Oil Gas Global Industry by wmj34955

VIEWS: 0 PAGES: 11

More Info
									                                                           Oil and Gas Industry   Page 1


Running head: ECONOMIC PROFILE OF THE OIL AND GAS INDUSTRY




             Economic Profile of the United States Oil and Gas Industry

                                   [Your Name]

                                 [Your University]

                                September 26, 2008
                                                                     Oil and Gas Industry     Page 2


                                              Abstract

The oil and gas industry is one of the most important industries in the world. Petroleum is the

single largest source of energy used in the United States. Forty-one percent of the crude oil

consumed in the United States is imported from other countries. Importation of crude oil has

resulted in a trade imbalance of $27 billion more goods being imported to the U.S. than are

exported to other countries. The United States is the largest producer of refined petroleum

products in the world with 25% of global production. The U.S. petroleum industry provided

$219 billion in annual shipments and employed over 101,000 workers in 2001. The wage paid to

production workers in petroleum refineries is one of the highest in the nation, about $27.40 per

hour.

There are a variety of factors, both foreign and domestic, that are affecting global supplies,

demand, and prices of oil and gas. These factors need to be carefully managed, domestic drilling

needs to be increased, conservation needs to be encouraged, and alternative energy sources need

to be encouraged to the maximum extent practical in order for global energy supplies to keep up

with increasing global energy demands for a healthy and growing global economy.
                                                                     Oil and Gas Industry     Page 3


                             Economic Profile of the Oil and Gas Industry

                                             Introduction

        Petroleum is the single largest source of energy used in the United States. The nation

uses two times more petroleum than either coal or natural gas and four times more than nuclear

power and renewable energy sources.

        The oil and gas industry in the United States is one of the most important, if not the most

important industry in the United States. Nearly all industries rely on the oil and gas industry in

some fashion. Finished products produced by refineries include fuels (gasoline, aviation fuels,

distilled and residual oil, liquefied petroleum gas, coke, and kerosene), non-fuel products

(asphalt, road oil, lubricants, solvents, and wax) and petrochemicals (ethylene, propylene,

benzene, and others).[4] The largest volume products of the industry are fuel oil and gasoline.

Petroleum is vital to many industries and is important to maintaining industrialized civilization

itself. Petroleum is thus a critical concern to many nations. The world consumes 30 billion

barrels of oil per year. The top oil consumers largely consist of developed nations. Twenty-four

percent of the oil consumed in 2004 was consumed by the United States. The production,

distribution, refining and retailing of petroleum represent the single largest global industry in

terms of dollar value. [6]

                    Economic Profile of the United States Oil and Gas Industry

        The petroleum industry includes the global processes of exploration, extraction, refining,

transporting (often by oil tankers and pipelines) and marketing petroleum products. Oil accounts

for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe

and Asia to a high of 53% for the Middle East. North America uses oil to produce 40% of the

energy consumed.[6] Labor productivity has improved significantly over the last decade, rising
                                                                     Oil and Gas Industry       Page 4


an average of nearly 3% between 1989 and 1999. In 2001, the average hourly wage for

production workers in the petroleum industry was $23.60 per hour. However, the United States

oil and gas industry extraction industry has lost over 21,000 jobs. The refining sector has lost

over 75,000 jobs or 4.5% of the workforce, since February 1982.

        The United States petroleum industry provided $219 billion in annual shipments and

employed over 101,000 people in 2001. The wage paid to production workers in petroleum

refineries is the highest in the nation, about $27.40 per hour, almost $4 higher than the petroleum

industry as a whole. [4]

        The United States is the largest, most sophisticated producer of refined petroleum

products in the world, representing about 29% of global production. At the end of 2000, the

United States had 150 operating refineries and 16.6 million barrels per day of crude oil

distillation capacity.

        During the 1960s, multinational corporations such as Mobil, British Petroleum (BP), and

Shell had access to more than 80% of the global oil and natural gas reserves. Today, world oil

reserves are 80% owned by the national oil companies of foreign governments, many formed

during the past thirty years. Only six percent of worldwide oil reserves are now held by investor-

owned companies. [2]

        The oil and gas industry in the United States can be roughly divided into three areas:

exploration and extraction, refining, and retail marketing.

Exploration and Extraction

        The first oil drilling in the United States began in 1859, when oil was successfully drilled

in Titusville, Pennsylvania. In the first quarter of the twentieth century, the United States

overtook Russia as the world’s largest oil producer. By the 1920s, oil fields had been established
                                                                      Oil and Gas Industry     Page 5


in many countries including Canada, Poland, Sweden, the Ukraine, the United States, and

Venezuela. In 1947, the first offshore oil platform was constructed off the Gulf coast of

Louisiana. [4]

        Due to regulatory and environmental issues, the United States has significantly reduced

the amount of oil exploration and extraction occurring within United States territory and has

begun importing crude oil instead. Currently, the United States produces just 41% of the crude

oil we consume. Canada is the largest external supplier of crude oil to the United States,

supplying 11.6% of the oil consumed. [2] Buying crude oil from other countries instead of

extracting our own oil reserves has resulted in a trade imbalance with billions more dollars being

spent to buy crude oil than are being earned from other countries. In 2001, the United States

exported $8.2 billion worth of goods and imported $35.2 billion of mostly crude oil, resulting in

a trade imbalance of $27 billion.

