Assignment Task ��
�The growing influence of OPEC, economic growth from non-OECD countries, Climate Change
Policy and the access to new fossil reserves are having an effect on how the future of refining is
shaping up globally� �
From the above, present a critical analysis about the veracity of this statement and the possible
implications for the UK Oil and Gas Retail Industry. ��
Total Marks for Assignment: 100�
Note: I underlined the key words of understanding that would give you direction on how to do the write
up. Mind you I am from United Kingdom and when it comes to critical analysis, the answers should
focus on UK oil & gas retail industry NOT America oil & gas retail industry PLEASE.
(Front page, Introduction, body, Conclusion, Page number, references (Harvard style), NO:- table of
contents, Executive Summary and Abstract)
DEVELOPMENT IN OIL AND GAS RETAIL UK INDUSTRY
UK Oil and Gas Retail Industry 2
Name
Institution
Date
Development in Oil and Gas Retail UK Industry
Introduction
The global oil and gas industry has undergone major turbulence, with economic,
environmental and policy factors influencing global refining to significant extents. The
mounting influence from the Organization of the Petroleum Exporting Countries (OPEC),
non-OECD (Organisation for Economic Co-operation and Development) countries’ economic
growth, changes in climate policy and new fossil reserves access; have been instrumental in
shaping the future of refining globally. As a result, oil supply fluctuations and disruption have
been witnessed across the UK, consequently destabilizing the industry. Most recently,
plummeting of fuel prices has been witnessed across the UK and globally, with experts
predicting more slumps in the future. Therefore, it can be argued that the above statement is
UK Oil and Gas Retail Industry 3
valid; and that the dynamics indicated could have lasting implications for the oil and gas
industry in the UK.
The petroleum market in the UK is composed of over 200 companies involved in
either refinery, distribution of marketing. UK’s oil and gas industry is classified as mature
and growth in reference to demand is virtually stagnant (UKPIA, 2012). Due to the numerous
changes affecting the industry in the recent years, the retail industry has endured reduced
returns as business turns into a low-margin-high-volume undertaking. The increasing number
of supermarket encroachment in the industry is also a major threat to oil and gas retailers.
This paper is a discussion of the impact of changing global refining trends and how
this will affect the oil and gas retail industry in the UK.
Discussion
Statement veracity
It is indeed true that economic, environmental and policy factors identified in the
statement including influence from OPEC, non-OECD countries’ growth, changes in climate
policy and new fossil reserves access are shaping the future of global refining. This is bound
to influence the retail industry extensively as will be discussed in this paper. The impact of
the dynamics identified above on global refining are elucidated as follows:
Influence from OPEC
OPEC is known to control crude oil prices and supply and is thus highly influential in
the oil and gas industry. OPEC consists of a group of countries in the Middle-East, formed to
UK Oil and Gas Retail Industry 4
create bargaining power in the oil and gas industry and thus influence supply and prices of
oil. Based on their bulk production and low production costs, OPEC are a major influence of
oil prices across the globe (Devold, 2015).
At a time when the world was experiencing a major slump on oil and gas prices due to
an influx in supply in 2015 for example, OPEC continued to supply more oil, conscious of
the fact that this would only make the prices fall even further. OPEC nations decided to
maintain their production targets of 30 million barrels a day in a bid to uphold its market
share (Reuters, 2014). This was a reaction to the increase in supply of Canada’s oil sands and
the U.S shale oil production, which was a threat to OPEC’s markets. OPEC’s major objective
as to keep pumping and thus drive the competing players, whose production costs are higher,
out of the market. This led to major plummeting of prices, falling by over 70% in 18 months
(BBC, 2016). It is not until February 2016 that OPEC countries initiated deal talks with
Russia to freeze their production in order to prevent negative effects on their economies.
While the deal is considered a noble idea, many remain sceptical on whether it will really
happen and whether it will lead to any changes in the industry (CNBC, 2016).
Based on the above discussion, it is notable that OPEC is very influential. Such
influence from OPEC affects global refining and consequently impacts on the oil and gas
retail industry.
