Introduction
Oil is a natural resource and specific to a location. Oil continues to become difficult to harvest with time, as the topmost and easily available resources dwindle. Miners and explorers have to look for new technologies and examine new locations that did not feature as potential oil producing regions in the past few decades. The non-renewable nature of oil is also a factor that affects the relationship of the parties involved in the industry’s supply chain (Bridge & Billon 2013).
The claim for resources informs the dynamics of power in an oil supply chain, with the least endowed parties being the ones most likely to resort to aggressive tactics to force recognition and allocation of resources and their proceeds. In reviewing the ways in which power relations shape and affect different actors in the oil supply chain, the essay first breaks down the different elements of the supply chain and then presents the present structure of the supply chain globally. It then offers case examples as part of the discussion on power relations and their effects on the actors.
Nature of oil supply chain
The oil industry is based on extraction, thus its supply chain is producer driven and capital intensive. The only companies that take part in the production processes along the supply chain need to have adequate capital; thus, they are mostly transnational corporations (TNCs) or state owned operations. The multinational nature of TNCs allows them to leverage on the scale of operations to keep specific country operations’ costs low.
As a resource, oil is a combination of carbon and hydrogen elements. It produces different kinds of fuel when it is refined. The extraction process of oil takes long. In addition, the crude oil deposits follow certain geographic characteristics of the earth. Major oil production areas are in the Middle East, North America, West Africa, and South America. New regions are adding up to redistribute the historical concentration of oil producing countries.
Globally, oil has majorly been an affair controlled by seven companies, also called the “seven sisters”. They are Exxon, Royal Dutch Shell, British Petroleum (BP), Chevron, Texaco, Gulf Oil, and Mobil (Franks & Nunnally 2011). It is a highly integrated industry. These companies owned most of the technology used in the mining of oil. They also had significant stakes in oil producing regions of the 1900 to 1950s (Bridge & Billon 2013). They continue to dominate the industry globally, but have given way to state owned corporations and emerging multinationals in some emerging and historically oil producing areas around the world.
Nationalisation caused the weakening of the seven sisters’ power over global oil production. It also weakened OPEC, the organisation formed to deal with increased western dependence on oil and the declining prices of oil that were caused by the dominance of the seven sisters. Countries wanted independence. As producers of oil, they saw OPEC as a step towards more independence in their ability to set prices. At the same time, the industry experienced a number of oil shocks in the decades after 1950, which compelled major oil producers to think about innovative ways of safeguarding their economies that were dependent on oil production (Inkpen 2010).
In terms of consumption, major oil demand comes from the developed countries, with North America dominating the demand. Europe and Eurasia regions have also been dominant, while Asia Pacific is the newest dominant region. Africa and the Middle East still have considerably low demand, and so do South and Central America.
Oil prices were higher during the 1970-1990 periods, and later from 2005 to 2011. However, changing technologies in the development of crude oil reserves are threatening the high oil prices. High prices create more earnings for producer countries. They also make economic sense for exploration to persist, even where the cost of doing so is high.
Global supply chain of oil
The oil supply chain begins with exploration and then proceeds to the production of crude oil. The crude oil moves to the refining stage, which is handled by the same producers of crude oil or other companies. Refineries are mostly located away from the production centres and near export routes, such as seaports. Thus, there are midstream actors providing transportation as pipeline owners and operators, or just conventional transporters. After the refining stage, oil products move on to the market for consumption as fuel (Franks & Nunnally 2011).
There are states and firms dominating the power play in the upstream part of the chain. Firms continue to dominate the transportation of crude oil to refineries and they still have to deal with the state. The civil society also comes on board as a stakeholder, keen on the distribution of oil resources and the management of social and economic affairs around a country’s oil resource exploitation. Labourers also have a stake in the process, as suppliers of human service and stakeholders in the industry (Franks & Nunnally 2011).
In the exploration and production parts of the supply chain, companies wishing to engage with this sector have to first gain permission from the authorities in charge of the exploration region. Countries present oil exploration regions as blocs and then license the exploration companies to prospect for oil in these regions for a specific lease period. Agreements can explicitly determine the party that bears the cost of exploration and how firms pay for exploration privileges. The agreements also cover the relationship between the government and the firms during and after exploration. Successful exploration leads to the discovery of crude oil, which then ushers additional negotiations for production.
After successful negotiations, firms can become joint partners with governments to make a state owned corporation that handles the production of oil. They can also be independent producers answerable to the government as the main stakeholder, with certain arrangements made on revenue and cost sharing. Production then results in oil and gas sold locally and in the export market in crude form. Oil trading companies and transporters act in the midstream of the supply chain to link the explorers and producers with refiners and consumers. Pipelines are permanent infrastructures, just like roads, thus their development relies on negotiations with governments and could be undertaken by state firms to consolidate economic gains in the oil production sector.
