Xavier Institute of Social Service, Ranchi

Marketing – I Department
(2017 - 2019)
Managerial Economics
Project Report

On

International Oil Market

By:-
Amrapali Ghosh - 01
Zeeshan Mir - 02
Evander Brian – 03
Aniruddha Mandal - 04
Md. Faisal - 05
 Acknowledgement

The project report has been made possible by the combine effort of our
group. And thanks to our Prof. Bhabani Prasad Mahapatra for
providing us with this knowledgeable project.
 Index

1. Project Objective
2. Learning Objective
3. Overview
4. Introduction
a) SCP (structure, conduct, performance) Paradigm
5. Conclusion
6. References
 Project Objective

International oil market is like a big gamble. Ahmed Zaki

Yamani, Saudi Arabian politician who was Minister of Oil and
Mineral Resources from 1962 to 1986 and a minister in OPEC
for 25 years once said “The Stone Age didn’t end for lack of
stone, and the oil age will end long before the world runs out
of oil”. So, in today’s world one who holds oil does hold the
power to change the face of economy or war. What
determines oil price? Who are major player of oil market?
What are the strengths and weaknesses of oil market? In this
project, we tried to find out the same.
 Learning Objective
Under this assignment of Managerial economics, we are required
to dive in into the oil market and find out how the oil market
works. Basically, what driving the oil market has to be known and
a rough idea needs to be generated based on which some insights
can be gained. Secondary data associated with that business and
the overall industry needs to be collected and analyzed
considering the environmental context of the problem identified.
Ultimately, the project should provide us with an insight over the
following –
a) Structure, Conduct and Performance paradigm.
b) Political issues related with oil.
 Overview

This project primarily focuses on the understanding of the international

oil market in a better way. Oil, on which the world economy runs and
one who holds it does have the power to change the face of economy or
war, is essential for every nation. We have seen many wars for oil in the
past like Iraq war, Iran Iraq war, gulf war, invasion of Kuwait etc. So
how does the oil market runs? Why so much blood shed for just a
resource? In this project we tried to understand the same.
 The Report
Top 10 Oil producing countries in 2016 (barrels/day)

Russia- 10,551,497

Saudi Arabia (OPEC) - 10,460,710

USA- 8,875,817

Iraq (OPEC) - 4,451,516

Iran (OPEC) - 3,990,956

China- 3,980,650

Canada- 3,662,694

UAE (OPEC) - 3,106,077

Kuwait (OPEC) - 2,923,825

Brazil- 2,515,459

Major Players

OPEC: Organization of the Petroleum Exporting Countries is an intergovernmental

organization of 14 nations (Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran,
Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United Arab
Emirates, and Venezuela) as of May 2017, founded in 1960 in Baghdad by the first five
members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela), and headquartered since 1965
in Vienna. As of 2016, the 14 countries accounted for an estimated 44 percent of global
oil production and 73 percent of the world's "proven" oil reserves, giving OPEC a major
influence on global oil prices that were previously determined by American-dominated
multinational oil companies.

BP: BP P.L.C. formerly British Petroleum, is a British multinational oil and gas company
headquartered in London. It is one of the world's seven oil and gas "super majors", the
company with the world's twelfth-largest revenue (turnover). It is a vertically integrated
company operating in all areas of the oil and gas industry, including exploration and
production, refining, distribution and marketing, petrochemicals, power generation and
trading. It also has renewable energy interests in biofuels and wind power.
Royal Dutch Shell: Royal Dutch Shell plc, commonly known as Shell, is a British–Dutch
multinational oil and gas company headquartered in the Netherlands and incorporated in
the United Kingdom. It is one of the six oil and gas "super majors" and the sixth-largest
company in the world measured by 2016 revenues (and the largest based in Europe).
Shell was first in the 2013 Fortune Global 500 list of the world's largest companies; in that
year its revenues were equivalent to 84% of the Netherlands' $556 billion GDP.

Petro bras: Petro bras is a semi-public Brazilian multinational corporation in the petroleum
industry headquartered in Rio de Janeiro, Brazil. The company operates in six business
areas; Refining, transportation and marketing – refining, logistics, transportation,
trading operations, oil products and crude oil exports and imports and petrochemical
investments in Brazil. Exploration and production – crude oil, NGL and natural gas
exploration, development and production in Brazil. Distribution – distribution of oil
products, ethanol, biodiesel and natural gas to wholesalers and through the Petro bras
Distribuidora S.A. retail network in Brazil. Gas and power – transportation and trading of
natural gas and LNG, and generation and trading of electric power, and the fertilizer
business, International – exploration and production of oil and gas, refining,
transportation and marketing, distribution and gas and power operations outside of Brazil.
Biofuels – production of biodiesel and its co-products and ethanol-related activities such
as equity investments, production and trading of ethanol, sugar and the excess electricity
generated from sugarcane bagasse.

