007). Since OPEC occupies a dominant position, its behavior has a fairly crucial impact on the supply of oil. BP's production of oil increased slowly during these years, due to the changing technology. Besides, supply can also be affected by geopolitics or extreme weather events (BP Annual Review, 2008) in short term. For example, some unexpected disasters interrupt the activities of exploring or production, resulting in a supply shock.
2.2.2 price elasticity of supply
In the short-term, the worldwide price elasticity of oil supply is -0.07, compared with 0.10 for long-term. The price elasticity for short term is consistently low and negative. One plausible explanation could be that the oil industry operates on a short-term downward supply curve, in order to achieve economies of scale (Noureddine Krichene, 2002). While in the long term, the supply of crude oil showed a positive response to price, resulting in the positive price elasticity of oil supply.
2.3 oil market structure
Oil market is oligopolistic. Though many small oil companies exist, several big players in EU oil markets - the Exxon, BP, Shell, Chevron and Total- could influence oil prices or could force smaller players out of oil exploration, since these companies account for an absolutely large proportion of oil market share (BBC news).
2.4 oil price
Fig 3. Crude oil prices
The oil price should be derermined by demand and supply. Since the price elasticity of both demand and supply is low, slight changes in demand or supply may lead to a great impact#p#分页标题#e#
Source: BP strategy presentation 2009. on the oil price. In the short-term, the demand disturbances are the main factor behind output fluctuations, but evetually prices adjust to restore equilibrium (Hilde Christiane,2000). The characteristic of the oil price in the whole 2008 is volatile, with an overall upward trend in first-half year. It reached peak during the mid-year then underwent a steep decline, which trend was also reflected in the price of gas. The price is not only influenced by the various determinants of demand and supply, but aslo by complicated macroenocomic factors, which are analyzed as following.
3. Macroeconomic analysis 宏观经济分析
The replacement cost profit of BP (Table 2) increased by approximately 45% from 2004 to 2006, then suffered a sudden decline by 19% in 2007. The total profit appeared a strong upward trend, reaching $ 41,727 millions. During 2008, the profit of Q4 declined by 13%, while that of Q1, Q2 and Q3 increased respectively by 46%, 12% and 147% compared with the corresponding period of 2007. The total profit of first three quarters in 2009 declined sharply by 51% compared with the same period of 2008. These figures correspond in oil price showed in Fig 3. The decline of profit emerged in Q4 of 2008 resulted from the turning point of oil price, which appeared since mid-2008.
3.1 GDP growth
GDP measures the sum of value-added at all stages in the production of final goods. It is one of the most attention-grabbing macroeconomic statistics and significant indices of development of economies, which has a tight correlation with demand of oil. The relationship between economic growth and the national rate of oil-consumption depends partly upon GDP, as well as a mixture of factors (R.M. Mackay, S.D. Probert, 2001). The robust economic growth will definitely induce the swift increment of oil demand. Since oil is indispensible in every field of life, providing adequate oil resource is essential in fulfilling activities in production, raising living standard worldwide and improving human welfare (M. Asif, T. Muneer, 2007). Therefore, booming economy should be accompanied by a great demand for crude oil. Meanwhile, in a certain stage of economic development, as economies have expanded more energy-intensive service sector or substituted more energy-efficient capital stock, then the demand of oil will appear a downturn tendency (John C.B Cooper, 2003). The overall trend of changes in demand for oil (Fig 1) corresponds to that of the global real GDP (Fig 4). For instance, when GDP growth is large, people have a high quality of living standard, which involves more consumption of cars and higher frequency of travel. Under these situations, the increasing consumption of gasoline and aviation fuel insures the resulting increment in demand for crude oil. However, when world wars or financial crisis incurred, followed economic depression could inevitably resulted in the sharp cutoff of demand for crude oil. The financial crisis played a determining role in the steep reduction of BP's replacement cost profit since Q4 of 2008. In 2008, the subprime crisis in US ignited the fuse of the following global financial crisis, which spread rapidly to every corner of the world. The industrial production reduced severely and the recession impacted the prospect of economy unprecedentedly. Demand for crude oil declined substantially as a result, as well as the oil price, which revealed an adjustment of the evident reduction. Due to the unexpected crash of price of crude oil, it is matter of course that the profit declined abruptly by 147% in Q4 of 2008 compared with that of 2007, together with a reduction by 51% of profit of the first three quarters in 2009, influenced by the aftershock of the crisis, severely hurt corporate performance of BP and other oil companies.#p#分页标题#e#
Taxes, which are usually set by national government, played an important role in the final displayed oil price on the pumps and companies' profitability (BP Annual Review, 2008). As shown in Fig 5, since the price elasticity of demand is quite low, the taxing oil, which induced a big fluctuation in oil price, will yield tax revenues since the tax burden on consumers is much heavier that on producers.
