Development in Oil and Gas Retail UK Industry Order Instructions: Assignment Task
“The growing influence of OPEC, economic growth from non-OECD countries, Climate Change Policy and the access to new fossil reserves are having an effect on how the future of refining is shaping up globally”
From the above, present a critical analysis of the veracity of this statement and the possible implications for the UK Oil and Gas Retail Industry.
Total Marks for Assignment: 100
Note: I underlined the keywords of understanding that would give you direction on how to do the write-up. Mind you I am from the United Kingdom and when it comes to critical analysis, the answers should focus on UK oil & gas retail industry NOT America oil & gas retail industry PLEASE.
(Front page, Introduction, body, Conclusion, Page number, references (Harvard style), NO:- table of contents, Executive Summary, and Abstract)
Development in Oil and Gas Retail UK Industry Sample Answer
Development in Oil and Gas Retail UK Industry
Introduction
The global oil and gas industry has undergone major turbulence, with economic, environmental and policy factors influencing global refining to significant extents. The mounting influence from the Organization of the Petroleum Exporting Countries (OPEC), non-OECD (Organisation for Economic Co-operation and Development) countries’ economic growth, changes in climate policy and new fossil reserves access; have been instrumental in shaping the future of refining globally. As a result, oil supply fluctuations and disruption have been witnessed across the UK, consequently destabilizing the industry. Most recently, plummeting of fuel prices has been witnessed across the UK and globally, with experts predicting more slumps in the future. Therefore, it can be argued that the above statement is valid and that the dynamics indicated could have lasting implications for the oil and gas industry in the UK.
The petroleum market in the UK is composed of over 200 companies involved in either refinery, distribution of marketing. UK’s oil and gas industry is classified as mature and grow in reference to demand is virtually stagnant (UKPIA, 2012). Due to the numerous changes affecting the industry in recent years, the retail industry has endured reduced returns as business turns into a low-margin-high-volume undertaking. The increasing number of supermarket encroachment in the industry is also a major threat to oil and gas retailers.
This paper is a discussion of the impact of changing global refining trends and how this will affect the oil and gas retail industry in the UK.
Development in Oil and Gas Retail UK Industry Discussion
Statement veracity
It is indeed true that economic, environmental and policy factors identified in the statement including influence from OPEC, non-OECD countries’ growth, changes in climate policy and new fossil reserves access are shaping the future of global refining. This is bound to influence the retail industry extensively as will be discussed in this paper. The impact of the dynamics identified above on global refining are elucidated as follows:
Development in Oil and Gas Retail UK Industry and Influence from OPEC
OPEC is known to control crude oil prices and supply and is thus highly influential in the oil and gas industry. OPEC consists of a group of countries in the Middle-East, formed to create bargaining power in the oil and gas industry and thus influence the supply and prices of oil. Based on their bulk production and low production costs, OPEC is a major influence of oil prices across the globe (Devold, 2015).
At a time when the world was experiencing a major slump on oil and gas prices due to an influx in supply in 2015 for example, OPEC continued to supply more oil, conscious of the fact that this would only make the prices fall even further. OPEC nations decided to maintain their production targets of 30 million barrels a day in a bid to uphold its market share (Reuters, 2014). This was a reaction to the increase in the supply of Canada’s oil sands and the U.S shale oil production, which was a threat to OPEC’s markets. OPEC’s major objective as to keep pumping and thus drive the competing players, whose production costs are higher, out of the market. This led to major plummeting of prices, falling by over 70% in 18 months (BBC, 2016). It is not until February 2016 that OPEC countries initiated deal talks with Russia to freeze their production in order to prevent negative effects on their economies. While the deal is considered a noble idea, many remain skeptical about whether it will really happen and whether it will lead to any changes in the industry (CNBC, 2016).
Based on the above discussion, it is notable that OPEC is very influential. Such influence from OPEC affects global refining and consequently impacts on the oil and gas retail industry.
Development in Oil and Gas Retail UK Industry for Non-OECD countries’ growth
As non-OECD countries continue to experience exponential growth, their oil consumption keeps increasing. This is unlike their OECD counterparts whose demand is actually declining. According to a report by International Energy Agency (2015), non-OECD countries are now demanding more oil than OECD countries, with leading regions being the Middle East, Asia, India, and non-OECD Americas. This is expected to increase overall demand for oil as non-OECD countries prominent in the energy industry. Based on the law of demand and supply, an increase in demand for oil by non-OECD could lead to an increase in prices of oil over time. This could consequently impact global refining and eventually affect the UK retail industry.
Changes in climate policy and Development in Oil and Gas Retail UK Industry
Oil refinery has become a highly regulated industry sector in a bid to reduce the climatic impact associated with this activity. Devold (2015) notes that as the severity of climate change continues to be witnessed, higher standards are expected from industries in terms of environmental conservation efforts. Climate policies emphasize creating a low carbon economy and the refinery sector must, therefore, adjust to accommodate such policy changes. However, the oil and gas industry almost entirely relies on fossil fuels, which are a major target of climate policies due to the high level of carbon emission. Companies operating in the industry must work towards developing newer technologies to reduce carbon emissions or seek alternative sources of energy. These might be expensive in the long run, thereby impacting supply and prices of fuel. The effect trickles down to the retailers because any changes affecting refining are felt throughout the supply chain.