Lukoil: Lukoil is one of Russia's largest oil companies. It is also one of the largest global
producers of oil. In 2012, the company produced 89.856 million tons of oil (1.813 million
barrels) per day. Headquartered in Moscow, Lukoil is one of the largest public companies
(next to ExxonMobil) in terms of proven oil and gas reserves. In 2008, according to the
data audited by Miller and Lents the company had 19.3 billion barrels of oil equivalent per
SPE standards. This amounts to some 1.3% of global oil reserves. The company has
operations in more than 40 countries around the world.

Petro china: is a Chinese oil and gas company and is the listed arm of state-owned China
National Petroleum Corporation (CNPC), headquartered in Dzogchen District, Beijing. It
is China's biggest oil producer.

ExxonMobil: Exxon Mobil Corporation is an American multinational oil and gas

corporation headquartered in Irving, Texas. It is the largest direct descendant of John D.
Rockefeller's Standard Oil Company, and was formed on November 30, 1999 by the
merger of Exxon (formerly Standard Oil Company of New Jersey) and Mobil (formerly the
Standard Oil Company of New York). The world's 10th largest company by revenue,
ExxonMobil is also the seventh largest publicly traded company by market capitalization.
The company was ranked ninth globally in the Forbes Global 2000 list in 2016.
ExxonMobil was the second most profitable company in the Fortune 500 in 2014.
ExxonMobil is the largest of the world's Big Oil companies, or super majors, with daily
production of 3.921 million BOE (barrels of oil equivalent).

Rosneft: Rosneft is an integrated oil company majority owned by the Government of

Russia. Rosneft is headquartered in Moscow's Bal chug district near the Kremlin, across
the Moskva River. Rosneft became Russia's leading extraction and refinement company
after purchasing assets of former oil giant Yukos at state-run auctions. As of 2016,
Rosneft was the 51st largest company in the world with $64.75 billion in sales during the
fiscal year.

What Determines Oil Prices?

With oil's stature as a high-demand global commodity comes the possibility that major
fluctuations in price can have a significant economic impact. There are way too many
factors.

1. There are different types of Crude oil - Brent, Dubai crude, West Texas
Intermediate, etc. Each of these oils differ on their sulphur content and how hard
is it to refine them. To simplify things, Brent is usually used as the standard and
other oil prices are decided relative to it. Majority of world's trading happen on Brent
Crude (mostly produced in the North Sea).

2. The different types of crude oils are traded in a special type of market called the
- Futures Exchange. In the US, this primarily happens in New York (NYMEX).
Here, the producers and purchasers would come with their orders for delivery at a
future date. For instance, Exxon could be selling a big chunk of their recent oil
finding that could be bought by a major refiner (such as Indian Oil).

3. The end buyers and sellers both have a price in mind and depending on their
urgency and needs will be willing to take a particular price. Depending on the
supply & demand situations of that time, the price would vary. Think about sports
tickets for a game. If a popular star is sick, the price will drop or if the team had
won a previous game, the price will rise at the spot market.

The traders in the futures market do a collective guessing on the total supply and
demand for oil in the future. Just like the black market stadium ticket sellers, they have
to be quick on the feet in their estimations.

What could change the guess?

1. News on new supply. US started tapping huge reserves of oil recently and this is
sending waves through the market. The news like the one below could come and
immediately the traders would start running around to reduce their oil inventories.
Price would then fall substantially, until some buyers on the fence (e.g. airlines)
come out and find their bargains.

2. Changes in consumer habits. For instance, if the news comes that Americans
are driving a lot this year, then the ripple would be felt across the market. US
consumes 20% of world's oil and almost half of the oil consumption goes to
gasoline. A small change in driving habits could cause either a scarcity or a
surplus.

3. Terrorist attacks and disturbance. If there is any war, terrorism or any act
involving an oil producers, buyers would panic. That would mean more demand
and prices would rocket. Some of these include Nigeria attacks, Iran war threats,
Venezuela crazy guy threat (RIP), etc.

4. Alternative energy sources. If solar, fuel cell or other disruptive energy source
could come, then oil traders would panic, dumping all their oil. That would trigger
a downward spiral. For now, this is not a major trend impacting the market but in
the future it potentially could.

5. Economic growth. If India, China and elsewhere suddenly show a change in

economic growth (upward or downward), oil market would react as traders would
have to revise their consumption projections.