Specific governments play a role as landlords, regulators, and producers in the oil supply chain. They receive rent for extraction of the oil mineral. They define the rules of engagement and business of oil in their jurisdiction and they act as exporting or importing states.
Firms, on the other hand, play increased intricate roles within the supply chain, as collaborators, independent, or government actors. The biggest and dominant multinationals like Exxon Mobil, BP, Total, Chevron, and Shell are vertically integrated. Their influence along the supply chain extends from the production to retail distribution points, although they do not necessarily manage the same country markets. Their different roles in the supply chain are often distributed among countries.
Independent firms manage the exploration, transport, and refining businesses. A firm can be in the business of transporting crude oil from producers to buyers using oil ship tankers. Others can build and operate pipelines in countries that produce oil. Many refineries around the world are also operated by private firms, which have a lease provided by governments. In addition to the main producers, transporters and refiners or distributors, there are also many smaller firms that provide services to larger firms and state corporations. These oil field service firms provide critical services, such as transportation, logistics, security, and recruitment of human resources to aid the process of exploration and production. They serve as outsourcing firms that carry non-essential operational burdens for the main producers.
Oil production interferes with the natural ecosystem of an area, while oil is a pollutant. Non-governmental organisations, other interested institutions, social movements, and government watchdogs create awareness around the effects and values of oil production to ensure that the industry players operate in transparent ways, gains reach communities affected by exploration and production activities, and environmental concerns of oil production do not go unattended. These organisations can operate at a local, national, regional, or global level. They can promote or discourage dealings with specific firms
Global Outlook
State corporations dominate the oil industry in the major producing countries, but multinational corporations still have a significant share of the business. The biggest producers are Saudi Aramco, National Iranian Oil Company, Exxon Mobil, Venezuela’s PdVSA, and China National Petroleum Corporation when looking at reserves of crude oil, production capacity, refinery capacity, and sales of oil as guidelines.
Power
The control of oil gives firms and state power. It is the same case with the control of critical aspects or levels of the supply chain. There are power relations between companies and governments that are involved in the exploration and production of oil. As governments control access to resources, they have the power to dictate the terms for firms that are willing to do exploration and production. At the same time, firms have access to technologies and funds, in some cases, which governments in small developing countries may not be able to access. Therefore, firms can also use their access to capital as a bargaining power to compel governments to give them favourable terms and exclusive access to the oil resources. They do this as a means of preventing competition and maximizing extraction economic gains, especially in the first years of operation to recoup their investments.
States will seek to dominate the relations of extraction and production of oil to exert their economic and political independence. In the process, they can affect the relationship with other states and cause economic or political tensions. Wars can arise out of differences in ideologies between states acting as producers and consumers. The control of oil resources assures states of economic prosperity. Challenging this position of states or firms receives hostile responses. Wars between states and firms are mainly economic, but they can become actual wars among the people affected by the distribution of resources related to oil. Wars also sabotage the operations of firms, while community interest groups can seek to force their way into the control position of oil resources.
Power dynamics, which lead to wars, economic liberty, and oil price changes happening between firms and states, may also occur among firms in the oil industry. Competition for access to resources and safeguarding of distinctive capabilities for competition are the main underlying factors for changes in power relations. Firms seek to gain more access to resources to cover their depleting resources and have an edge over their competitors in the market. The competition leads to a reduction in the prices of technologies and oil, as more firms enter the industry. Existing firms also contribute to this eventuality by discovering and using newer technologies to increase the production of oil or the efficacy of exploration. Diversification is also a consequence of increased competition, which is a strategy that firms use to increase their earnings and safeguard their positions in the industry.
Gains from oil resources and their redistribution to stakeholders attract scrutiny from the public, governments, firms, and the civil society. Each party seeks to have the highest possible allocation, thereby creating a power play over the equitable sharing of earnings.
Obi (2008) presents an example of stakeholder resistance to multinational firm entry into an oil-producing region in Nigeria. The Movement for the Emancipation of the Niger Delta (MEND), a radical group in Nigeria, resorted to bombing as a way of sending a warning to the Chinese interests in the Nigerian oil-extraction business that mainly occurred in the Niger Delta. This incident and its preceding circumstances highlight the power dynamics that affect countries acting as oil producers and importers, as well as firms and stakeholder groups. In Niger Delta, China is seeking to find a constant source of oil to fund its economic growth (Obi 2008).
