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Section – D
OIL AND GAS INDUSTRY
The oil and gas industry is the 8th largest industry in the world. It is worth $4.6 trillion. The
oil and gas industry has a workforce of millions of people.Crude oil is a highly valued
commodity due to its diverse applications, encompassing energy production and utilization as
a feedstock for transportation fuels and petrochemical products like plastics, solvents, and
adhesives. Consequently, the oil industry stands as a formidable force within the global
economy, and fluctuations in benchmark oil prices significantly impact various
manufacturing sectors and consumers. The oil and gas industry plays a pivotal role in the
world's economy, and despite its controversies, its influence on our daily lives and finances is
undeniable.
The U.S. produces the most oil of any country, producing 744.7 million metric tons in 2020.
Here are the top ten countries for oil production as of 2020:
Here are the top five oil and gas companies in the world by market capitalization:
Source- https://www.statista.com/statistics/1263326/global-oil-and-gas-investments-by-
sector/
The global gas and LNG market is projected to experience a rise in investment, while other
sectors within the oil and gas industry face potential declines. In 2024, gas and LNG
investments are anticipated to reach 171 billion U.S. dollars, marking a significant increase
from the 131 billion U.S. dollars invested in 2021. This upward trend stems from the energy
supply crisis that emerged in late 2021, primarily triggered by a gas shortage. Moreover, the
European Union's recent decision to categorize certain types of gas as clean energy within its
Fit for 55 green transition package further highlights the ongoing reliance on this fossil fuel
by some governments, while also emphasizing efforts to reduce coal and oil consumption.
Analysis of various factors affecting the industry using PESTEL
tool
POLITICAL FACTORS
Government policies play a crucial role in shaping the dynamics of the oil and gas industry.
Governments hold the ultimate authority to grant exploration permits, directly impacting the
industry's growth trajectory in a particular country. Pro-exploration policies foster a
conducive environment for oil and gas companies to operate and expand their operations.
ECONOMIC FACTORS
Economic factors like economic growth, exchange rates, interest rates, inflation, and
unemployment critically affects the Oil and gas industry.
Economic growth drives demand for oil and gas products. Countries with high
economic growth typically have higher living standards, leading to increased
consumption of oil and gas. For instance, households with higher disposable incomes
are more likely to own vehicles and travel more, driving up fuel demand.
Exchange rates also influence the oil and gas industry. Since oil and gas are often
traded in US dollars, fluctuations in exchange rates can affect the cost of imports for
countries that purchase these commodities. A stronger US dollar can lead to higher
import prices, impacting the overall cost structure of oil and gas companies.
Interest rates play a role in investment decisions within the oil and gas industry.
Lower interest rates can encourage businesses to invest in exploration and production
activities, boosting oil and gas demand. However, higher interest rates can make
borrowing more expensive, potentially slowing down investments in the industry.
Inflation can also affect the oil and gas industry. Rising fuel prices due to inflation can
impact both households and businesses. Households may have to allocate a larger
portion of their income to transportation costs, while businesses may face higher
operational expenses due to increased fuel consumption. Additionally, inflation can
erode the purchasing power of consumers, potentially reducing overall demand for oil
and gas products.
Unemployment levels can also impact the oil and gas industry. Higher unemployment
rates can lead to decreased demand for oil and gas products as individuals and
businesses have reduced spending power. Additionally, layoffs within the oil and gas
industry itself can contribute to economic instability and further impact demand.
SOCIAL FACTORS
Social factors exert a significant influence on the oil and gas industry. These factors include
population growth, urbanization, energy preferences, and behavioral patterns.
Population growth plays a crucial role in shaping oil and gas demand. Countries with
larger populations tend to have higher energy consumption, leading to increased
demand for oil and gas products. As populations expand, households and businesses
require more fuel for transportation, power generation, and other activities.
Urbanization also contributes to rising oil and gas demand. As more people migrate to
urban areas, demand for transportation fuels and energy for industrial and commercial
activities increases. Urban lifestyles often require higher energy consumption
compared to rural settings.
Energy preferences, influenced by cultural trends and environmental concerns, also
impact the oil and gas industry. While some countries are transitioning towards
greener energy sources, many still rely heavily on conventional fuels like oil and gas.
In these regions, demand for oil and gas products remains strong.
Behavioral patterns, influenced by social norms and individual choices, can also
shape oil and gas demand. For instance, increased car ownership and usage,
particularly in developing countries, drive up fuel consumption. However, cultural
shifts towards environmentally friendly practices and a growing preference for
electric vehicles can lead to reduced demand for oil and gas products.
TECHNOLOGICAL FACTORS
Technological advancements have significantly impacted the oil and gas industry, enhancing
its efficiency, productivity, and profitability. These advancements encompass data analytics,
robotics, and artificial intelligence.
Data analytics empowers oil and gas companies to make informed decisions and
forecasts based on comprehensive data analysis. This data-driven approach optimizes
resource allocation, risk management, and overall business operations.
Robotics has revolutionized the industry by automating hazardous and labor-intensive
tasks, particularly in drilling and mining operations. Robots and machines perform
these tasks with greater precision, safety, and efficiency, reducing reliance on human
labor and associated costs.
Artificial intelligence (AI) has emerged as a powerful tool for optimizing drilling
operations, inventory management, and supply chain management. AI algorithms can
analyze vast amounts of data to identify patterns and trends, enabling companies to
make informed decisions that enhance efficiency and productivity.
