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Oil and gas Industry a.Describe any notable microeconomic relationships, market outcomes, and/or trends in this industry....

Oil and gas Industry

a.Describe any notable microeconomic relationships, market outcomes, and/or trends in this industry. Include a graph, chart, or table containing related data.

b.How might government impact this industry’s market prices, output, and/or market structure?

**250 words please

No data is required.

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Answer #1

The challenge in supply Looking more closely at the recent short-term recovery, it seems to represent a recent rebalancing of market fundamentals, in a way that will make supply more challenging over the next few years. Oil supply growth has eased off, demand is robust, and inventory levels are finally eroding. On the supply side, OPEC has been critical to this adjustment. Its November 2017 decision, made along with non-OPEC members, to cut supply by 1.8 million barrels/day (bbls/d) through 2018 accelerated this rebalancing Exhibit 1 Growth in world oil supply and demand Million barrels/day 3.0 2.5 2.0 1.5 Demand ■ Supply 0.5 Source: IEA Oil Market Report, December 2017 Strategy& research 2014 2015 2016 2017Despite these signs of a renaissance, the sector faces a number of supply-related challenges. First is an ongoing decline in new discoveries By the end of 2017, the volume of new oil and gas discoveries, was at its lowest since the early 1950s. To put this into perspective, only 3.5 billion barrels of liquids (crude, condensate, and natural gas liquids) were discovered in 2017, which was enough to meet only 10 percent of demand. The reasons for this decline are simple: Its getting harder to find the large discoveries known as elephants, and most prospective areas have already been explored Exhibit 3 The long decline in new oil and gas discoveries Global volumes of new discoveries in oil and gas Milions of barrels 240,000 200,000 160,000 120,000 80,000 Natural gas liquids 40,000 Crude oil Source: Rystad Energy; Strategy& research 1950 1960 1970 1980 1990 2000 2010 2017More broadly, global upstream capital expenditure, which dropped nearly 45 percent between 2014 and 2016 is now forecast to rise 6 percent year-on-year in the medium term. Oil and gas rig activity levels are rising, driven by the North American market, and major projects are being approved. To name a few examples: BP went ahead with the second phase of Mad Dog, a floating production platform, in the Gulf of Mexico. Shell reached a final decision to invest in the Penguins field redevelopment, its first new staffed installation in the northern North Sea in almost 30 years. Exploration is on the rise again for the first time since the global recession. Numerous companies made bids in the recent Mexican deepwater auction, with Shell winning nine blocks (out of 19) and Eni, Chevron, and Repsol, among others, picking up acreage. In other regions, Tullow won offshore licenses in Peru and Cote dIvoire, ExxonMobil entered Ghana and Namibia and offshore Mauritania, and BP with its partner Kosmos, began exploration off the shore of the Cote dIvoire Exhibit 2 Expanding investments in oil and gas exploration Global oil and gas capital expenditures USS milions 800k 700k 600k 500k North America driving growth in capex 12% Australia Europe Africa South America Asia -44% 6% Middle East North America 100k Source: Rystad Energy Strategy& research 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25b) In the Indian scenario, the government can have a partial influence on the landed price of oil for the Indian companies buying oil.

Lets first understand this scenario step-by-step:
1. Indian companies buy oil from international market, mainly in Dollars. This is because its a sellers market and they dictate that payment must be in Dollar terms

2. As India's currency is the Rupee, these companies have to buy Dollars from the market at market-based exchange rate

3. These companies sell processed Petrol/ Diesel in India in Rupees

Point 2 is where partial influence of government is at play. The aforementioned market-linked exchange rate of Rupees vs. Dollar can be very much influenced by government policies.

Now, if the government want, it can take action to strengthen the Rupee and bring the exchange rate down. This way, Indian companies buying crude and selling you Petrol/ Diesel will have to pay less and Rupee terms and consequently charge you less. Just what the consumers want.

Sounds like a win-win, right? No. If the Rupee strengthens above a limit, it will create havoc for India. Exports will tumble, foreign investments and inflows will cease and as a trickle-down effect, Indian economy will be on the brink of disaster.

In short, Indian government's decisions can have an impact on landed cost of oil and final prices of Petrol/ Diesel but it will be wrong to credit/ criticize them for the decrease/ increase in the prices of Petrol/ Diesel.

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