Local groups that feel left out of the oil industry resources as major players can resort to the manipulation of populations and physical resources, such as denying firms access to production areas. They do this as a way of protecting their interests. Unfortunately, businesses’ interests will not easily allow disruptions to take place in order to protect capital investments and ensure there are returns gained from investments. Firms rely on their home and host governments for protection. On the other hand, governments, as signatories of global trade agreements, are obliged to protect business interests and safeguard their capital investments to maintain favourable relations with other countries.
A country like Nigeria with weak law enforcement, a poor record of human rights safeguards, and corruption is susceptible to the dynamics of power relations in the oil supply chain. Nigeria often finds itself as a recipient and a theatre of conflict between different industry stakeholders operating locally and globally (Obi 2008). At the same time, while referring to the case in Nigeria, Obi (2008) cautions that the struggle for resource control does not always emanate from revolutionary pressures from below. Instead, it can be an orchestration of elite groups seeking to obtain more power in the allocation of a country’s oil resources.
Similar to the Nigerian case, in Colombia, the Kofan people occupying major oil producing lands are in constant conflict and fighting infrastructural imperatives of globalisation and devastating effects of the oil industry. Their contempt for the rule of law makes them potential enemies to firms investing in the production and transportation of crude oil in Colombia (Salinas 2011).
On their part, multinational corporations embrace risk management as an important feature of their business, which involves dealing with local community groups and governments with varied interests and expectations (Frynas & Mellahi 2003). Risks to firms if something occurs in the oil supply chain depend on the firms’ goals and resources invested or expected out of the business interest. The same applies to governments and stakeholder groups. For example, firms facing increased hurdles in onshore exploration and production due to local resistance and geopolitics moved into offshore production, where they only had to deal with licensing rights and global environmental groups and enjoyed adequate protection of internal laws. This helped companies such as Chevron and Mobil to reduce their exposure to political risks prevalent in the exploration and production phases of the global oil supply chain (Frynas & Mellahi 2003).
Governments can embrace policies of nationalisation and expropriation of assets in the oil industry to affect the nature of their oil industries. These changes can come due to political ideology changes and influences from other countries. Other than the radical changes, firms all around the world have to deal with taxation and environmental legislation policies as part of their external business environment. Local ownership rules affect the interests of a firm in a given country’s oil resources and its ability to make dominant decisions affecting the actual oil production.
The global energy landscape is changing, as Europe and China, as well as other emerging economies prepare to become major dependants of oil imports. Meanwhile, the United States is preparing to cede its position as one of the biggest oil importers. An increase in unconventional oil and gas production in the United States promises to wean the country from global dependence. This shift should affect major oil companies’ concentration on production areas and the direction of exploration. It will also affect the global demand of oil as the market shifts away from North America to other regions.
Other than technologies, oil has always interacted with global politics for revolution to increase aggression. Nevertheless, a fall in prices to make the resource less lucrative may reduce its association with war in the future. Unfortunately, as long as energy security remains a project of national independence as sovereign nations, oil will always be a critical topic and a resource for firms and states (Colgan 2013).
Conclusion
Oil supply chain power dynamics are often volatile because of the significance of oil independence as a measure of a country’s political and economic security. States own the resources available within their borders, but often have to involve multinational corporations in mining. The companies use their access to technologies and capital as bargaining powers, while states use their access to the resources as their bargaining power. The policies of the states created by specific political ideologies and internal country pressures can affect the outlook of a country’s oil industry and affect the businesses of different participating firms in the supply chain.
States, as buyers, can also use their economic might to influence internal agreements and facilitate the access of their state owned corporations or other independent firms into the production of oil in other countries, as the case of China’s relations with Nigeria showed. On their part, firms seeking to avoid uncertainty often diversify their risk of operations along the chain. They find offshore production interest less risky than onshore ones. The future points to a decline in global prices, as countries like the U.S. become energy independent and global oil supply increases. Thus, aggressive power dynamics might reduce with the fall in prices.
Reference List
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Colgan, JD 2013, Petro-aggresion, when oil causes war, Cambridge University Press, Cambridge.
Franks, S & Nunnally, S 2011, Barbarians of oil, John Wiley & Sons, Hooboken, NJ.
Frynas, JG & Mellahi, K 2003, ‘Political risks as firm-specific (dis)advantages: Evidence on transnational oil firms in Nigeria’, Thunderbird International Business Review, vol 45, no. 5, pp. 541-565.
Inkpen, A 2010, ‘The global oil and gas industry’, Thunderbird School of Global Management, Web.
Obi, CL 2008, ‘Enter the dragon? Chinese oil companies & resistance in the Niger Delta’, Review of African Political Economy, vol 35, no. 117, pp. 417-434.
Salinas, C 2011, ‘Colonisation and resistance: oil, war, and the ongoing attempt to destroy the kofan people of colombia’, South Atlantic Quarterly, vol 110, no. 2, pp. 363-383.