Non-OECD countries’ growth
As non-OECD countries continue to experience exponential growth, their oil
consumption keeps increasing. This is unlike their OECD counterparts whose demand is
actually declining. According to a report by International Energy Agency (2015), non-OECD
countries are now demanding more oil than OECD countries, with leading regions being the
UK Oil and Gas Retail Industry 5
Middle East, Asia, India and non-OECD Americas. This is expected to increase overall
demand for oil as non-OECD countries prominent in the energy industry. Based on the law of
demand and supply, an increase in demand for oil by non-OECD could lead to an increase in
prices of oil over time. This could consequently impact global refining and eventually affect
the UK retail industry.
Changes in climate policy
Oil refinery has become a highly regulated industry sector in a bid to reduce the
climatic impact associated with this activity. Devold (2015) notes that as the severity of
climate change continues to be witnessed, higher standards are expected from industries in
terms of environmental conservation efforts. Climate policies emphasize on creating a low
carbon economy and the refinery sector must therefore adjust to accommodate such policy
changes. However, the oil and gas industry almost entirely relies on fossil fuels, which are a
major target of climate policies due to the high level of carbon emission. Companies
operating in the industry must work towards developing newer technologies to reduce carbon
emissions or seek alternative sources of energy. These might be expensive in the long-run,
thereby impacting supply and prices of fuel. The effect trickles down to the retailers because
any changes affecting refining are felt throughout the supply chain.
New fossil reserves access
Increased access to new fossil reserves insinuates greater supply of crude oil into the
market. It also means that there is greater competition in the oil and gas industry. The result
would be declining prices due to excessive supply, which in turn affects the retail industry’s
profitability levels.
Implications for oil and gas retail industry
UK Oil and Gas Retail Industry 6
The oil and gas retail industry in the UK has endured considerable fluctuations in
supply, demand and prices for oil and gas as a result of the dynamics indicated above. These
fluctuations affect the retail industry in different ways as discussed below.
Gas and oil prices have been declining in the recent past, yet future trends remain
significantly unpredictable. Based on the discussion of how various dynamics influence
global refining, it can be established that any change in prices or factors affecting the refining
process would have an impact on the U.K retail industry. In the event of higher prices,
retailers in the oil and gas industry are likely to suffer reduced demand, which would in turn
affect their profitability (Inkpen and Moffett, 2011). Their ability to access and purchase fuel
would also be curtailed, further affecting their performance.
It could be argued that with lower prices, the demand for oil and gas might increase,
such that retailers counteract the low process with high sales volume. However, this may not
be practical in the UK where the industry has reached maturity stage, with little or
insignificant changes in demand based on low prices (UKPIA, 2012). As a result, the retail
sector has to endure declining profitability and revenue growth (PWC, 2016). Other sectors
such as agriculture and manufacturing are however bound to gain from the current situation
because low prices insinuate lower production costs for them.
The demand for oil and gas products is not necessarily increasing in the UK market
despite the lowering prices. This insinuates that competition remains high and retailers must
adopt strategies aimed at increasing demand. Offering lower prices and other incentives are
the most common bargaining points for retailers. This further reduces their profit margins,
making the industry more difficult to survive in. According to UKPIA (2015), retailers are
UK Oil and Gas Retail Industry 7
now forced to make arrangements with popular brand names to sell fuel under their name in
order to attract customers.
Global trends in refining and consequent implications on competition has led to the
closure of some of the U.K’s refineries due to economic pressure. This means that the
country’s resilience in the event of oil shortage has been severely affected because there is a
large dependence on imports (Deloitte, 2012). Accordingly, the retail sector is at risk of
running out of stock in the event of an oil crisis. This would affect retailers to a significant
extent, affecting continuity of their businesses. Furthermore, increased imports expose the
retail sector to external supply chain shocks, which makes the industry highly volatile
(Deloitte, 2012).
