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Price of a product affects its demand and supply to the market at a prevailing; this trend is evident in the petroleum industry where the demand and supply of the petroleum products keeps on changing. This particularly happens in the demand for crude oil products that have risen drastically over the years. Speculation that prices of crude oil products are due to rise in the near future causes a change in demand. This, on the other hand, causes the suppliers of these products to hold the product; this is due to the anticipation that, in the future, they will sell at a higher price than the price in the current market. Grace (2006) states that the demand for petroleum products in the large economies, and the prices are volatile; consumers are more addicted to energy, and remarkably little can be done to stabilize this sector.

The petroleum industry is an essential commodity to the UK economy at all levels; this is because the price of petroleum products also affects the transport cost as well as the manufacturing costs. The overall effect of this is an increase in retail prices, which the consumer bears. With this trend, increase in crude oil prices, the cost of living will continue to increase due to the high retail prices of petroleum products.

Assumption of crude oil prices ($/bbl)

 

2001

2006

2010

2015

2020

Nominal price($/bbl)

27.7

25.4

33.6

35.0

39.8

FY 2001 real price ($/bbl)

22.4

23.3

24.0

24.7

25.5

Source: DOE Annual Energy Outlook, 2003.

A shortage of petroleum products in the market is not only a significant problem, but, it is also catastrophic to the whole world. The instability in demand and supply of petroleum products in the UK is mostly caused by the rise in prices of cruel products, crisis, such as the war in Iraq, and speculation about the future, which has led to hoarding. This country has a considerable demand for petroleum products due to the remarkable economic growth that it has experienced in the recent past; this has, therefore, caused disequilibrium between demand and supply.

Petroleum is the most vital resource that a country can have in the world today; a lot of countries have gone to war because of this precious product. The source of the UK’s petroleum products is Russia and the Middle East, which is the world’s most affected region because of the fuel crisis. There is an enormous conflict of interest in this industry because it is controlled by a small number of large players that have the largest share in the petroleum industry in the UK. These significant players include, Shell, Bp, Exxon, among others; these multinational companies are well established in this sector thus making it hard for new entries into the petroleum sector. These key players also work towards eliminating one another from the market so as to enable the winning company to form a monopoly. Therefore, there is an enormous conflict of interests in this sector involving the private sector and the government that owns some of the oligopolistic corporations

Price leadership occurs when one company in the market sets the price of a commodity and other substitute companies follow the lead. In the UK, the petroleum market price leadership is owned by few people that determine the price of these products. BP has been the world leader for a long time thus acting a price setter both in the UK and the world at large. The following data shows the share price of BP in the stock market that makes the best quoted petroleum industry.

In the oligopolistic nature of the petroleum industry, there is an existence of abnormal profits. The key players in this market are also the price setters; therefore, they set the price at a point where they make abnormal profits. Any efforts by the government to control the petroleum industry leads to hoarding that creates an abnormal shortage; this shortage leads to price increase that the companies sell their stocks at thus they make the abnormal profits.

This market is faced with so many barriers to entry that make it almost impossible to other players to enter this market and make any profits. These industries aim at protecting the existing industries so as to enable them to retain their abnormal profits. Entry by other players would mean that supply to the market would increase; this would lead to a fall in prices that in turn would lower the profits from supernormal to normal.

Entry Barriers

Economies of scale - this is where a company has an advantage to exploit the market resources; therefore, it develops a cost advantage over the new firms. This has made competition impossible by the new entrants into the market because the existing firms produce at remarkably low prices.

Strategic barriers - these include product identification, aggressive takeovers and remarkably low production costs that make it almost impossible for other players in the market to play.

Research and development - most of the well established companies, like Shell and BP, in the UK have invested to find out what is best for the end consumers as well in the market through research. The research also aids in development of new technologies that make these companies cost effective and produce the best products to the market. This is an enormous challenge to the small companies trying to venture into the industry.

There is also the regulation particularly in the oil industry concerning the environment; therefore, there are few players who are allowed in this market. This industry is mainly controlled by the government and meeting the deadline is hard, especially for individuals who might not meet the tax and the environmental conservation requirements.

Economic theory discusses many aspects of economics; they include production and consumption of goods and services. The petroleum industry to some extent does not conform to the economic theory because it limits entry and free competition in this market.

Just like the economic theory states, the petroleum industry is a remarkably competitive industry with few players that work towards eliminating each other. Like other businesses, it is a risky business that only few people venture into. It requires a detailed analysis of the cost and benefits before investing into it; this is because if the investor has not done enough research on it, he or she can experience enormous losses. 

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