A Microeconomic Analysis Of British Petroleum Economics Essay

September 25, 2017 Economics

BP ‘s ( British Petroleum ) origins can be traced back to 1901 when William Know tried to research oil in Persia. The first commercial oil find was made in the Middle East by BP in 1908. In 1935, the company prospered and was renamed the Anglo- Persian Oil Company. The war attempt resulted in the British authorities going a stockholder of the company ( until 1987 ) . In 1950, Anglo-Iranian expanded into petrochemicals. The Persian nationalisation of the oil industry and subsequent diplomatic solution affecting Britain, the US, and Iran led to the outgrowth of a new pool affecting Anglo-Iranian Oil called The British Petroleum Company ( founded in 1954 ) .

1.2 Company Overview

BP is one of the largest vertically incorporate oil and gas companies in the universe. The company ‘s operations chiefly include the geographic expedition and production of gas and rough oil, every bit good as the selling and trading of natural gas, power, and natural gas liquids. BP is headquartered in London, the UK and employs approximately 92,000 people.

1.3 Why taking BP for the essay

The company recorded grosss of $ 361,143 million during the fiscal twelvemonth ended December 2008 ( FY2008 ) , an addition of 27 % over the fiscal twelvemonth ended December 2007 ( FY2007 ) . The operating net income of the company was $ 36,347 million during FY2008, an addition of 9.2 % over FY2007. The net net income was $ 21,157 million in FY2008, an addition of 1.5 % over FY2007.

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1.4 Business Description

BP is one of the universe ‘s largest oil and gas companies. It has presence in more than 100 states across six continents. The company operates through two reportable concern sections: geographic expedition and production ; and refinement and selling. The company besides operates through a 3rd concern section, other concerns and corporate. Upstream activities involve oil and natural gas geographic expedition and field development and production. The midstream operations involve the ownership and direction of petroleum oil and natural gas grapevines, processing and export terminuss, and LNG processing installations and transit.

For the FY2008, BP ‘s worldwide web consisted of some 22,600 locations branded BP, Amoco, ARCO, and Aral. BP ‘s retail web in the US for the FY2008 comprised about 11,700 sites, of which about 9,200 were owned by middlemans ( who purchase their merchandises straight from the refinement companies and either sell them to retail merchants or straight to the terminal users ) and 900 operated under a franchise understanding. At the terminal of FY2008, BP ‘s European retail web consisted of about 8,600 sites and had about 2,300 sites in the remainder of universe.

Other concerns and corporate section of the company comprises exchequer ( which includes involvement income on the company ‘s hard currency and hard currency equivalents ) the company ‘s aluminium plus, the alternate energy concern, and transportation and corporate activities worldwide.

1.5 What we will discourse

Not a hint yet.

2. Analysis

2.1 Microeconomic analysis

2.1.1 Consumer demand, monetary value snap and BP grosss for FY 2008

We will take one illustration here to analyze the jurisprudence of demand and how it applies to BP. For this specific illustration we will utilize gasoline as merchandise. In general, the jurisprudence of demand provinces that the measure demanded of a good falls when the monetary value of the good rises ( presuming other things equal ) . To stand for this alteration, the demand curve is used. It is a graph that represents the relationship between the monetary value of a merchandise ( gasoline in this instance ) and the measure demanded.

demand.JPG

Figure – The Demand Curve

( image taken from www.freeworldacademy.com )

As you can see in figure1, when the monetary value increased from P1 to P2 the measure demanded dropped from Q1 to Q2. Changes in the demand curve can be caused by many factors such as the consumer income, the monetary value of replacements and others.

There are 2 classs of goods though. The 1s that the demand does n’t alter a batch when monetary value is changed and those that even a little monetary value alteration will ensue in a immense alteration in the demand. This is called the snap of demand. The monetary value snap of demand for gasoline is inelastic ( monetary value snap & lt ; 1 ) and we can set all the goods necessary to people in this class. This means that even if the monetary value of gasoline additions dramatically, people will still go on to purchase it as it is necessary for Lashkar-e-Taiba ‘s state drive to work.

inelastic.JPG

Figure – Inelastic demand

You can see here that an addition in monetary value ( p1 to p2 ) leads to a lessening in measure ( q1 to q2 ) that is proportionally smaller. This consequences in an addition of the entire gross of the company. Let ‘s see how BP performed.

revenue.JPG

Figure – BP gross in 2008 ( BP one-year reappraisal )

BP recorded grosss of $ 361.143 million in the twelvemonth 2008 compared to $ 284.365 million in 2007.

This big gross addition is partly due to the really high oil monetary value. Peter Sutherland ( BP president ) said in his address in February 2009: “ There are few case in points in history for such a rapid and dramatic alteration in the concern environment. In the infinite of a few months we went from a record oil monetary value of more than $ 140 per barrel, and BP describing two back-to-back quarters of record net incomes for the group ” .