The increase in supply of oil and gas as a result of increased access to new fossil
reserves and oversupply from OPEC countries for example means that there is increasing
competition among suppliers, wholesalers and manufacturers as they seek to reach potential
clients. This could be to the advantage of retailers because suppliers are more likely to bear
the cost of transport and deliver the products in a bid to capture the market. This helps in
reduction of transport costs and also enhances convenience (Deloitte, 2012). However,
increased competition has led to unhealthy competitive tactics among retailers, resulting in
unfair competition and eventually ousting weaker retailers. It is notable that retailers with
strong financial capability such as hypermarkets and large supermarket outlets are making
arrangements with manufacturers to purchase oil directly, at lower prices. The supermarkets
trend has been instrumental in the decline of the retail industry because regular players in the
sector can no longer compete with these outlets, which are capable of selling fuel at
considerably low prices (UKPIA, 2015). The effect is continued exit by UK gas and oil
UK Oil and Gas Retail Industry 8
retailers. Therefore, the effect of price fluctuations as influenced by the major dynamics that
affect global refining can be considered detrimental to the UK retail industry.
Fluctuations in returns from oil and gas is detrimental to the retail sector of gas and
oil. This can be explained by the loss of industry attractiveness, which has led to the exit of a
significant number of retailers and declined investment into the retail market in recent years.
According to UKPIA (2015), UK’s filling stations declined from 19,000 to 8,494 sites
between 1990 and 2015. The high-volume-low-margin business environment, thus limiting
margins for retailers. Coupled with increasing competition from large supermarket outlets
that tend to source their fuel directly from manufacturers, the retail sector is no longer as
lucrative as it was initially. Therefore the changing dynamics in the economy, environmental
and policy factors are likely to have a momentous impact on the growth of the oil and gas
retail industry.
Conclusion
This discussion undoubtedly proves that any changes in policy, environmental factors,
competitive environment, price and demand for oil and gas greatly influences the refining
activities globally and consequently impacts on the UK gas and retail market. The identified
dynamics including influence of OPEC, growth of non-OECD countries, climate policy
changes and access to new fossil reserves play a major role in influencing the gas and oil
industry. Such influence can be observed through changes in supply, demand and prices of oil
and gas; all which affect the retail industry in the UK. Based on fluctuations in demand,
supply and prices, the retail industry in the UK has been experiencing challenges ranging
from decreasing demand to reduction in profitability and investment returns. As a result, the
UK Oil and Gas Retail Industry 9
number of retailers in the industry has dropped significantly as investors exit the market. The
retail industry for oil and gas in the UK is losing its attractiveness and the level of investment
in this industry has declined portentously. Unfortunately, salvaging the situation could take a
considerable amount of time before the retail sector is re-established. In conclusion, it can be
justified that the influence from OPEC, non-OECD countries’ growth, changes in climate
policy and new fossil reserves access are shaping the future of global refining, with
consequent detrimental effect on the UK gas and oil retail industry.
Reference List
Baumeister, C, & Kilian, L 2016, ‘Forty Years of Oil Price Fluctuations: Why the Price of Oil
May Still Surprise Us†’, Journal Of Economic Perspectives, 30, 1, pp. 139-160,
Business Source Complete, EBSCOhost, viewed 18 July 2016.
BBC 2016, Oil price ‘may have bottomed out’, Retrieved from www.bbc.com/news/business-
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Biello, D 2016, ‘Cheap Oil Undermines Climate Cleanup’, Scientific American, 314, 3, pp.
Deloitte 2012, influence from OPEC, non-OECD countries’ growth, changes in climate
policy and new fossil reserves access are shaping the future of global refining,
UK Oil and Gas Retail Industry 11
Devold, H 2015, Oil and Gas Production Handbook: An Introduction to Oil and Gas
Production, Lulu.com, North Carolina.
Inkpen, AC., & Moffett, MH 2011, The Global Oil & Gas Industry: Management, Strategy &
Finance, PennWell Books, Oklahoma.
International Energy Agency, 2015, Energy balances of non-OECD countries,
Petroleum Economist 2015, ‘UK capacity margins slimmer than ever’, Petroleum Economist
Reuters 2014, OPEC keeps oil output target at 30 million barrels per day,
