Home > Business essays > Pentroleum Industry as Oligopoly in United States

Essay: Pentroleum Industry as Oligopoly in United States

Essay details and download:

  • Subject area(s): Business essays
  • Reading time: 7 minutes
  • Price: Free download
  • Published: 17 September 2015*
  • File format: Text
  • Words: 1,792 (approx)
  • Number of pages: 8 (approx)

Text preview of this essay:

This page of the essay has 1,792 words. Download the full version above.

The oligopoly market is a few relatively large firms that have adequate to significant market power and that they recognize their interdependence. Each firm know that their choice of actions or changes in their outputs will have an effect on other firms and in response to the change, other firms will take actions accordingly to adjust therefore will affect its sales and revenue. (Thomas 428) To closely define, the oligopoly characteristics consist of (a) a few large dominant firms exercise market power in the industry (b) a product or services are standardized (c) firm’s decision can affect the demand and marginal revenue of other firms in the market; and (d) the entry barriers to become a dominant firm consist of costly capital expenditures. With these characteristics, there are usually as few as two and as many as ten firms that make up large market shares in any one particular industry.
According to U.S. Energy Information Administration website (eia.gov), a crude oil refinery is identified as a collection of many industrial facilities that turns crude oil into petroleum as finished products. Petroleum and oil are used interchangeably.
This paper focuses on the oil industry, limited to crude oil and refineries U.S. based companies, is identified as oligopoly in U.S. market due to their market shares and powers.
Dominant Firms
The oil and gas industry in general is dominated by a few large firms therefore it is set as operating in an oligopoly market. Due to acquisitions in the industry, the four largest oil companies in the United States control the market power.
ExxonMobil, Chevron, ConocoPhillips and Marathon Oil dominate the oil industry in the United States. These four U.S. based companies are actively and highly involving in variety venues to shape the oil supply chain in this country. They are focusing investing in research and development, exploration and production as well as transportation, refining, and retail marketing, both in the United States and worldwide.
As shown in the chart below, reflecting 2013, the big four hold approximately 80 percent market value of the Oil and Gas companies in U.S. as U.S. base companies. Their main competitors are Royal Dutch Shell  and British Pentroleum (BP)  Amoco-Arco. Exxon Mobil controls about 41 percent of the US market share; following after is Chevron dominating almost a quarter of the market share and ConocoPhillips at 12 percent and Marathon Petroleum/Oil, 3 percent.
The companies are dominating the oil market by the numbers of its operating refinery locations in U.S. According to the Petroleum Administration for Defense Districts, PAD District, there are total of 143 operable refineries in the countries as of January 1, 2013. However, there are 139 only operating refineries in the country with 11 in District I, 27 in District II, concentrated areas in District III and V with 56 and 32, and 17 in District IV. ConocoPhillips has 13 refineries, Exxon Mobil has 7, Marathon Oil Corp and Chevron both has 6 refineries each.
There are almost 18 millions barrels produced totally per calendar day in US. Conoco Phillips took second lead with 1.6 millions barrels per calendar day after ExxonMobil, who produces 1.9 million barrels, see list below. The big four companies, combined, produced about 30 percent of the total barrels per calendar day in 2013.
Companies Barrels per Calendar Day (b/cd)*
ExxonMobil 1,855,600
ConocoPhillips 1,594,000
Marathon Oil Corp. 1,248,000
Chevron Corp. 943,271
Others 13,430,788
Source: Energy Information Administration, Refinery Capacity 2013
Oligopoly firms compete for profits the same way as other firms in different markets. Firms choose to optimize their quantities where marginal revenue equals marginal cost (MR=MC). Price is set using Demand curve as guideline where per unit cost is on the average total cost (ATC) curve. Petroleum companies are interdependent on its productions. Oil price is directly affected by the decisions of all firms in the industry on the prices they are willing to sell and the output they are able to produce. If there is a shortage in supply, the price of oil will most likely to increase. Demand for oil, just like any Demand curves, is influenced by major factors such as external factors like the seasonal, change of taste in products of consumers, substitute and complement products etc. For example, oil price goes up during summer due to increase in traveling, both by cars and airplanes, therefore the demand of oil increase via the increase in demand of gasoline usage. It goes the same as in an increase in car sales can also increase in demand of oil. However, substitution in electric and hybrid cars can reduce the usage of gasoline therefore the demand of oil decreases. Price increases in short-term demand doesn’t effects on consumer’s behavior, however, in the long run, consumers will find alternatives for cost-savings.
Pricing among firms in the oil industry is consistent because of advances in technology and the price control of cartels, OPEC. Firms are constantly find way to increase their reserves. The more reserves and storage a firm has, the stronger power it has in the market. Since petroleum products are standardized, firms promote brand recall and brand recognition, putting their logos out there, as much as they can. Most firms spend a lot on advertising for its standardized products. Successful advertising and marketing campaign can increase sales. Therefore, we can say that there is a direct relationship between marketing budgets and marginal supply generated. For example, Chevron focuses on cleaner air and engine in their marketing campaign as a way to advertise the improvement on quality and customer’s benefits. To give financial and added-value incentives to loyal customers, Chevron paired up with Von’s, a supermarket chain, to start up the “Great Gasoline & Grocery Giveaway” and savings on gasoline using Von’s club card. (Horovitz)
