The Marketplace

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The Marketplace
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• Markets and the Oil Industry

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Objectives

• To develop knowledge and understanding about the
  nature of markets
• To learn about one important market oil
• To appreciate the importance of markets for
  business managers

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Overview

• What is a market?
• The Oil industry
• Types of markets
• Market players and structure (supply chain)
• Market forces

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What is a market?

• A mechanism for exchange between the buyers and
  sellers of a particular good or service (8)
• Dynamic relationship in a demand, choice-based
  system (capitalist ideology)
• Involves an exchange based on perception of value
  and/or allocation of resources (economics
  perspective)
• Discovery, creation and realization of an
  opportunity (entrepreneurial perspective)

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The Oil Industry Overview

• Oil is a vital source of energy, transport fuel,
  and raw material in many manufacturing processes
• Oil is the worlds most important internationally
  traded item (volume and value)

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The Oil Industry Overview
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The Oil Industry Overview
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The Oil Industry Overview
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The Oil Industry Overview
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The International Flow of Oil
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Accessed via American Petroleum Institute
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Consumption of Oil by Country
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Consumption of 80 million barrels per day (OPEC,
Natl Geog)
Accessed via American Petroleum Institute
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The Oil Industry Price

• Oil prices affect
• Consumer decisions, industrial projects, input
  costs for manufacturers and transportation
  industries
• Supply of capital for international banking
  system
• Macro-economic factors like national income,
  ability to borrow and pay debt, currency
  valuation
• Oil is a global commodity its price is
  determined by supply and demand factors on a
  worldwide basis
• Producer countries (volume and quality of supply,
  extraction infrastructure productivity, risk
  premium),
• Consuming countries (demand, distribution
  infrastructure, tax)
• Intermediating industry (transportation and
  refinement)
• Price http//www.nymex.com/index.aspx and U.S.
  Energy Administration figures

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How Oil Prices Influence Gas
The price of gasoline is largely determined by
the worldwide demand for and supply of crude oil
American Petroleum Institute
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• Distribution factors
• Store location,
• Commercial arrangements with suppliers,
• Branded or un-branded gas,
• Size of the station

Accessed via American Petroleum Institute
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The Oil Industry Supply Chain

• Gas stations are just one destination for oil
  products. Other uses include
• Industrial, commercial and residential energy,
• Petrochemical industry (over 4000 products like
  ethylene, benzene, ammonia, propylene) with
  create plastics, synthetics, rubbers, and
  detergents
• Agriculture (fertilizer, running equipment)
• Gases (butane), light oils (aviation), and fuel
  oils (shipping), lubricants
• Residuals (asphalt, wax)
• Perfume!

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Accessed via American Petroleum Institute
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The Oil Industry Structure
Marketplace
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Transportation
Extraction
Exploration
Refining
Distribution
Customers

• The industry is characterized by
• Massive economies of scale, long term investments
• Production is most economic with a regular flow
  of inputs (profitability is eroded by variable
  flow as high fixed costs are paid over smaller
  ranges of output)
• Vertical integration, across national boundaries,
  to ensure regular supply and to reduce risk of
  interuption
• Traditionally dominated by oligopolies

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The Oil Industry Organizations
International Organizations OPEC, U.S. Energy
I.A., OECD, WTO, IMF and World Bank
Corporate Players Royal Dutch Shell, BP,
Exxon-Mobil, Chevron, Total SA,
National Players Saudi Aramco, National Iranian
Oil Co., Gazprom, Venezuelas PDV
Marketplace
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Transportation
Extraction
Exploration
Refining
Distribution
Customers
Canadian Players Petro-Canada, Syncrude, Irving
Oil
Market facilitators like New York, Cushing
Oklahoma, U.S. Gulf Coast, Rotterdam, Singapore
Financial Intermediaries like New York
Mercantile Exchange Commercial banks Foreign
Currency Trading Houses Investors
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The Oil Industry Trends

• Growing demand
• Rising incomes, population growth, emerging
  market industrialization
• Price/availability/attractiveness of alternate
  sources of energy
• Changing supply
• Approaching the peak of easy, cheap sweet oil
  supply (lower quality/harder to extract varieties
  still abundant)
• Growing cost of oil extraction/refinement
• Growing risk premium the price of political
  instability
• Environmental impact assessment
• Shift to nationalized producers in OPEC countries
• Western concern for future sources of supply
• At the rate of production in 2005, OPEC's oil
  reserves are sufficient to last more than 80
  years, while non-OPEC oil producers' reserves
  might last less than 30 years (OPEC)

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Takeaways Types of markets

• Major types of markets
• Business to consumer (e.g. gas stations)
• Business to business (e.g. OEMs selling to auto
  manufacturers)
• Business to government (e.g. paving roads)
• An industry is a group of firms participating
  in a supply chain, subject to similar market and
  environmental forces, competing with products
  aimed at satisfying the same buyers. Industries
  vary in terms of
• Economic features such as demand/supply, size,
  growth, age, pace of change, resource
  requirements
• Number and size of participants in supply chain
  who collectively form markets, all subject to
  rivalry or competitiveness in the industry, all
  competing with strategies to satisfy their
  customers

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Takeaways Types of Industries

• There are different types of industries
• Primary -- changing resources into primary
  products. Includes agriculture, fisheries,
  forestry, mining and quarrying
• Secondary -- create finished, usable products.
  Includes manufacturing and construction
• Tertiary -- provision of services to businesses
  and consumers. Includes banking, transportation,
  insurance, retail
• Quaternary -- provision of intellectual services
  such as research, development and information.
  Includes information and communication
  technology, consulting, research and development
• Quinary -- provision of not-for-profit services.
  Includes education, health, and culture.

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Next class

• To introduce students to Demand
• Review the data from the following 2006 Census
  http//www12.statcan.ca/english/census06/data/prof
  iles/community/Details/Page.cfm?B1AllCode112140
  01Code212CustomDataCountGeo1CSDGeo2PRLa
  ngESearchPR01SearchTextAntigonishSubd.ASea
  rchTypeBegins
• Ref works Sessions
• Wednesday, October 1 _at_ 1245-200pm NHB22
• Thursday, October 2 _at_ 1145-1230pm NH123
• Wednesday, October 8 _at_ 945-1100am NH123
• Thursday, October 9 _at_ 700-815pm NHB22

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Oil Industry Sources

• American Petroleum Institute
• International Energy Agency
• New York Mercantile Exchange
• OPEC Organization of the Petroleum Exporting
  Countries
• The End of Cheap Oil by Tim Appenzeller in 2004
  National Geographic
• Understanding the World Economy by Tony Cleaver
• U.S. Energy Information Administration

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