- Shannon Davison
Companies face a number of opportunities and challenges in as far as their growth is concerned. An analysis of the Shell Oil Company reveals a number and therefore a consideration of the same in their strategies is necessary. This paper looks at a number of issues surrounding this company in as far as its performance as a business is concerned.
The Analysis of Shell Oil Company
One of the household names across many countries of the word when it comes to oil and oil products is the Shell Oil Company. Undeniably, Shell Oil Company is one of the largest oil multinational companies controlling huge market share not only in the United States of America, but the world as well. The Shell Oil Company which is a subsidiary of the Royal Dutch origins is headquartered in Houston, Texas (Pirog, 2007). Shell Oil Company together with its consolidated and equity companies is arguably the America’s largest producer of natural gas and oil. Besides production, Shell Oil Company markets natural gas and gasoline as well as petrochemicals. In the United States of America, Shell Oil Company significantly contributes to economic growth and development not only due to the large market spectrum and production, but job creation as well. This is because the company has absorbed approximately 22, 000 employees in the U.S America are approximately 22, 000 Shell Oil Company employees in the U.S. of America (Pirog, 2007). This paper provides a descriptive analysis of Shell Oil Company in relation to production, marketing competitiveness and challenges affecting the energy sector.
Roles of the Firm
Apart from its normal business of selling oil and oil products, Shell Oil Company and its subsidiaries participate in various community development initiatives, environmental mitigation initiatives both in the United States of America and the subsidiary countries. This acts in their favour in terms of making their presence within the communities they work more significant and relevant. Furthermore, they are able to meet their moral obligation of ensuring that the communities they work with are at home doing business with them. For instance, Shell initiates environmental conservation programs in vulnerable oil producing nations including but not limited to Niger Delta and Nigeria (Pirog, 2007). The programs facilitate the restoration of degraded environmental ecosystems. This is in tune with what is going around across many other organizations and individuals who are out to ensure that the environment is kept safe from degradation in order to promote human life. The initiatives therefore promote environmental conservation stewardships and biodiversity through sensitization, research activities and reduction of pollutants.
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On the other hand, the company provides competitive global transport fuel to 10 million customers daily. The customers are served through the 44,000 fuel stations spread in over 70 countries of operations. Equally, Shell’s products and services are designed to fulfill various business needs, encompassing chemicals to shipping and construction to aviation industries among others. Overall, Shell is a globalised group of energy and petrochemicals companies producing, marketing and enhancing sustainable environmental conservations. Globally, the company has employed approximately 92, 000 people in more than 70 subscribing countries and territories (Rexler, 2010). Moreover, Shell Oil Company has significantly capitalized on the technological advancements in bid to foster innovative approaches for sustainable energy production and marketing. However, the Shell Oil Company has also experienced challenges in equal measure in bid to accomplish the outlined goals and objectives. Therefore, the newly appointed CEO Ben van Beurden in together with the company’s top management team brainstorm on potential solutions to the problems affecting the company and its subsidiaries. Among the challenges that they have to wrestle with include the stiff competition that is mounting up day after day, suppressive environmental and other policies given the nature of the problems that the company is dealing in, availability of alternative sources of energy such as solar and wind which is a threat to the marketability of its products, political and legal challenges within the countries they work in and cultural challenges, among others.
Shell’s Recent Past Supply and Demand Impacts
Although Shell Oil Company has greatly influenced global Oil production and marketing as well as transport, construction and aviation industries, but the last four decade-scenarios technically put the giant company in jeopardy. Hennchen (2011) attributes this to emerging issues in global oil trends as far as production, competitive product sales and marketing (136). Shell Oil Company and its subsidiaries use these scenarios in projecting future trends in relation current and emerging challenges. The projections underpin insightful outlines of the company’s future growth and development strategies. The scenarios have actually been into play since the early 1970s aimed at forecasting the future demand of refinery sectors. Ideally, Shell Oil Company among other players has been significantly affected by the inevitable changing global trends in economic status, population, geopolitics, climatic changes and resource stressors. The World over, there is a global economic liberation taking shape thus the increasing demand of energy. Increasing number of developing countries is an implication of growing demand of Oil and oil products. To this effect, dwindling crude oil stocks in the producing countries has significantly affected global supply of the commodity. Moreover, the situation was fanned by the intrigues emanating from Oil Petroleum Exporting Countries (OPEC) union.
On the other hand, global climatic change has negatively affected oil production and refinery processes. Climatic changes eventually leads to global warming caused by significant rise in temperatures as well industrial gasses emission into the atmosphere (Rexler, 2010). Many oil producing countries are greatly predisposed to environmental degradation owing to poor harvesting methods and greenhouse gas emissions among other factors. For instance the Nigerian based Shell has been accused of indulging into fraudulent and corruptible deals thereby negatively affecting the performance. Major stakeholders in the vital commodity have therefore been compelled into adopting strategic development analysis.