New fossil reserves access for Development in Oil and Gas Retail UK Industry
Increased access to new fossil reserves insinuates greater supply of crude oil into the market. It also means that there is greater competition in the oil and gas industry. The result would be declining prices due to excessive supply, which in turn affects the retail industry’s profitability levels.
The oil and gas retail industry in the UK has endured considerable fluctuations in supply, demand, and prices for oil and gas as a result of the dynamics indicated above. These fluctuations affect the retail industry in different ways as discussed below.
Gas and oil prices have been declining in the recent past, yet future trends remain significantly unpredictable. Based on the discussion of how various dynamics influence global refining, it can be established that any change in prices or factors affecting the refining process would have an impact on the U.K retail industry. In the event of higher prices, retailers in the oil and gas industry are likely to suffer reduced demand, which would, in turn, affect their profitability (Inkpen and Moffett, 2011). Their ability to access and purchase fuel would also be curtailed, further affecting their performance.
It could be argued that with lower prices, the demand for oil and gas might increase, such that retailers counteract the low process with high sales volume. However, this may not be practical in the UK where the industry has reached the maturity stage, with little or insignificant changes in demand based on low prices (UKPIA, 2012). As a result, the retail sector has to endure declining profitability and revenue growth (PWC, 2016). Other sectors such as agriculture and manufacturing are however bound to gain from the current situation because low prices insinuate lower production costs for them.
The demand for oil and gas products is not necessarily increasing in the UK market despite the lowering prices. This insinuates that competition remains high and retailers must adopt strategies aimed at increasing demand. Offering lower prices and other incentives are the most common bargaining points for retailers. This further reduces their profit margins, making the industry more difficult to survive in. According to UKPIA (2015), retailers are now forced to make arrangements with popular brand names to sell fuel under their name in order to attract customers.
Global trends in refining and consequent implications on competition has led to the closure of some of the U.K’s refineries due to economic pressure. This means that the country’s resilience in the event of oil shortage has been severely affected because there is a large dependence on imports (Deloitte, 2012). Accordingly, the retail sector is at risk of running out of stock in the event of an oil crisis. This would affect retailers to a significant extent, affecting the continuity of their businesses. Furthermore, increased imports expose the retail sector to external supply chain shocks, which makes the industry highly volatile (Deloitte, 2012).
The increase in the supply of oil and gas as a result of increased access to new fossil reserves and oversupply from OPEC countries for example means that there is increasing competition among suppliers, wholesalers and manufacturers as they seek to reach potential clients. This could be to the advantage of retailers because suppliers are more likely to bear the cost of transport and deliver the products in a bid to capture the market. This helps in the reduction of transport costs and also enhances convenience (Deloitte, 2012). However, increased competition has led to unhealthy competitive tactics among retailers, resulting in unfair competition and eventually ousting weaker retailers. It is notable that retailers with strong financial capability such as hypermarkets and large supermarket outlets are making arrangements with manufacturers to purchase oil directly, at lower prices. The supermarkets trend has been instrumental in the decline of the retail industry because regular players in the sector can no longer compete with these outlets, which are capable of selling fuel at considerably low prices (UKPIA, 2015). The effect is a continued exit by UK gas and oil retailers. Therefore, the effect of price fluctuations as influenced by the major dynamics that affect global refining can be considered detrimental to the UK retail industry.
Fluctuations in returns from oil and gas is detrimental to the retail sector of gas and oil. This can be explained by the loss of industry attractiveness, which has led to the exit of a significant number of retailers and declined investment into the retail market in recent years. According to UKPIA (2015), UK’s filling stations declined from 19,000 to 8,494 sites between 1990 and 2015. The high-volume-low-margin business environment, thus limiting margins for retailers. Coupled with increasing competition from large supermarket outlets that tend to source their fuel directly from manufacturers, the retail sector is no longer as lucrative as it was initially. Therefore the changing dynamics in the economy, environmental and policy factors are likely to have a momentous impact on the growth of the oil and gas retail industry.
Development in Oil and Gas Retail UK Industry Conclusion
This discussion undoubtedly proves that any changes in policy, environmental factors, competitive environment, price and demand for oil and gas greatly influences the refining activities globally and consequently impacts on the UK gas and retail market. The identified dynamics including the influence of OPEC, a growth of non-OECD countries, climate policy changes and access to new fossil reserves play a major role in influencing the gas and oil industry. Such influence can be observed through changes in supply, demand and prices of oil and gas; all which affect the retail industry in the UK. Based on fluctuations in demand, supply and prices, the retail industry in the UK has been experiencing challenges ranging from decreasing demand to a reduction in profitability and investment returns. As a result, the number of retailers in the industry has dropped significantly as investors exit the market. The retail industry for oil and gas in the UK is losing its attractiveness and the level of investment in this industry has declined portentously. Unfortunately, salvaging the situation could take a considerable amount of time before the retail sector is re-established. In conclusion, it can be justified that the influence from OPEC, non-OECD countries’ growth, changes in climate policy and new fossil reserves access are shaping the future of global refining, with a consequent detrimental effect on the UK gas and oil retail industry.
Development in Oil and Gas Retail UK Industry Reference List
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