Taxation varies among different countries. For example, taxes account for about 70% of the charged total oil price in the UK and much of EU, compared to only 20% in the USA and Mexico (BP Annual Review, 2008). Taxes in oil industry compose an essential part of fiscal revenue, which can be captured by Government through introducing supplementary taxation. By designing petroleum fiscal regime and subsequent amendants, Governments affect the trade-off between the State and the oil companies (Carole Nakhle, 2007). At the outset the Government has two main objectives, securing a fair share of profits for the nation and ensure a suitable return for oil companies on their capital investment (Carole Nakhle, 2007). Therefore, according to Nakhle (2005), taxation is a principal determinant of profitability and prosperity of oil companies.
According to Table 3, the effective tax rates during 2004-2008 basically kept increasing, except a decline in 2007. The rises were controlled in 5%. Therefore, the taxation did not impact much on BP's profitability.
3.3 exchange rate
Exchange rates around the world influence significantly the oil price during the process of converting the West Texas Intermediate price (WTI) to local currencies (Wayne Chodzicki, 2008). Global crude oil trade chooses US dollars as currency while consumers use local currencies to buy petroleum products; oil-producing countries receive revenues in US dollars while purchase goods or service by other currencies; oil companies sell crude oil in US dollar while using other currencies to pay for various costs (AF Alhajji, 2004). In conclusion, the exchange rate between US dollar and other currencies affects oil demand and supply.
The exchange rate between US dollar and G.B. Pound kept basically constant during 2004 to 2006 then underwent a slight decline since 2006 to the end of 2008. In 2009, the figure remained an upward trend (Fig 6). Dollar devaluation leads to an increasing demand for oil in countries with non-dollar appreciating currencies (AF Alhajji, 2004), since consumers pay less for the oil product as a result. Meanwhile, dollar devaluation reduces drilling activities in the oil producing countries where most costs are denominated in local currencies (AF Alhajji, 2004), resulting in the reduction of oil supply. Since demand exceeds supply, oil price rose rapidly in 2007-2008. On the contrary, the appreciating US dollar contributed to the decline of oil price.#p#分页标题#e#
4. Recommendations 建议
According to Moss Kanter (1989) 'the turbulent fast-paced environmental and global competition and constant innovation in technology and corporate structure is effecting dramatic changes in our lives across the entire business spectrum'. BP is always making effort to adapt to the rapid externally environmental change. Both internal and external pressure, together with challenges BP faces make it vital to retain its place as a giant in the energy market (John Donegan, 1990).
The worldwide economy relies substantially on the consumption of oil, due to the independence on the crude oil mainly in industry. The demand for crude oil undoubtedly will not decrease in short term. However, global proved reserves are estimated to provide another 40 years if current consumption rate continues (BP's annul review, 2008). In addition, many developed countries are looking for suitable substitutes to reduce the cost of pollution. Therefore, BP should concentrate on the long-term provision of energy. More investment and innovation in developing other types of energy is a feasible and an indispensible solution, which keep BP's position in the energy market and may become a differential advantage to secure a leading profitability.
The financial crisis in 2008 hit the whole oil market hard, including BP, whose replacement cost profit of the first three quarters of 2009 fell sharply by 51% compared to the same period of 2008. This situation is primarily attributed to the steeply decreasing oil price. One plausible recommendation is to cut costs. As shown in Fig 7, the BP cash cost index increased gradually from 2004-2008. The profitability will definitely rise if cost reduces without changing oil price. Since BP cannot determine the oil price optionally to ensure certain profit, but it can improve cost efficient by cutting some unnecessary overheads or simplify organizational structure. By repositioning cost efficiency, BP can effectively improve profitability to offset the crash of the financial crisis.
BP has a super advantage in production among other major competitors (Fig 8). Since 2002, BP appeared an obvious competency in oil production, better than the other oil companies. However, BP's production fluctuated during this period, though maintained the competitive advantage in the
production. One recommendation is that BP should keep oil production by obtaining more exploration success all over the world. The future vision concludes a better development of technology in exploration and recovery, together with improving drilling performance.
5. Summary 总结
The essay investigated various influencing factors both in microeconomic and macroeconomic aspects that affect the price of crude oil, which is a main business field of BP. After analyzing the company's performance during these years, some recommendations were given to alter or improve company's strategies to ensure BP's future prosperity.#p#分页标题#e#