Therefore, stakeholders have prompted all the stakeholders concerned with the vital commodity into making strategic planning and development for a favorable business environment. The External Review Committee proposed various strategies to revive the economically vital sector (Uytrecht, 2013). Two energy scenarios are apparently at the foreplay namely; the scramble and unrest in oil producing countries hence less attention to better policies, probably until the supply would have tightened. Secondly, there is likelihood of outlined blueprints to address economic challenges in relation to energy, security and environmental pollutions. Basically, this could easily be facilitated by clean energy development technologies, carbon dioxide sequestration and trade and financial incentives to player countries thus reduced environmental degradation. Such initiatives would definitely enhance sustainable growth and development both in energy sector and industrial expansion. The strategies would help in tackling the World’s dwindling oil stocks which eventually might affect the Shell’s production levels. Today, Saudi Arabia is apparently unwilling to disclose to the world the total value of her exploitable crude oil despite having prior insinuation that it has the largest active oil fields. Definitely, Shell Oil Company depends on a seemingly depleted stock from Mexico, Cantrell and the U. S of American oil reserves among others (Sperling and Gordon, 2009). Poor cooperation amongst the oil producing countries coupled with high cost of extraction and high demand from developing nations result into global oil disaster. In addition to these, adverse policies among countries involved and unfavorable political atmospheres are also a great hindrance.
Shell Market Share and the Price elasticity of Demand
Price elasticity of demand (PED) is defined as the economic responsiveness of how the quantity of goods or services demanded changes in relation to the prices. The price elasticity of demand is usually affected by several factors, including time, availability of substitute, nature of commodity, uses of goods/services among others (Pirog, 2007). Similarly, the price elasticity of Shell Oil company products and services are dependent on the aforementioned factors. Given the structural changes in the world oil markets in the last ten years, the competitiveness of oil and its products have significantly influenced the balance between supply and demand. There is an apparent increase in oil supply emanating from unconventional oil reserves hence less elasticity of Shell Oil products. The price elasticity of Oil and oil products become elastic when a small change in prices produces a large change in demand. Shell Oil Company, one of the major players of oil and petrochemical products in not only the United States of America, but in the world greatly influences the price elasticity of demand of the vital commodity. The Shell’s profit margins are affected by the price elasticity of demand since costs usually change with the sales. At elastic price, the demanded shell products and services can be obtained by reducing price thereby raising sales. The company would therefore make remarkable returns through the economies of scales. The global change in oil production over the last four decades has significantly affected the price elasticity of demand.
The price elasticity of commodities tends to fall over prolonged time duration. The “price inelasticity of oil and oil products over a short period of time could be attributed to high prices” (Sperling and Gordon, 2009). However, the elasticity would gradually become elastic in the long run following strategic planning and regulative mechanisms. To that effect, sustainable global oil production could easily be achieved by adopting modern technological advancements in refining and marketing crude oil as proposed by the ERC. On the other hand, highly competitive products are usually less affected by the price elasticity of demand. This is because the products would remain in high demand despite the presence of substitute goods and services from other companies. Additionally, the price elasticity of oil products can easily be affected by a reduction in the consumption of such goods and services, perhaps owing to economic downtown and loss of jobs. To that effect, the price elasticity of Shell Oil company products and services has been significantly affected by the economic meltdown in the Euro zone and the U.S. of American economic recession.
The presence of OPEC in the market could also influence the price elasticity of demand owing to stringent measures. Although oil and oil products are usually less elastic due to relatively marginalized choices, but there are sometimes when the price elasticity of demand become vulnerable owing to global economic situation and trends in the production (Rexler, 2010). However, natural gas is rarely affected by the price elasticity of demand because it barely has alternatives. Petrol and other oil products that many consumers use are also least affected by the price elasticity of demand.
The Costs of production
Today, the world’s increasing demand in oil is attributed to fast developing economies as occasioned in China and India. Industrialization process basically implies increased consumption of energy thus oil products. Pirog (2007) argues that developed countries are yet to “change their oil consumption habits” despite the global changing trends in oil supply (14). Therefore, several factors come into play to affect the cost of producing oil in different countries. For instance, varying cost of extracting crude oil in different counties greatly influences companies’ capacity to efficiently produce high quality and cheap oil products.
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In the United States of America, the federal government usually provides production patents to major players in the oil industry. Ultimately, Oil companies with production patents greatly influence the prices of oil hence the production costs. The price of oil products in some parts of the U.S. of America has been a function of domestic crude oil production, for instance in North and South Cushing. Consequently, the average cost of one barrel of crude oil basically fluctuates at around $101.50 thus the prevailing situations in Cushing. In fact, this is a measure of local production in relation to average pipeline inflow capacity per day.