        Based on United States oil reserves currently identified, the U.S. has enough oil and

natural gas to produce 116.4 billion barrels of oil and 650.9 trillion cubic feet of natural gas.

These reserves could power over 65 million cars for 60 years and heat 60 million homes for 160

years. [2]

Refining

        The United States is the largest producer of refined petroleum products in the world with

25% of global production and 163 operating refineries (as of 1998). In 1997 refineries supplied

more than six billion barrels of finished products and employed more than 65,000 people.

United States refineries are also the largest energy consumers in manufacturing and spend $5 to

$6 billion annually in pollution abatement costs. [4] The petroleum refining industry continues to

be a strong contributor to the United States economy.
                                                                      Oil and Gas Industry     Page 6


       Since 1985, United States refining capacity has increased by twelve percent even though

there are 73 fewer refineries. It is more cost effective to add on to a refinery than to build a new

one. The elimination of subsidies under the government price and allocation controls in 1981 led

to the closure of many smaller, less efficient refineries throughout the 1980s and 1990s.

According to the U.S. Energy Information Administration, current domestic refinery expansion

plans will boost domestic refining capacity by another 800,000 barrels per day by 2010, the

equivalent of four new refineries. [2]

Retail Marketing

       In many ways, the retail marketing sector of the oil and gas industry is the most difficult.

Retailers are squeezed between the prices charged by the refineries (which are driven by the

prices charged for crude oil) and the transporters, and the amount the consumer considers a “fair”

price. The retailers are required to collect multiple taxes as part of the price they charge for fuel.

The taxes on gasoline sales can represent as much as 20% of the market price. [4]

       Fuel retailers are frequently threatened with investigations into “price gouging” if their

prices seem too high to consumers and local politicians, but if they lower their prices below cost,

they are threatened with investigations for “unfair business practices.” If they set their prices the

same as other retailers in their area, they are threatened with investigations for “price fixing” and

“collusion.”

                     Factors Affecting the United States Oil and Gas Industry

Shifts and Price Elasticity of Supply and Demand

       The United States demand for fuels and the price elasticity are significantly dependent on

time. Consumers have a base level of fuel that they must have for necessary functions

(commuting to work, driving to stores, transporting children) that is not easily or cheaply
                                                                    Oil and Gas Industry     Page 7


reduced. The reduction of this base fuel demand requires significant investment, such as buying

a new vehicle, moving, or changing jobs. The consumer will pay a significantly higher price for

this base level of fuel, unless the price of fuel becomes higher than the significant investment

required to make the drastic changes needed to reduce this base level or the consumer is

convinced that the price increase will be permanent or semi-permanent enough that the drastic

changes will pay for themselves in the fuel savings eventually.

       There is a level of fuel demand by consumers that is above the base level and represents

voluntary use of fuel, such as vacations, pleasure drives, and unnecessary vehicle use. This level

of demand is very sensitive to price. This voluntary fuel use can and will be eliminated when the

price of fuel increases.

       The United States oil and gas industry is also competing with an increasing global

demand for petroleum. Demand for gasoline has been met with strong supply fed by record

refinery production and high levels of imports. By contrast, the market for diesel is much

tighter. While production has been strong, supplies have been limited by weaker imports. The

Europeans are exporting less to the United States, because they are keeping more diesel fuel for

domestic consumption. Diesel prices are also higher today because it is a more advanced, low-

sulfur fuel. Such fuels may help improve air quality but they are more expensive to refine. [2]

       Many factors have contributed to today’s energy market. Demand is very strong,

especially in developing economies like China, India, and the Middle East. The world’s demand

for oil has increased in recent years, rising from 77 million barrels per day in 2001 to 86 million

barrels per day in 2007. [2]

Positive and Negative Externalities
                                                                      Oil and Gas Industry     Page 8


        The United States oil and gas industry can only extract 41% of the petroleum needed in

the U.S. from domestic sources. Many areas within the United States that are known to contain

petroleum reserves are located in publicly-owned areas that are restricted from petroleum

extraction by regulatory or legislative bans. Even areas when petroleum drilling is allowed

requires a permitting process that can require up to ten years before drilling can begin. The

Alaskan National Wildlife Reserve (ANWR), Gulf of Mexico offshore areas, and Pacific

offshore areas are all areas known to contain billions of barrels of oil, but drilling is not allowed

in these areas by United States companies, even though Cuban and Chinese oil and gas

companies are drilling in international waters just outside of the thirteen mile limit of the U.S.

