The consumption of oil and gas is considered important for sustaining economic growth in this globalised and industrialized world. This sector provides wide range of chemicals and energy that are further vital for other industries, transport and households. The government also earns substantial export revenue and tax that inturn supports economy. Through this sector, more than 380,000 people get employment in UK (UK government Oil and Gas Sector strategy, 2012). However, the recent global recessions has reduced the demand of oil causing the rise in its prices. Furthermore, the environmental and the climatic changes have also constrained the growth and profitability of various industry players including retailers. The central aim of this report is to study the complex environmental factors that influence the oil and gas sector in UK and how these factors can affect development
UK is the world’s largest producer of natural gas and petrol in European Union and as per the report of BP Statistical Energy Survey, 2008; UK constitutes 0.29% of whole world’s oil reserve which is more than any other member country of EU. Moreover, it is one of the largest exporters of crude oil and main importers being US, Germany, Netherlands and France. In UK, large oil producers include BP, Shell, Total and ChevronTexaco. Production from oil and gas fields reached the peak in late 1990s, but gradually it declined over the past years (Oil and Gas in United Kingdom- Overview, 2013). Petroleum has also been produced in UK for centuries. At present, there are over 240 offshore fields for petroleum production. Large numbers of factors are there that affect the current oil and gas industry environment and thus influence the operations of retailers in the industry. Some of the significant factors comprises of Economy, technology and politics. These factors are as discussed below:
Political factors: Oil and gas is the most required commodity worldwide and any fluctuation in their prices greatly influences the economies of the nations. Volatility in the prices has not only affected the common people, but many companies had also been droven away. For this reason, prices are regularly monitored by various economists (Moffett and Inkpen, 2011). Political factors refer to the degree to which government interferes in the economy and thus in overall industrial sector. These factors include labor law, tax policy, trade restrictions, fiscal and monetary policy, tariffs as well the environmental law. All these factors have a great impact on various operation of the sector. Tax policies of the government have a huge impact on operations of the retail organizations. Due to increase in taxes, they have reduced their investment on plants and even encouraged the speculative activities by the retailer. Decisions made by the governmental bodies also directly or indirectly affect the oil and gas industry operations. For instance, the sector has major effect on climatic changes, due to which the UK government has tightened the law on decommissioning. It has also formulated various policies and laws that directed companies to produce energy for the economy while reducing the amount of emission and utilizing new energy option. The government has also introduced carbon tax charges in order to reduce the greenhouse gas emission generated by industry. Moreover, it has also levied several taxes on energy which inturn compelled the industry to look at new renewable energy options (Wils and Neilson, 2007). Apart from that, the government has adequate control over the oil prices, at the time of global high prices, it lower the prices of oil inturn creating financial problems for the fuel retailers that further lead to supply shortage. Presently, the oil companies are reaping huge benefits in terms of rise in energy prices etc., but certain environmental laws and policies have made difficult for them to sustain in long term. The production and exploration segment of industry is continuously affected by the regulations governing the production of oil and gas, royalties and taxation policies of government which inturn has increased their overall cost of production further leading to increase in prices for ultimate consumers (Moffett and Inkpen, 2011). Even the refining and retail segment is also subject to various laws which include regulation on underground storage of oil or gas, cleaner gasoline, reducing refinery emissions etc. Deregulation of certain restrictions as on one hand has enabled the business enterprises to acquire or merge with other companies, but this has also obliged companies to review or reconstruct their operations and establish cleaner fuels Apart from that, most of the oil reserves are controlled by government owned enterprises in many nations. Thus, it can be said that oil and gas industry is highly governed by the political bodies intervention (Vactor, 2010)..
Economical factor: Oil and gas sector both affect the nation’s economy as well as affect by the economy greatly. It has a complex relationship with the nation’s economy. As on one hand economic prosperity or growth lead to the increase in demand for oil and gas by both households as well as the industrial consumers (The economic impacts of the oil and natural gas industry on the US economy: Employment, Labor income and value added, 2009). These rises in demand comes from the energy and dependent sectors such as commercial sector, agriculture, transportation, residential and the industrial sector of the economy. The rise in demand may also pose economic unrest. While on the other hand, economic downturn also greatly affects the demand for such oil and gas commodities. The usage of oil and gas products is increasingly growing in every industry which means the fluctuation in their prices will have a great effect on prices of goods and services of other industries that further lead to inflation (Oil and Gas-Top 10 risks, n.d). Economic forces include economic condition, growth, inflation rate, interest and exchange rates etc. These factors tend to have major influence on business, its operations as well as decisions. In context with oil and gas industry, for instance, interest rate may affect the company’s cost of production which inturn influences the business growth and expansion. Exchange rates also have great affect on exporting of goods by firm. Moreover, the prices of oil and gas commodities are also influenced by demand and supply factor that affect the retail business to a great extent. The retail sector of oil and gas industry is subject to various challenges (Dey and et. al., 2007). Retailers face major problem because of the prices charged by producer or the refineries and the transporter and when the consumer considered it as unfair. More often allegations of “price gouging” are put on them when prices seems to be higher while when the prices are lowered by them below the actual cost, then they are investigated for doing unfair trade practices. Apart from these allegations, they are also charged for “collusion” and price fixing when they set same prices as that of the other retailers. High prices for the fuel may cause consumers to lower their consumption of fuel affecting the retail business greatly (Oil and Gas-Top 10 risks, N.d). Thus, it can be said that rise or fall in prices of oil and gas affect the retailing business extremely.