Recently, ExxonMobil spends $190 billion on new explorations and development therefore it invests in the ‘Energy lives here.’ campaign which including their advertising on sponsorship and product placement such as promoting National Math & Science Initiative in Dallas, TX to gain positive supports from its customers.
Barriers to entry
To achieve the maximum profits, the firms must compete and rely on its size to effectively lower their marginal cost. Technologies play an instrument role in trimming costs while increase reserves. Firms invest millions in research and development as well as upgrading their equipment and machines. For example, in order to continue being one of the market power holders, ExxonMobil invests nearly $600 million annually in technology and expansion so its refinery facilities can be 60 percent larger than its competitors. This has made Exxon Mobil the
second largest firm in the oil industry nationally and globally.
It is expensive for a new firm to enter the petroleum industry. Sunk cost is the number one reason why the oil industry has high barriers to entry. To be in the oil industry, firms have to understand that it is a long-term commitment. It may take up to 10 years for a refinery to be up and running. Full operation begins after the oil field is thoroughly analyzed. The newest refinery in the US began operating in 2008. It is based in Douglas, Wyoming. Once the refinery is up and running, it continues to produce a steady output which is inflexible to any ‘current’ market situation. Therefore, firms know that in order to operate most efficiently and resourcefully, they must take advantage of combining operations or acquisitions. Firms are looking to venture on buying separated refining assets to maximize their productivities and lower costs. This helps them lower their input price while increasing their supply.
Every firm wants to increase its supplies and sell more than others to gain market shares and power. The oil industry has the privilege to working their ways to increase profits by their relationship with the U.S. government. The oil firms have been working closely with the government and state agencies since the 1920s for especial regulations regarding refineries and preservatives/storage. The oil industry favors those who favor them. Due to limited natural supplies, the government intervenes with the storage areas and refineries sites. The constraints are also based on oil field itself, human resources matters such as personnel and the equipment and supplies use.
Strategies and Decisions
Several large oil and gas producers with refining operations, including Marathon Oil Corporation and ConocoPhillips, reassigned their refining resources to stand-alone refining companies. In early 2011, Marathon Oil announced dividing its upstream and downstream
operations into two separate entities to seek stronger financial returns. Marathon Oil became pure-play exploration and production side of the house while Marathon Petroleum holds is downstream unit. Within one year of this decision, Marathon Oil’s revenues grew by 6 percent. The eight percent increase in exploration and production revenues has resulted in higher oil volumes and a net realized gain on crude oil byproduct of $15 million. In 2012, the company announced that it would spend $5.2 billion in 2013 for equipment and facilities upgrades and exploration.
Soon after, ConocoPhillips recreated its portfolio by creating two public trades firms with different business strategies. In 2012, ConocoPhillips announced focuses on upstream activities while Phillips 66 heads its direction to midstream and downstream activities. The Phillips 66 firm engages in production side of the house, downstream, such as the refining and marketing and chemicals productions leaving ConocoPhillips to fully focus on research and development and inventions. (Schaefer)
Another venue to expand their power and maximize profits with limited capital spending, firms in different industries merges with one another. For example, Delta Air Lines, which is not in the oil industry and does not own any refineries, has purchased one of ConocoPhillips’s refineries. This way, it doesn’t have to depend on the external oil supply and be able to produce jet fuel for its airplanes. It could also making additional revenues by producing other petroleum products that it does not consume and sell to the oil industry. For the future outlook, Delta Air Lines can slowly emerge into the oil industry.
In conclusion, the oil industry in U.S. has the oligopoly market structure. It reflects the key characteristics of the structure such as a few firms hold a substantial market power. Although petroleum products are standardized, firms strive to differentiate their products via
promotions and marketing campaigns. Due to the nature of technology and economics scales of the industry, significant set-up and maintenance cost are required as well as government constraints and long-term commitment, the petroleum industry has high barriers to entry into the market. Firm doesn’t directly setting prices for their products, oil companies maximize their profits by lowering cost and marketing campaigns. Firm’s decision on its output and storage capacity may affect the price of petroleum product in the industry as a whole. To effectively expanding their outputs and gain larger market shares, firms aim specializing sectors and merge with different industries.

...(download the rest of the essay above)

About this essay:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay Sauce, Pentroleum Industry as Oligopoly in United States. Available from:<https://www.essaysauce.com/business-essays/essay-pentroleum-industry-as-oligopoly-in-united-states/> [Accessed 20-09-23].

These Business essays have been submitted to us by students in order to help you with your studies.

* This essay may have been previously published on Essay.uk.com at an earlier date.