International Business Environment and Strategy

Extract

[...] International Business Environment and Strategy 1. You have been asked by a major oil company to analyse the likely developments in the oil market over the next five years. Carefully explain the theoretical underpinnings to any predictions you make. How might your predictions influence the future strategic direction of the oil company? Explain your reasoning. The process of industrialization and the subsequent move to a post- industrialized economy that have occurred worldwide for over a century has guaranteed continual oil consumption growth (excluding rare periods following infamous oil shocks), due to economies' structural dependence upon this energy source for the production of electricity, as an industrial input and as fuel for transport. [...]

[...] Yet there may indications of change. On the demand side, reports show that China's consumption and imports of oil decreased in 2005, by 1 million tons, against market predictions which overestimated the ‘China factor'. This reduction, attributed to energy-saving efforts and high oil prices, follows the exceptional 2004 growth. On the supply side, high prices, which may signal a new era rather than being a temporary spike, have increased upstream investment globally and projects now under development will soon be coming online. [...]

[...] The main contenders for the very long term in fact are considered so because exhaustibility is not one of their features. These are the renewable energy sources such as wind which is already making inroads in select countries like Germany. Already some countries have made it official government policy to be oil-free. Sweden has set 2020 as a target for independence from fossil fuels and Iceland is intent on becoming the world's first ‘hydrogen economy' by 2050. Will the world run out of oil? [...]

[...] In electricity generation, natural gas is increasingly becoming the energy source of choice. In addition, coal is set to be reborn—if in fact it did die—, thanks to its abundance and geographical dispersion, necessity and less polluting technology advances; as is nuclear energy. Also, renewable and non-conventional oil (such as ethane) appear to finally be feasible on a large scale and are often able to secure government subsidies. In the transport sector, an effect similar to that following the 1973 OPEC oil embargo may be in the cards. [...]

[...] In effect, oil though exhaustible may never be exhausted. Thus the long term sees oil consumption growth more likely to be smothered by lack of demand. Today we seem to be reaping punishment for the previous decade of low oil prices that discouraged investment, creating the current lack of supply. In the short and medium run, supply is still more probable to be the cause for a decrease in oil consumption growth. The long run on the other hand sees demand being at fault, at which point the world will have broken free of its addiction to oil. [...]