Technology: Technological changes have revolutionized the UK oil and gas industry greatly. Various technological innovations have provided the significant growth to nation’s economy as well as the economies of other countries. With the advancement, the nation has experienced the increase in production of natural gas and the oil which has reduced the importing of these commodities from other nations (Kassi and et. al., 2008). Upstream development of technology has affected each and every component of the industry which includes oil and gas producers, suppliers, service sector, oil and gas equipment manufacturer and the consumers also. In order to survive and sustain in this highly dynamic environment, it has become essential for the retailers of oil and gas products to keep pace with the technological changes. Thus, they are also adapting themselves with the latest technological upgrades in order to cut their increasing cost on investment and also to improve the service quality. They are implementing various applications such as POS customization, laboratories for testing the product etc. for enhancing their operations. In addition to this, retail enterprises are also equipping their premises with certain IT devices which benefitted them to cut their unnecessary costs (Pongsiri, 2004). Many giant companies are undertaking wet stock management technique that has great impact on profitability and the brand image. As the retail business organizations depends on transactional sales, it might lose their competitive position unless they capitalize their analytical abilities into business operations (Varqa, S. and Gibbons-Wood, 2004). This will help in making the strategic decisions for the corporation and will also aid in customer profiling and segmentation. The technological advancement provided many advantages to the retail business houses in rendering quality services to their customers. The fleet card is one of the techniques that is employed by today’s organization to entice more and more customers. Fleet card help in enhancing the efficiency in operations, control fuel and also manage record keeping. These upgradations will help the companies to reduce the operational cost and improve performance. Attributing to this fact, it can be rightly said that in order to survive in globalised and highly regulated business environment, retailers of oil and gas are required to adapt themselves with the innovative technologies and thus to ensure efficient operations (Arnott and Antill, 2000).
Regulation: Increased attention about the rise in oil and gas prices, balance of trade, energy security combined with concern about reducing the green house effects, gas emissions have lead to formulation of wide array of policies and regulations that supports energy efficient and biofuel products in EU (Oil and Gas in United Kingdom- Overview, 2013). Oil and gas are associated with several impacts on society as well as the environment. Due to the primary operation of the industry i.e. exploration, mining and extraction which affects the environment to large extent and moreover the consumption of the oil and gas commodities also pollute the atmosphere and create various environmental problem. While the chemicals used in the operations of the oil and gas extraction poses various problems (Kumar and Markeset, 2007). Thus, in order to address such issue and to maintain the sustainability in the economy various regulations have been imposed so as to control the operations of refineries and the oil & gas producers. These regulations not only affected the activities of the upstream organizations but the retailers and marketers are also subject to various rules and laws. There are various regulations which constitute both national and international legislation (UK government Oil and Gas Sector strategy, 2012). The primary legal instrument in context with oil and gas activities is IMO treaties. Oil and gas activities are extractive which create a high degree of societal and environmental disturbance and thus adversely affect the bio diversity and the socio-cultural communities. The problems through operations of extraction, refining and ultimate consumption arises in form global warming, air and water pollution, acid rain etc. which further affect the living beings. Because of these destructions, several regulations have been imposed on oil and gas operations which obliged companies to operate in accordance with practices and methods that support fair oil field practices and reasonable precautions (Longwell, 2002). This regulatory framework has greatly affected the profitability of the oil and gas retailers. Consolidation has also to great extent redefined the oil and gas industry which has enabled the companies to save costs, enhance competitive position, increase shareholder value and access to the latest technology. These activities further created the more integrated and aggressive market players. These leading players in turn dominate the retail segment of the industry and thus have great influence on oil and gas retailing in UK (Providing regulation and licensing of energy industries and infrastructure, 2012).
Societal factors: Oil and Gas industry is both positively and negatively affected by the social and cultural impact. The changing lifestyle of the people, innovation in the technology has increased the demand for oil and gas. Therefore the social factors are required to be considered at every stage of company’s life cycle in terms of expansion in new market, development of new operation, decommissioning etc. Societal forces include demographics, socio-economic, social infrastructure, cultural aspects, career attitudes etc. Changes in these factors influence the demand for oil and gas products and also on company’s operations (Gao, 2000). For instance, the improvement in standard of living of people have made them travel on their own vehicle, this in turn increased the demand for petrol, diesel and gas. On contrary, the increasing awareness of consumers towards the environment has also affected the demand for such products. For example, today’s generation people prefer more eco-friendly products which have further deceased the demand for oil (Wright, 2006) This awareness has also led to the invention of various solar products which again has declined the oil and gas consumption by households. Creation of the “Green Culture” in the nation has made people to use solar and hydro energies rather than oil or gas. Fluctuation in their prices has reinforced special concern of government, oil producers and even the consumers. Increase on their prices create a huge economical unrest and also give rise to inflationary pressures (Ajayji and et.al., 2011). This in turn compels households to reduce their consumption which then affect the business of retailers of oil and gas products.
Oil and gas are the essential source of energy for every economy on which various technological and economical development depends. Almost all industries require the fuel or energy for carrying out their operations and even the household depends on these products for their daily activities. Oil and gas are generally utilized in transportation, power generation as well as space heating etc. In sum, it can be concluded that being the highly regulated as well as competitive industry, the business enterprises are required to consider all the macro environmental factors before making any strategic decisions such as expansion in new market, introducing new activity etc (Vactor, 2010). As discussed above, it is clear that all the factors such as technological, political, and social greatly affect the growth and development of oil and gas companies and also the retailers. Apart from that the increase concern of modern generations and also the government towards the environment has influenced the demand for oil and gas severely which in turn requires the retail organizations to adapt their business with changing conditions. These factors when addressed effectively may assists in strengthening investment, global expansion, and adoption of the new technologies, sound infrastructure in distribution and the marketing for the retail companies. It is important for them to abide with all the rules, laws and regulations imposed by the government and thus operate in ethical and legal manner (Longwell, 2002) and also to work with regard to consumers as well as other stakeholders.
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