Assignment: Pricing Oil in World Markets: Backdrop
Because of its seemingly insatiable "addiction to oil," in the past the US was and still purchases crude oil primarily from countries in the Middle East. It is said that each day, the average payment to the tune of almost $1 billion a day leaves US shores to finance oil purchases, which is known to be the greatest outflow of wealth in the world. However, oil consumption in the US and elsewhere has been on the decline thanks to the development of alternative fuels, including bio-diesel, bio-fuels, solar power, and battery-based electric technologies. Another reason world oil supplies have risen, which you might be aware of is the practice of fracking and shale oil production in the US and Canada, which is a relatively new innovation. The use of newer technologies to extract oil has had far-reaching, multi-pronged effects that include:
A. An increase in the world oil supplies;
B. Reduction in the price of gasoline all over the world, including in the US where it sells for less than $2.50/gallon, which you must have witnessed, and
C. A reduction in the dependence of Middle East oil, which has the potential of severely mitigating global geo-political power plays and influence, regional conflicts and hegemony (e.g., Iran, Iraq, and Saudi Arabia etc.).
With the increase in global oil supplies, the economies of Saudi Arabia, Iran, Iraq, Russia, Nigeria and even Venezuela, among others, have been severely impacted-some are said to be on the verge of bankruptcy and economic disintegration due to the reduction of revenues and profits they earn from crude oil, which is selling at much lower prices. (Once priced at over $100 a barrel, crude oil prices fell to $45 per barrel and now is in the $60 range.) If you have been following the current news, you will have learnt that the Venezuelan economy has been decimated and verge of collapse due to the drop in oil prices. In a similar vein, with Russia already reeling from economic sanctions imposed on it due to their war with their ally Ukraine over the annexation of Crimea, the Russian economy, which is dependent on the export of oil and natural gas, has also suffered a double-whammy due to the drop in oil prices. Indeed, it is also said to be on the verge of devastation. (President Putin claims that this is the outcome of a political conspiracy of western countries to undermine Russia as well as sow the seeds of unseating Putin as President.)
With respect to oil producing countries, here are some additional facts to bear in mind:
A. In many countries, oil is a natural resource that is owned by state-run governments or kingdoms, and is considered an asset owned by the people;
B. Some oil-rich countries, such as Saudi Arabia and Kuwait, have tremendous capital reserves, and its citizens do not pay income taxes. In essence, these economies, are run on oil revenues.
C. Other oil-rich countries, such as Venezuela and Nigeria, which are dependent on oil-revenues could collapse due to lower oil prices.
D. The cost of oil extraction differs vastly. For example, shale oil extraction is far more expensive than extracting oil from desert and sea-based reserves, which is much less costly.
E. Oil-like any other product-is a business. And just as companies compete with one another, so do oil producing countries compete for multibillion dollar revenues and profits in which the stakes are EXTREMELY HIGH!!!
OBJECTIVES OF THE ASSIGNMENT ON PRICING STRATEGY
If you do your homework in earnest by conducting research online, this exercise can have a tremendous impact on increasing your understanding of pricing issues-including the impact of the invasion of Ukraine by Russia and the sanctions imposed by many countries of the world on Russia that has been on the news. Specifically, the objectives of this Assignment is to show you that with regard to crude oil, there is much more than companies competing against one another for a piece of the pie. Indeed, it goes over and above and beyond that to include countries competing for the high stakes crude oil commodity as well as economics and international geo-political political forces influences in trying to create (or even trying to break) the hegemony of others. If you do your research, you will even learn about the "back curse"-where many countries that have been endowed by nature's bounty to have vast natural resources are either repressive regimes as well as economies that are still economically backwards, although one might expect that with the wealth from oil it is put to good use to benefit the population of the countries in question. As you must have surmised, the whole impetus to develop alternative fuel sources, such as bio-fuels, and solar energy, including shale oil extraction and fracking in the US is to break the chokehold that oil producing countries and the Organization of Petroleum Exporting Countries or OPEC have on the economies of other countries. By weaning the US of its "addiction to oil," it will less dependent on and not under the influence of oil producing countries.
With the above backdrop, it is suggested that you conduct research online to increase your understanding of the oil industry and geo-political dynamics at work.
Additionally, apply your understanding from the Multimedia PowerPoint Video Lecture Modules as well as the Chapter on PRICING STRATEGY to answer the following extremely thought provoking Discussion Exercise, which asks you how you will tackle seemingly simple, but vexing strategic marketing issues that can have far reaching implications and ramifications. Although most students and people think marketing is "easy," attempt this exercise, which deals with the topic of PRICING STRATEGY and experience what it feels to think and make decisions like a CEO.
Task
1. What pricing strategy can be employed by the major oil producing countries as a response to the increase in shale oil supplies from Canada and primarily the us? Justify your decision by offering solid rationale in defense of your thoughts.
2. What is the business rationale for selling crude at an even lower price point than current prices? Justify your decision by offering solid rationale in defense of your thoughts. Could some countries have ulterior motives in the pricing objectives to sell oil at the breakeven price point or even lower price at a loss? Justify your decision by offering solid rationale in defense of your thoughts. (Personally, there's something fishy!!! Does anyone else perceive there are conspiracy theories at work? Lol!!!)