There is a story in Hindu mythology about the god of knowledge - Saraswati. She keeps
playing her Veena (a stringed instrument) endlessly as new sources of knowledge is
created. In the same way, news is created across the world, every second and traders
constantly guess how much each news will affect the overall supply or demand.

MAJOR PLAYERS AND MARKET SHARE IN THE

MARKET:-
The main Oil companies in the crude oil market are as below from the revenue
earned:-

1. Saudi Aramco – 455 Billion USD – 12% Market share

2. Sinopec – 448 Billion USD -
3 – 4%
3. China National Petroleum Corporation – 429 Billion USD
4. Petro China – 368 Billion USD
5. Exxon Mobil – 269 Billion USD – 3%
6. Royal Dutch Shell – 234 Billion USD – 2%
 21% of market shares are hold by international oil companies according to the
lists of Energy Intelligence firm.
 34% of market share is hold by major companies from Middle East according to
the lists of Energy Intelligence firm.
 15% is held by other companies from other part of the world (Americas and rest)

SWOT ANALYSIS
STRENGTH

• Continued dependency on crude oil – The world dependency on Crude oil will
continue for a longer period of time as other substitute of the caliber of oil has
not yet been achieved.
• Other sector’s dependency on crude oil - A lot of sectors such as apparel,
cosmetics, medicine, plastic etc. are dependent on the crude oil apart from the
automobile sector which depends heavily on oil.
• Control over meeting demand and production – The major oil players can
influence the market conditions by controlling the production of oil. Higher
production leads irrespective of demand can lead to lower price. This
 happened in 2014 when the OPEC countries tried to capture the market they
increased their production which lead to oil prices going as low as 37 USD
per barrel.
• Inelastic Demand – The changes in price over last few years have been drastic
as compared to the change in the demand. The product is almost un-
substitutable.

WEANESS

• Fragile socio-political condition of oil producers – Most of the OPEC

countries where oil is being produced, do not have a stable government and
are plagued by war and social unrest except few such as Saudi Arabia, UAE
etc. This may hamper the growth of the oil market and may hamper oil supply
and may result in higher prices.
• The control over oil may be debilitating to the world – History is evidence
how control over oil fields have resulted to war and human losses.
• High production to capture market – lower prices may give an advantage to
the other sectors dependent on oil, but for a short period of time. In the long
run the crude oil market will suffer because of lower revenue and hence will
affect other sectors.

OPPORTUNITY

• Demand from Developing economies – There have been increase in the

number of developing countries and they are getting more dependent on oil
for fulfillment of energy needs to accomplish their task of achieving higher
production and services. The oil producing counties have a good opportunity
to earn from these countries.
• Rising income and purchasing power – As people are having more money
they will look forward to have better life style and desire to have better
products. Hence all the sectors dependent on oil have an advantage of this
situation to generate more revenue.
THREAT
• Non-renewable sources of energy – There has been continuous emphasis on
use of renewable sources of energy. Introduction of Electric cars in the market
is one of the threat that is going to affect the automobile sector which is
currently dependent upon the oil. Many governments of countries have set
target to replace vehicles running on diesel, petrol or gasoline with the electric
substitute.
• Rising pollution – Rising pollution, both air water and land have forced many
activist groups and the government to push for using substitute of non-
renewable sources of energy. There has been a lot of research and
development in this field and we can see how solar panels are used instead of
using diesel generators in house. Usage of Wind energy and Tidal energy are
also being considered.
• Competition within the countries over oil – The competition within the OPEC
and Non-OPEC countries over the control oil can be debilitating to the world
economy in long run. This can be seen from the decrease in price in the past
three to four years as a result of oversupply of oil from the OPEC countries.

Conclusion
Non- Renewable sources of energy are the future of energy sector, but it is not
coming so soon and the substitution of oil in the near future is not certain. Crude oil
will still hold importance in the development of the economy and any effect on it
will affect other sectors as no substitute of oil has been found out in the current time.

Non-OPEC players are going to play a major role in the future as they are also trying
to capture the market and earn revenue. The key indicator can be the change in co-
relation of oil prices and USD. The trend has completely changed and now with the
increase in oil prices, the value of USD is also increasing. USA and allies will
probably try everything to get advantage of this situation to control the oil market as
it also has huge reserve of Oil as compared to OPEC countries. Even Chinese
companies are getting a strong foothold in oil market. Rise of several Chinese
companies is a clear indicator of the same.

The organization which controls the demand and supply of oil will hold a place of
great importance in the world as it will have a control over prices and hence will be
able to earn revenue by controlling the market.

References
The Following person & sites were referred to in the preparation of this project
report.

Books:-

 https://www.iea.org/oilmarketreport/omrpublic

 Balaji Viswanathan, CEO of Invento Robotics.

 Quora