This profitableness in 2008, in theory can be based to the “ monetary value consequence ” which states that after a monetary value addition, merchandise ( gasoline ) sells at a higher monetary value, which tends to higher gross. The “ gross revenues consequence ” does n’t use here because we are speaking about inelastic demand.

2.1.2 Oil Market Structure ( supply curve, market equilibrium, entire excess )

It ‘s hard and most times inaccurate to seek and analyze the supply curve for inelastic merchandises. A supply curve illustrates houses ‘ willingness to provide at peculiar monetary values. But in the oil industry there are exogenic factors that affect the monetary values. When a factor changes we say we have shifts in supply. That can be anything, for illustration a alteration in the figure of house selling gasoline, a alteration in the monetary value of a factor input ( oil geographic expedition disbursals ) or a alteration in engineering. In our instance, the supply is non affected by client ‘s willingness to purchase. Person will purchase gasoline at any monetary value in order to cover their demands ( e.g thrust to work ) . But in theory, the more measure requested, the higher the monetary value set by the house. In the instance which the monetary value has reached the degree where measure supplied peers measure demanded, we use the term “ equilibrium ” . On a graph, it is the monetary value at which the supply and demand curves intersect. The entire excess refers to the entire net addition to consumers and manufacturers from trading in the market. IT is the amount of the manufacturer and consumer excess. But in pattern the things are a small spot different. There is ever necessitate for more gasoline ( or oil merchandises by and large ) . This means that BP and other houses can bring forth as much gasoline as they want. The boundaries here are if the crude oil houses can bring forth more gasoline. It ‘s clear that the house that can sell more barrels of oil, they will bring forth more gross and derive more market portion.

BP ‘s public presentation in the last 10 old ages has been exceeding good. They improve and increase the production every individual twelvemonth and that ‘s due to increased refinement handiness.

In the following page ( figure4 ) you can see some of the public presentation factors.

performance.JPG

Figure – BP ‘s public presentation ( image taken from BP ‘s one-year study 2008 )

As you can see in the exposure, the production was high but a spot lower that the twelvemonth 2006. This is due to the unstable economic system and monetary values in the last 2 old ages. BP still managed to increase their net incomes by bettering their procedures. The high spots of the twelvemonth are: replacing cost net income of $ 25.594 million ( up 39 % ) , capital outgo and acquisitions of $ 30.700 million and portion monetary value addition. The complete tabular array with informations will be attached in the appendix.

2.1.3 Government statute law ( competition policy and C trading )

The competition policies are different from state to state. We will speak about the policies in England as the BP is a British house. In the UK there is the function of “ Director of just trading ” and their occupation is to oversee the behavior of companies. If they think that a house is making something is non supposed to make so they can mention those houses to the “ Competition Commission ” for probe. The maximal market portion that a company can keep is less than 25 % of the entire market. If it exceeds this bound the Director of just trading can mention the company to the Competition Commission. Besides, houses are non allowed to conspire because this manner they restrict the competition by puting monetary values. Besides, because many companies operate in Europe or worldwide, there are other administrations that keep an oculus on house ‘s scheme.

In the oil industry the top 3 rivals are: Exxon Mobil, Royal Dutch Shell and BP. BP is the 2nd largest refinement and fuel retailing house in the UK and 3rd in the universe. In their attempt to go the largest crude oil and offer high assortment of merchandises, BP merged or acquired other houses over the past few old ages. The company ‘s cardinal merchandises and services now include the undermentioned: Aromatics and ethanoyl group, petrochemical merchandises, oil and gas geographic expedition and production, lubricators downstream derivative merchandises, aluminium spiral and other.

To bring forth their merchandises, houses utilise large sums of energy. This energy normally comes from firing fossil fuels. For illustration, oil and coal are used to bring forth electricity. By firing these fuels, nursery gas is emitted in the ambiance. Carbon dioxide is a pollutant and the European authoritiess have set regulations to seek to cut down the emanations. The ground the houses do n’t care much about pollution is because they maximise net income by cut downing their costs. Nowadays though, they have to pay large sums of money depending how much they pollute the environment ( surplus licenses ) .

“ BP is assisting to run into the universe ‘s turning demand for sustainable and low-cost energy, constructing alternate energy concerns with the possible to turn and vie far into the hereafter ” . gas.JPG

It is besides impressive how much money BP invests in alternate energy, $ 1.4 billion merely in 1 twelvemonth. The entire cost they are willing to put is $ 8 billion. Alternate beginnings of energy BP is experimenting with are: Wind ( 432MW ) , Solar ( 162MW ) and Biofuels.

Furthermore, they are running a undertaking called CCS that stands for Carbon Capture and Storage. What CCS does is capturing the CO2 emitted during the combustion and processing of fossil fuel. Then, it is transported and stored in deep geological formations such as gas or oil Fieldss. CCS engineering is supported by the authorities and the mark is a world-wide execution that will assist cut down the job of planetary warning.

2.2 Macroeconomic Analysis

2.2.1

2.2.2

3. Decision

Based on your analysis, province your recommendations depicting the possible schemes that the house can see.

x

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