Research Proposal on "BP Strategy Based on Oil Price Variation"

Research Proposal 17 pages (4930 words) Sources: 0 Style: APA

[EXCERPT] . . . .

Companies competing in the oil and gas industry today are faced with a two-fold dilemma. On the one hand, they have invested enormous sums in an infrastructure that it specifically designed to identify and extract fossil fuels in the most efficient manner possible and most have entered into long-term contractual agreements with other countries where the proven reserves are located. On the other hand, the world's supply of fossil fuels is rapidly being depleted, and many experts caution that the days of cheap oil are about to end. In this environment, determining how variations in the price of oil tend to affect oil and gas companies' strategies has assumed new importance and relevance. The purpose of this study was to develop such an analysis to provide a strategy proposal and specific recommendations for its implementation for use by British Petroleum. To this end, a comprehensive review of the relevant peer-reviewed, scholarly, governmental and organizational literature was combined with a statistical analysis of historic oil prices and corresponding fluctuations in British Petroleum's stock prices to identify trends and patterns that might reveal what investment initiatives were more effective at one point in time than others. A synthesis of the resulting findings is presented in the concluding chapter, together with salient conclusions and recommendations for the leadership team at British Petroleum.

Table of Contents

Chapter 1: Introduction

Statement of the Problem

Purpose of Study

Importance of Study

Scope of Study

Rationale of Study

Overview of Study

Chapter 2: Review of Related Literature

Chapter 3: Methodology

Description of the Study Approach

Data-gathering Method and Database of Study

Chapter 4: Data Analysis

Chapter 5: Summary, Conclusions and Recommendations

The Effect of Oil Price Variations on Oil and Gas Companies' Strategies, and a Strategy Proposal and Recommendations for Implementation for British Petroleum

CHAPTER ONE: INTRODUCTION

The oil and gas industry is at a historic crossroads today, with some conservative observers suggesting that the world's supply of these fossil fuels are about to reach their mid-point level of exhaustion, while others place the available reserve levels slightly higher. Nevertheless, the important point for the oil and gas industry is that its days are numbered and it is vitally important at this juncture to identify the best approach to maximize existing available reserves while continuing the search for new sources. Indeed, it is no longer a debate over "if" peak production will be reached, but a matter of "when" it will be reached. According to Odland (2007), "The debate surrounding Peak Oil is about 'when' rather than 'if.' It entails a range of opinions concerning how much oil remains to be discovered and extracted and how soon we face a gap between consumption demand and the oil production rate" (p. 2). Despite an increased focus on these issues in recent years, there are a sufficient number of unknowns involved to make accurate predictions particularly difficult. For instance, Odland also notes that, "We do not know whether the world oil production curve will end up a peak, a bell, or a plateau. But based on historical production curves for oil fields and regions, it is safe to assume that after the first half of the ultimately recoverable oil reserves have been consumed, the world will be at or near its maximum oil production" (p. 2). The overwhelming majority of recent assessments place the world's original endowment of recoverable oil at no more than about 2,400 billion barrels; the average estimate is 2,000 billion barrels, an estimate that is regarded as being congruent with the cumulative production plus reserves reported in British Petroleum's annual statistical review (Odland, 2007).

Other important trends are also affecting the oil and gas industry in ways that are going to inevitably affect their ability to remain profitable and competitive in the future, including growing concerns over the impact that fossil fuels are having on global warming and the overall quality of the environment, as well as the emergence of burgeoning and energy-hungry economic powerhouses such as China, Brazil and India whose demand for oil and gas will place unprecedented demands on the finite resources remaining. Moreover, as Cuervo (2008) emphasizes, "The price of oil and hydrocarbon reserves are not the only important economic issues. Crude oil prices and inflation, the impact of the Chinese and Indian economic growth, and excessive liquidity in the international capital markets partially caused by higher oil prices are some of the risk factors for the international economy" (p. 433).

In recent years, crude oil prices and production distribution have also become foreign policy and energy security issues and sensitive matters that are inextricably interrelated with war and peace. Variations in those prices will serve to determine the futures of many single commodity producing countries, as well as the entire Middle Eastern region. Moreover, the economic growth and stability of the world's primary energy consumers, i.e., the United States, Japan, China, and the European Union, heavily rely upon dependable and stable oil and gas supplies to operate their economies. To date, efforts to exert any substantive control over energy sources by the United States through military expeditions and adventures have threatened the legitimacy of the United Nations, and have created issues involving international laws and institutions (Cuero, 2008). Furthermore, according to an analysis by Shojai and Katz (1998), the results of their study do not conclusively support the hypothesis that oil price variations consistently resulted in trade fluctuations; however, their study found that a unidirectional causality relationship from oil price changes to terms of trade movements among 12 of the countries they studied. Without a doubt, concerns over energy supplies represent a paramount issue for the entire international community and a growing number of countries are resorting to true resource diplomacy to achieve their respective goals (Cuervo, 2008). Despite these constraints, some oil and gas companies continue to enjoy enormous profits that have allowed them to expand their search for new reserves while making their existing operations safer, more efficient and environmentally responsible. Foremost among these companies is British Petroleum whose operations span the globe and provide energy resources to tens of millions of consumers around the world today.

Statement of the Problem

If there are any still around, oil industry analysts in the 22nd century will likely look back on this juncture in world history in one of two different ways. The first way will be one of amazement that the world continued down a headlong path to energy depletion despite the countless wake-up calls that emphasized the world was rapidly running out of fossil fuels and action must be taken sooner than later in order to avoid a catastrophe of global proportions, including wars fought over dwindling supplies of fossil fuels. The second way would be one of admiration that acknowledged the foresight and implementation of energy policies that managed to avoid the fossil fuel wars by careful investments in what resources remained while aggressively pursuing alternative and renewable sources of energy to replace the world's dependence on oil and gas. These trends have been borne out in the historical record as well. For instance, according to Woloski (2005), "When historians speak of doomed civilizations, they often point to Easter Island, a society that based its culture and economy on the natural resource of wood -- until the consumption of the final tree. Many fear today's global civilization is heading down a similar path, this time brought about by the depletion of current energy sources and of the atmosphere" (p. 40).

The 2004 British Petroleum Statistical Review of World Energy determined that based on current projections, the world's oil reserves will be depleted by 2045, and the peak supply of cheap oil will be exhausted at some point earlier than that, of course, perhaps within the next 5 to 30 years (Woloski, 2005). With current oil prices hovering around $3 per gallon and skyrocketing heating costs, renewable energy sources have become an increasingly attractive alternative for U.S. consumers. Yet renewable sources, such as wind, geothermal, solar, and hydroelectric energy, as well as biomass, comprise less than 4% of U.S. energy consumption. The increasing prices have been driven by various factors including unease in global markets, but a long-term concern about continued fossil fuel use is the expectation that oil reserves will be exhausted by 2045 (Woloski, 2005).

Purpose of Study

The purpose of this study is to determine how variations in the price of oil tend to affect oil and gas companies' strategies in general and British Petroleum's in particular and to provide a strategy proposal and specific recommendations for its implementation for use by the leadership team at British Petroleum.

Importance of Study

Today, most energy is produced by the burning of fossil fuels (coal, oil, and natural gas), which can be extracted more easily and cheaply than most other types of energy. Overusing this non-renewable source of energy will not only lead to its exhaustion, or at least to significant increases in its cost, as angry customers at gasoline pumps may have noticed; it may also… READ MORE

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