The integration of automation into upstream processes has further streamlined
operations and reduced costs. Digital technologies provide real-time data and insights,
allowing companies to make proactive decisions to optimize resource utilization and
minimize downtime.
These technological advancements have not only improved the financial performance
of the oil and gas industry but have also contributed to environmental sustainability.
Carbon capture and storage technologies are being employed to mitigate CO2
emissions, helping to address the environmental impact of oil and gas exploration.
ENVIRONMNETAL FACTORS
Environmental factors exert a significant influence on the oil and gas industry, posing
challenges and influencing its operations. These factors include natural disasters, climate
change, water scarcity, the transition to clean energy, and pollution
Natural disasters can significantly impact oil prices. In 2005, Hurricane Katrina
disrupted nearly 20% of the U.S. oil supply, causing a $13.5 per barrel oil price
increase. Similarly, the Mississippi River flooding in May 2011 contributed to oil
price fluctuations.
Climate change, a pressing global issue, poses a substantial threat to the oil and gas
industry. Natural disasters triggered by climate change can disrupt infrastructure,
supply chains, and transportation of oil and gas, leading to shortages and price
volatility.
Water scarcity, another critical environmental concern, impacts the oil and gas
industry due to its reliance on water in drilling processes. As water resources dwindle,
the industry's consumption can exacerbate water shortages in drought-prone regions,
further straining water availability.
The shift towards clean energy, driven by environmental concerns and sustainability
initiatives, is also impacting the oil and gas industry. Governments and businesses are
increasingly investing in renewable energy sources, such as solar and wind power,
reducing demand for oil and gas. This transition poses challenges for the industry, as
it may lead to lower production and revenue.
Pollution, a significant environmental consequence of oil and gas extraction and use,
negatively impacts the industry's reputation and sustainability efforts. Greenhouse gas
emissions from oil and gas combustion contribute to climate change, while oil spills
can cause devastating harm to marine ecosystems and pose risks to human health.
Oil and gas companies are taking steps to mitigate their environmental impact and
adapt to changing environmental conditions. They are investing in technologies to
reduce greenhouse gas emissions, minimize water consumption, and prevent oil spills.
Additionally, they are exploring alternative energy sources and developing strategies
to transition towards a cleaner energy future.
LEGAL FACTORS
Legal frameworks play a significant role in shaping the oil and gas industry, varying across
countries. Examples include the Petroleum Act in the UK, the Federal Oil and Gas Royalty
Management Act in the USA, and the Petroleum and Natural Gas Rules in India.
Environmental laws significantly impact the oil and gas industry. Strict environmental
regulations can lead to penalties for high CO2 emissions, negatively affecting industry
profitability.
Labor laws also influence the oil and gas industry. Strict labor laws mandating high
wages for workers in challenging environments can increase labor costs and reduce
profits.
Laws promoting competition are beneficial for the oil and gas industry, preventing
monopolies and fostering a competitive landscape that drives innovation and growth.
Effective dispute resolution mechanisms are essential for the oil and gas industry,
providing a legal framework for resolving business and contract disputes efficiently.
Licensing requirements govern the operations of oil and gas companies. Companies
must obtain permits to conduct exploration activities, and governments have the
authority to restrict exploration by denying permits.
Occupational health and safety laws are central to the oil and gas industry. Companies
must adhere to strict health and safety standards and implement quality standards like
ISO/TS 29001 to ensure worker safety and environmental protection.
OPEC holds immense control over the global oil supply, managing nearly 80% of the world's
oil reserves according to 2018 statistics. By adjusting production levels, OPEC can influence
the price of oil, either increasing or decreasing it.
Prior to 2014, OPEC endeavored to maintain oil prices above $100 per barrel. However, in
mid-2014, oil prices experienced a dramatic decline, plummeting from over $100 a barrel to
below $50 a barrel. This price plunge was largely attributed to OPEC's decision to refrain
from cutting oil production.
IN POLITICAL FACTORS-
IN ECONOMIC FACTORS-
IN SOCIAL FACTORS:
Addressing Social Concerns: Engage with local communities to address social and
environmental concerns related to oil and gas operations, fostering trust and promoting
sustainable development.
IN TECHNOLOGICAL FACTORS:
IN ENVIRONMENTAL FACTORS:
References
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from: https://www.theguardian.com/business/2023/apr/03/why-are-oil-prices-rising-opec
Liang, A. & Thomas, D., (2022). Ukraine war: Oil prices fall back after cap on Russian crude kicks in.
BBC. Retrieved from: https://www.bbc.com/news/business-63855030
McGreal, C. (2021). Big oil and gas kept a dirty secret for decades. Now they may pay the price. The
Guardian. Retrieved from: https://www.theguardian.com/environment/2021/jun/30/climate-crimes-oil-and-
gas-environment
Silverstein, K. (2020). COVID-19 Is Killing Oil and Gas But the Virus Could Also Poison Renewables.
Forbes. Retrieved from: https://www.forbes.com/sites/kensilverstein/2020/04/06/covid-19-is-killing-oil-
and-gas-but-the-virus-could-also-poison-renewables/?sh=4eea8d6565cf
Sircar, A., Yadav, K., Rayavarapu, K., Bist, N., & Oza, H. (2021). Application of machine learning and
artificial intelligence in oil and gas industry. Petroleum Research, 6(4), 379-391.
Stevens, H. (2023). Why Biden’s oil policies upset both oil companies and environmentalists. The
Washington Post. Retrieved from: https://www.washingtonpost.com/climate-
environment/interactive/2023/biden-oil-drilling-permits-willow-project/