On the other hand, the updated crude oil cost in Oklahoma depicts a tightening regional demand thereby outstripping the supply. However, the cost of crude oil is likely to remain unpredictable until the completion of the American-Canadian Keystone XL pipeline project in 2016 or 2017 (Rexler, 2010). The global demand in oil and technological advancements also affect the cost of producing oil. The OPEC’s strategic planning and policies predetermine the global oil production costs hence the prevailing prices. Although the counties subscribing to OPEC control about 80% of the world’s oil reserves, but they only produce a third owing to high cost of extraction. The unprecedented failure of OPEC to effectively strategized oil production cost has significantly impacted on global oil prices. The cost of oil production is also influenced by the availability and cost of water.
Competitive Advantage and Entry Barriers
Shell Oil Company and its subsidiaries enjoy remarkable portion of the world’s oil market owing to its competitive advantage over other oil producing companies. The recent ERC report describes Shell’s strategic plans in addressing production and marketing issues currently facing the energy sector (Sperling and Gordon, 2009). Shell’s active involvement in environmental conservation, community development initiatives and strategic planning basically give the company a cutting edge over other oil producing companies.
According to ERC, Shell’s production and sales has significantly increased owing to the competitive brands of oil products released into the market. In addition, Shell’s top management embraces collaboration thus business integration. Shell closely works with research institutions, NGOs and other companies to plan and strategize for a sustainable oil production and marketing across the world. The sustainable oil production requires technologically innovative ways of extracting and processing crude oil to meet market’s growing demand for oil and oil products. Alternatively, business patent apparently enjoyed by the Shell Oil Company puts it on a better position than other oil producing companies. This is because politics usually take center stage in influencing business laws and policies. In addition, business patents usually bar new business ventures from getting into the market thereby hindering free and fair business completion. There are other business barriers controlling the restricting competitive venture into energy sector (Uytrecht, 2013). For instance, large startup capital as well as resource ownership usually limit the number of businesses in the vital energy sector.
The federal government of the United States of America issue patents, copy ownership and restriction waivers only after the fulfillment prerequisite terms and conditions set up in laws and regulations. The market segment exposed at the oil production and marketing could thus be described by the monopolistic structure (Uytrecht, 2013). This is owed to the barriers imposed by the major oil payers in collaboration with federal government of the U.S. of America. Therefore, Shell Oil Company apparently enjoys oil business patents thus the exclusive right to use, sell, develop and explore more energy resources, preferably through research.
Shell Product Substitutes
According to the case study, the majority of clients usually find no difference in motor oils hence minimal alternatives. However, critical analysis reveals various differences in motor oils based on the manufacturers’ standards and performances (Hennchen, 2011). Informed customers may therefore prefer one oil product to another based on the combustion rate, additive content and uses. Oil and oil products have fewer substitutes despite significant variations in customers’ distinctive preferred properties. For example, propane has been extensively used in almost 200,000 vehicles in the United States of America. However, propane is not considered a good substitute for gasoline since it is harvested as a byproduct when refining natural gas and petroleum (Uytrecht, 2013). Alternatively, hydrogen has been proposed as a possible replacement for gasoline thus alleviates the already strained energy sector. Similarly, ethanol has been proposed for use in Brazil and the United States of America to provide alternative fuel energy source.
In conclusion, Shell Oil Company plays a significant role in the production and marketing of oil and oil products not only in the U.S. of America, but also globally. Being present in a number of countries across the world, its business is of high value and is therefore expected to meet different opportunities and challenges at the same time. As such, both the opportunities and challenges need to be met with a number of heightened strategies in order to deal continue running a profitable business. Apart from the core business, Shell Oil Corporation actively participates in making strategic planning and development programs. The strategies would help in solving various challenges currently impacting on the vital energy sector. Eventually, the sector would register an effective, efficient and sustainable global oil production, marketing and environmental health. As has been seen in the analysis, corporate social responsibility is also a key consideration that this company needs to keep to speed with as it is happening given the numerous advantages that it is bound to reap from the same. There are different challenges that this company is facing and these can be tagged on both external and internal factors.
Hennchen, E. (2011). The role of oil mayors in supporting sustainable peace and development in Nigeria: the case of Royal Dutch Shell. Barcelona: School for a Culture of Peace (UAB): Institute for Social Innovation (ESADE), 1(2), 133-145.
Pirog, R. (2007). The Role of National Oil Companies in the International Oil Market. CRS Report for Congress, 1-20.
Rexler J. (2010). Beyond the oil curse: Shell, State power, and environmental regulations in the Niger Delta. Stanford Journal of International Relations, 12 (1), 1-6.
Sperling, D. Gordon, D. (2009). Two billion cars: Driving toward sustainability. Oxford: Oxford University Press.
Uytrecht, M. U. (Ed). (2013). Transforming refinery economics technology and catalysts to maximize margins. Shell Global Solutions, 1 (3), 1-16.