A Microeconomic Analysis Of British Petroleum Economics Essay

A Microeconomic Analysis Of British petroleum Economics rise turns per second (British Petroleum) origins lowlife be traced back to 1901 when William Know tried to research crude in Persia. The first commercial fossil oil colour dis even upy was do in the Middle East by BP in 1908. In 1935, the alliance prospered and was renamed the Anglo- Persian Oil Company. The war effort resulted in the British presidency becoming a sh beholder of the telephoner (until 1987). In 1950, Anglo-Iranian expanded into petrochemicals. The Iranian nationalization of the oil industry and subsequent diplomatic solution involving Britain, the US, and Iran conduct to the emergence of a new consortium involving Anglo-Iranian Oil called The British Petroleum Company (founded in 1954).1.2 Company OverviewBP is virtuoso of the largest vertically integrated oil and gas companies in the world. The companys operations primarily include the exploration and doing of gas and crude oil, as well as the mar keting and craft of innate(p) gas, power, and natural gas liquids. BP is headquartered in London, the UK and employs well-nigh 92,000 people.1.3 Why choosing BP for the kibosheavorThe company save r compensateues of $361,143 million during the financial twelvemonth ended celestial latitude 2008 (FY2008), an increase of 27% over the financial year ended celestial latitude 2007 (FY2007). The operating profit of the company was $36,347 million during FY2008, an increase of 9.2% over FY2007. The authorise profit was $21,157 million in FY2008, an increase of 1.5% over FY2007.1.4 Business commentaryBP is one of the worlds largest oil and gas companies. It has presence in more than blow countries across six continents. The company operates through deuce reportable origin segments exploration and production and refining and marketing. The company also operates through a third business segment, different businesses and corporate. Upstream activities involve oil and natural gas expl oration and field development and production. The midstream operations involve the self-control and management of crude oil and natural gas pipelines, processing and export terminals, and LNG processing facilities and transportation.For the FY2008, bps ecumenic clamswork consisted of some 22,600 locations branded BP, Amoco, ARCO, and Aral. BPs retail network in the US for the FY2008 comprised approximately 11,700 sites, of which approximately 9,200 were have by jobbers (who purchase their products directly from the refining companies and either sell them to retailers or directly to the end users) and 900 operated under a franchise agreement. At the end of FY2008, BPs European retail network consisted of approximately 8,600 sites and had approximately 2,300 sites in the rest of world.Other businesses and corporate segment of the company comprises treasury (which includes rice beer income on the companys cash and cash equivalents) the companys aluminum as aline, the alternative postal code business, and transportation system and corporate activities worldwide.1.5 What we will discussNot a clue yet.2. summary2.1 Microeconomic analysis2.1.1 Consumer take aim, monetary value snap fastener and BP tax taxations for FY 2008We will take one type here to analyse the law of involve and how it applies to BP. For this specific example we will use petrol as product. In general, the law of demand states that the quantity demanded of a good falls when the monetary value of the good rises (assuming other things equal). To represent this motley, the demand thread is used. It is a graph that represents the relationship amongst the price of a product (petrol in this case) and the quantity demanded.demand.JPGFigure The charter Curve(image taken from www.freeworldacademy.com)As you shtup see in figure1, when the price increased from P1 to P2 the quantity demanded dropped from Q1 to Q2. Changes in the demand curve nominate be caused by many figures such as th e consumer income, the price of substitutes and others.There are 2 categories of goods though. The ones that the demand doesnt change a lot when price is changed and those that even a small price change will result in a huge change in the demand. This is called the e ultimatelyicity of demand. The price e at lasticity of demand for petrol is inelastic (price elasticity inelastic.JPGFigure Inelastic demandYou coffin nail see here that an increase in price (p1 to p2) leads to a decrease in quantity (q1 to q2) that is proportionately smaller. This results in an increase of the correspond revenue of the company. Lets see how BP performed.revenue.JPGFigure BP revenue in 2008 (BP annual review)BP recorded revenues of $ 361.143 million in the year 2008 compared to $ 284.365 million in 2007.This large revenue increase is partially due to the very high oil price. dent Sutherland (BP chairman) said in his speech in February 2009 There are hardly a(prenominal) precedents in history for such a rapid and dramatic change in the business environment. In the space of a few months we went from a record oil price of more than $140 per barrel, and BP reporting two consecutive quarters of record profits for the group.This profitability in 2008, in theory can be based to the price effect which states that by and by a price increase, product (petrol) sells at a high price, which tends to higher(prenominal) revenue. The sales effect doesnt apply here because we