Riordan Manufacturing Inc

The Petroleum Industry in the World Economy

Edward Perez, Gerald Drumright, Sherry Henry,

Andrea Carlson, Warren Busby, Lisa Holguin, Trent Madsen

ECO 360 - Economics for Business I

Facilitator: Albert Chavez

University of Phoenix Online

July 10, 2006

Petroleum Industry Economics

The petroleum industry plays a vital role in the world's economy. "The world consumes over 82 million barrels of oil per day (BPD), with the United States taking roughly 20 million BPD" (McFarlane). Petroleum is used to produce goods and services that are essential to the quality of life. It warms and cools our home and gets us where we need to go. Oil provides about 97 percent of transportation fuels, which power nearly all of the cars and trucks on the nation's highways. It is also used to produce plastics, medicines, fertilizers and many other products that are used on a daily basis. Needless to say, the petroleum industry has a tremendous impact on the economy. This paper will provide an industry overview and a SWOTT analysis for the petroleum industry and will analyze how the petroleum industry affects the Gross Domestic Product (GDP) and the inflation rate as measured by the consumer price index (CPI).

Industry Overview

Figure: Edwin Laurentine "Colonel" Drake (1819-1880)

(Wikipedia.com, n.d. para. 1).

In 1859 Edwin Drake made history by becoming the first person to drill for oil. His intensions were to obtain crude oil for the purpose of kerosene lamps. Over a century later we are using oil for cars, trucks, airplanes, trains and even in homes. Drilling for oil is not an easy task; improper techniques can terribly ruin the earth's natural physicality. Proper measures must be taken before drilling as mishaps can lead to leakage into the ocean resulting in negative media attention. Protecting the wildlife is a big concern. The industry has made tremendous strides with the use of technology. GPS satellites can help determine great areas for drilling using 3-D and 4-D images of the earth.

A refinery is used to process crude oil into petroleum products; the government is closely watching and testing to assure that the environment is being maintained. Air pollution is another factor that affects the petroleum industry. The burning of gasoline used in cars and diesel for trucks are sending pollutants into the sky that increases global warming. There are laws and actions that are developing as we speak to protect the earth from polluting the air.

SWOTT Analysis

Strengths

o World wide, existing oil and gas infrastructure is extensive.

o There is significant natural gas/oil in known fields.

o There are large deposits of fossil fuel, especially crude oil and gas worldwide.

o A network of natural gas/oil pipelines worldwide.

Weaknesses

o The challenge of environmental degradation arising from oil exploration and production, flooding, erosion and gas flaring.

o Declining production on existing wells.

o Environmentalist opposition to new drilling.

o Deep well opportunities are limited by the cost of technology and drilling and limited funding for exploration research.

o Production of green house gases.

Threats

o Resource sterilization.

o Price volatility.

o Perception that oil and gas operations are in fundamental opposition to environmental issues.

o Abandonment of marginal wells limits opportunities for secondary or enhanced production.

Opportunities

o Drilling deeper may result in significant new energy resource discoveries.

o Tar sands could be produced with innovative secondary or enhanced recovery techniques.

o Additional natural gas or oil could be produced from fields during CO2 sequestration.

o Alternative uses for depleted fields include sequestration, gas storage, and waste disposal.

o The shift to alternate fuels will create a demand for hydrogen resources that can be served by natural gas.

o Portable natural gas-powered engines located near depleted natural gas fields may facilitate small-scale, distributed electric power generation.

Real GDP and Unemployment Rate

Recently, the petroleum industry has taken a rise in the market. Despite the recent inventory, reviews stating that prices of petroleum would decrease have proven the industry wrong. Currently the cost of petroleum barrels is at an all-time record high. Oil is steadily holding a price tag of approximately $70.00 dollars a barrel. The current increase in cost, despite a rise in petrol stocks and a high demand, is associated with the false GDP statistics. GDP had originally estimated that the increase in supply would gradually occur over the course of a year. This was not the case as petroleum hit the supply world in less than 4 weeks at a 1.4 percent gain (http://www.nzherald.co).

Gross Domestic Product data has also caused a slippage in the petroleum industries unemployment rate. The petroleum industries unemployment rate is on the rise despite the recent attempts to create long-term mining jobs. Majorities of the petroleum industries are located in other countries and they estimate that the unemployment rate will increase 16% due to base closers. The petroleum industry is currently looking for ways to regulate the estimated unemployment increase over the next few years. The unemployment rate amongst the petroleum Industries is projected to be over 30,000 in this year alone. Some of the measures the industry is considering are tax amendments. These tax amendments will allow