coastline. Oil and gas drilling has become much more environmentally protective in the last two

decades. The surface footprint of a drilling operation has decreased to 2 acres while accessing

eighty square miles at the depth of the oil reserves. Currently, United States offshore operators

must operate under the requirements of 17 major permits and obey 90 set of federal regulations,

even to drill in the areas currently open for drilling. [2]

        Tight petroleum supplies have also been aggravated by political instability, resource

mismanagement and weather. The Iraq insurgency, civil unrest in Nigeria, and political

uncertainty in Venezuela are among the examples of political instability. Multiple hurricanes in

the Gulf of Mexico in the last two years have affected operations in both the United States and

Mexico.

Wage Inequalities

        Wage inequalities don’t have a significant impact on the oil and gas industry. Many of

the oil exporting countries, particularly in the Middle East, hire American and European workers
                                                                     Oil and Gas Industry      Page 9


to operate their oil and gas facilities. Wages for production workers in petroleum refineries in

the United States are among the highest in the nation. [4]

Monetary and Fiscal Policies

       The United States federal and state taxes paid by the consumer at the retail outlet for fuels

can be as high as 20%, which significantly increases the price of fuel and causes consumers to

lower their fuel usage as much as they can without significantly disrupting their lifestyles. [4]

       According to publicly available data on the top 27 energy companies, the total income tax

expenses incurred by these companies almost doubled between 2004 and 2006, increasing from

$48.4 billion to $90.4 billion. Imposing additional taxes on the United States oil and natural gas

industry is contrary to the goal of providing stable and cost-effective supplies of energy for

American consumers and discourages the tremendous capital investments needed to meet the

nation’s growing energy needs. [2]

       During the last year, the depreciation of the United States dollars against other countries

around the world has accelerated. For American consumers it means they are more affected by

raising crude oil prices than the citizens of other countries that use currencies like Euros or Yen.

                                             Conclusion

The oil and gas industry both affects the economy and is affected by the economy. Since

petroleum products are used by nearly every industry in some form, high fuel prices cause an

increase in the prices of most goods and services, which results in general inflation throughout

the economy. With the prices of all goods increasing, the consumer has less money available to

purchase fuel above the absolute minimum necessary, which causes a reduction in fuel demand

and causes more damage to the oil and gas industry.
                                                                   Oil and Gas Industry     Page 10


       Other economic factors that affect the oil and gas industry in a negative way include the

devaluation of the dollar. As the dollar continues to lose value against other currencies, the

imported crude oil consistently becomes more expensive, even if no other factors are increasing

prices. As the amount of fuel being sold decreases, state and federal governments receive less

tax revenue for road maintenance. If the governments respond by increasing the fuel taxes to

make up the shortfall, then the price of fuel increases and consumers buy less, which damages

the oil and gas industry further.

       As the U.S. economy continues to slow, politicians are discussing repealing tax

provisions designed to encourage investment in the United States. Repeal of these provisions

will discourage new domestic oil production and refinery investments, threaten American jobs,

and make it less economic to produce domestic energy resources; therefore increasing our

dependence on imported crude oil and gasoline. [2]
                                                             Oil and Gas Industry    Page 11


                                        References

1. American Petroleum Institute. (2008) Industry Sectors. Retrieved May 12, 2008 from

       http://www.api.org/aboutoilgas/sectors/.

2. America’s Oil and Natural Gas Industry. (2008) The Truth about Oil and Gasoline: An

       API Primer. Retrieved September 26, 2008 from http://www.api.org/aboutoilgas.

3. BP Global. (2008) Reports and Publications: Oil Reserves. Retrieved February 26,

       2008 from http://www.bp.com/sectiongenericarticle.do?category

       Id=9017902&contented=7033474.

4. Department of Energy. (1998) Petroleum Industry Analysis Brief. Retrieved September

       26, 2008 from http://www.eia.doe.gov/emeu/mecs/lab/petroleum/.

5. Halliday, Fred. The Middle East in International Relations: Power, Politics and

       Ideology. Cambridge University Pres: USA, 270.

6. Energy Information Administration. (2006) International Energy Annual 2004.

       Retrieved July 14, 2006 from

       http://www.eia.doe.gov/pub/international/iealf/tablee2.xls.

7. Library of Congress. (2005) Business & Economics Research Advisor. Issue 5/6:

       Winter 2005/Spring 2006. Retrieved September 21, 2008 from

       http://www.loc.gov/rr/business/BERA/issue5/issue5_main.html.

8. Robertson, P. J. (2003) Economic and Energy Development in the Middle East – A

       Time for Optimism. Business Briefing: Exploration & Production: The Oil & Gas

       Review 2003, Vol. 2, pp 28-32.

								
To top