are blithering about inelastic demand.2.1.2 Oil Market Structure (supply curve, market equilibrium, native surplus)Its hard and most times inaccurate to try and analyse the supply curve for inelastic products. A supply curve illustrates immobiles willingness to supply at busy prices. But in the oil industry at that place are exogenous factors that affect the prices. When a factor changes we say we have shifts in supply. That can be anything, for example a change in the number of square selling petrol, a chang e in the price of a factor input (oil exploration expenses) or a change in technology. In our case, the supply is not affected by customers willingness to bargain for. Someone will buy petrol at any price in order to cover their needs (e.g drive to work). But in theory, the more quantity requested, the higher the price set by the firm. In the case which the price has reached the train where quantity supplied equals quantity demanded, we use the term equilibrium. On a graph, it is the price at which the supply and demand curves intersect. The total surplus refers to the total net gain to consumers and firers from trading in the market. IT is the sum of the producer and consumer surplus. But in practice the things are a little bit different. There is evermore need for more petrol (or oil products generally). This means that BP and other firms can produce as much(prenominal) petrol as they want. The boundaries here are if the petroleum firms can produce more petrol. Its clear that the firm that can sell more barrels of oil, they will generate more revenue and gain more market take.BPs performance in the last 10 years has been exceptional well. They improve and increase the production any single year and thats due to increased refining availability.In the undermentioned page (figure4) you can see some of the performance factors.performance.JPGFigure BPs performance (picture taken from BPs annual report 2008)As you can see in the photo, the production was high but a bit lower that the year 2006. This is due to the unstable economy and prices in the last 2 years. BP still managed to increase their profits by improving their processes. The highlights of the year are replacement cost profit of $ 25.594 million (up 39%), corking expenditure and acquisitions of $ 30.700 million and share price increase. The complete table with selective information will be attached in the appendix.2.1.3 Government legislation ( contender indemnity and carbon trading)The compe tition policies are different from country to country. We will talk about the policies in England as the BP is a british firm. In the UK there is the role of Director of fair trading and their job is to supervise the behavior of companies. If they think that a firm is doing something is not supposed to do indeed they can refer those firms to the Competition Commission for investigation. The maximum market share that a company can hold is less than 25% of the total market. If it exceeds this limit the Director of fair trading can refer the company to the Competition Commission. Also, firms are not allowed to collude because this way they restrict the competition by setting prices. Also, because many companies operate in Europe or worldwide, there are other organisations that keep an eye on firms strategy.In the oil industry the top 3 competitors are Exxon Mobil, Royal Dutch Shell and BP. BP is the second largest refining and fuel retailing firm in the UK and third in the world. In their effort to become the largest petroleum and adduce high variety of products, BP merged or acquired other firms over the bypast few years. The companys key products and services now include the following Aromatics and acetyls, petrochemical products, oil and gas exploration and production, lubricants downstream derivative products, aluminum coil and other.To produce their products, firms utilise big amounts of energy. This energy usually comes from burning fossil fuels. For example, oil and coal are used to generate electricity. By burning these fuels, glasshouse gas is emitted in the atmosphere. Carbon dioxide is a pollutant and the European governments have set rules to try to reduce the emissions. The reason the firms dont care much about pollution is because they maximise profit by reducing their costs. Nowadays though, they have to digest big amounts of money depending how much they pollute the environment (surplus permits).BP is helping to assemble the worlds growin g demand for sustainable and affordable energy, building alternative energy businesses with the potential to grow and compete far into the future. gas.JPGIt is also impressive how much money BP invests in alternative energy, $ 1.4 billion just in 1 year. The total cost they are willing to invest is $ 8 billion. ersatz sources of energy BP is experimenting with are Wind (432MW), Solar(162MW) and Biofuels.Moreover, they are running a chore called CCS that stands for Carbon Capture and Storage. What CCS does is capturing the CO2 emitted during the burning and processing of fossil fuel. Then, it is transported and stored in deep geological formations such as gas or oil fields. CCS technology is supported by the government and the target is a worldwide implementation that will help reduce the problem of global warning.2.2 macroeconomic Analysis2.2.12.2.23. CONCLUSIONBased on your analysis, state your recommendations describing the possible strategies that the firm can consider.