BP and Consolidation of Oil Industry, 1998-2002

Topics: Peak oil, Oil reserves, OPEC Pages: 5 (1482 words) Published: October 1, 2013
BP and Consolidation of the Oil Industry, 1998-2002

Executive Summary

BP should sell its business and start a new business, a clean energy production, because it would lose profits from oil supply. Oil industry had not developed in perfect competition; oil price was easily controlled since oil industry was oligopoly, many consumers exist and the government protected oil industry from competition. However, oil industry is facing perfect competition; oligopoly formation of oil industry would come to perfect competition because OPEC started apart from each other. This perfect competition tends to be price competition since oil is commodity. To maximize the profit, competitors would increase supply with low prices, and the government changed regulations that could trigger to reduce oil consumption and strengthen substitutes. The market would become saturated and slow-growth that cause less profitability.

Analysis

First, changes in oligopoly form trigger perfect competition. Although oil industry had been monopoly by OPEC which has more than 70% of world oil reserve and more than 40% of world oil supply, vertically integrated companies, called super-majors that perform exploration, development, refinery, and sales, affect oil prices. These super-majors disturb price control by OPEC because when OPEC raises oil price, super-majors raise oil supply. Some counties of OPEC started to sell oil more than the amount that OPEC set the production quota. OPEC used to control oil prices between $20 and $28 per barrel after forming in the 1960 by holding meetings among OPEC countries. However, vertically integrated companies, whose number of companies was reduced from 24 in 1979 to 12 in 1999 by merging with each other, became powerful. In the 1980, super-majors and countries other than OPEC increased oil stock within the countries, oil prices decreased to $15 per barrel. Oil prices again decreased to $10 per barrel because Asia crises reduced oil consumption and Iraq, one of OPEC members, and super-majors increased oil supply. As OPEC could disband and China and Russia could enter to compete for oil market share, oil industry could become perfect competition. Any firm cannot influence the prices of products; perfect competition determines market prices. This perfect completion is likely price competition. Oil industry tends to be price competition because oil became commodity that fundamentally leads to price competition. Oil companies face difficulty in differentiating their products from others as its products are commodity. As industry has been developed, energy use has relied primarily on fossil fuel. As a result, heat, transportation, and electric generation for business and individual have demanded oil supply. Oil became commodity, which usually brings about price competition. BP tends to involve in price competition unless it is kept from perfect competition. Similarly, market price of oil industry could decrease since merger within the oil industry aimed at economic of scale led to an increase in supply. The more companies of oil industry tried to take advantage of economies of scale that decreased costs and increased profit. However, economies of scale can optimize when production rates are maximized. For instance, a world average of production rates increased from 80% in1990 to 90% in 2000 in order to compete for lower oil prices. North American and Europe increased production rates from 80% to 90%, and Middle East increased from 89% to 91%. These economic of scale increases the world oil supply. If oil demand remains constant, the increase in oil supply causes oil price lower. This price competition would become severe competition because majority of fixed assets in oil industry, including oil concessions, mining machinery, pipelines for transportation, refinery machinery, is specific use. For example, 5 super-majors, that expanded their...
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