Monopoly and Oligopoly in Oil Industry

Oil is a key energy source in the world. It has high energy consumption and is convenient for transportation, which makes it an indispensable energy resource. Currently, the world community is undergoing a period of structural reorganization of all spheres of public life. An important element of this process is the modernization of the oil market, which causes the appearance of many different types of market structures within the oil industry. Nowadays, the oil industry market is in a transitional position from monopolistic to oligopolistic competition. Despite the negative development forecasts, the oil industry market within the framework of oligopoly remains in demand in the long term.

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Definition of Monopoly and Oligopoly in the Oil Industry

The oil industry market has transformed from monopoly to oligopoly. In general, a market is a system of economic relations that takes shape in the processes of production, circulation, and distribution of goods, as well as cash flow (Hawdon, 2017). The market structure depends on the nature of the product, the number of sellers, and the possibility of entering the market (Hawdon, 2017). The characteristics of monopolistic and oligopolistic markets are shown in Table 1 (Hawdon, 2017).

Table 1. The Comparison of Pure Monopoly, Homogenous Oligopoly, Differentiated Oligopoly

 

Pure monopoly

Homogeneous oligopoly

Differentiated oligopoly

Nature of the product

one

Homogeneous products

Differentiated products

Number of sellers

one

a few

a few

Market entry

impossible

there are barriers

there are barriers

Initially, the petroleum industry was in the form of a monopoly. The only product was oil as a raw material; the primary characteristic was the substantial regulation of the industry by the state; the latter also made it impossible for private companies to enter the market (Mahdavi, 2014). However, the processes of globalization and the intensification of market relations in the economy have stimulated the transition from state regulation to private trade relations (Mahdavi, 2014). The oil industry remains to be strategically important for the functioning of the state; therefore, oligopoly is the only acceptable form in the oil market. In addition, at the present stage, the oil industry market is a differentiated oligopoly and is characterized by the presence of vertically integrated oil companies that operate in all market segments: oil production and refining, storage, wholesale, small wholesale, and retail sales of petroleum products. The dynamics of oil production in the world allowed defining the ten largest oligopolies of the oil industry in 2016. These dynamics are shown in Table 2 (Jiménez-Preciado, & Venegas-Martínez, 2017).

Table 2. The Dynamics of Oil Production in the World

 

A country

Production, million tons

Russia

513.5

Saudi Arabia

464.0

USA

450.0

China

207.0

Iran

180.0

Canada

177.0

Mexico

147.0

Brazil

134.0

Iraq

133.5

Kuwait

126.0

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Effect of Oligopoly in the Oil Industry

Oligopoly as an industry-specific market structure is characterized by a high degree of concentration and a small number of large producers (sellers) who are interdependent. Firms should take into account the possible reaction of rivals to their decisions in the field of price and volume selection (Gevorkyan & Semmler, 2016). Moreover, the oligopoly of the oil industry has negative characteristics. The main problems faced by potential and existing market participants are the restriction or the lack of access to refining, supply., and storage facilities for oil imposed by independent market participants (Gevorkyan & Semmler, 2016). This, in turn, affects companies and economies around the world.

The primary impact on the economy is related to the price of oil. In the oligopoly type of market, the oil price is decided by the joint agreement of all participants in the market (Hawdon, 2017). This deprives a particular country of the possibility to establish the price of oil independently (Hawdon, 2017). A constraining factor in the expansion of business activity in the United States, Iran, Saudi Arabia, and Russia is the high level of world energy prices achieved recently (“Article: Effects of Oligopolistic Nature,” 2018). For example, the United States, Russia, and Saudi Arabia are net oil importers (“Article: Effects of Oligopolistic Nature,” 2018). The recent stabilization of world prices for this resource at the level of $20-30 per barrel has had a generally negative impact on the economic development of these countries (“Article: Effects of Oligopolistic Nature,” 2018). This trend has emerged because the price contributes to the growth of costs, including transport and energy costs of companies, as well as other business sectors. However, since the above-mentioned countries are energy producers and the oil fields they develop are expensive, high world oil prices stimulate the development of the national oil industry, the emergence of expensive oil fields, and the spread of alternative energy sources.

The economic outlook for oligopolies in the oil industry also remains uncertain. On the one hand, for the United States and other industrialized countries, there was a favorable opportunity to use temporary easing in the global oil market to further implement energy-saving policy measures, to reconstruct and restructure energy-intensive industries (for example, the steel and aluminum sectors), to introduce energy-saving technologies, and to reduce the dependence on oil imports from OPEC countries (“Article: Effects of Oligopolistic Nature,” 2018). This opportunity can guarantee oil-importing countries that the exacerbation of energy tensions will not hinder economic growth in the short term. On the other hand, a drop in the level of oil prices in the short term may weaken the efforts of the United States and other industrialized countries to use energy more efficiently and to develop alternative sources (“Article: Effects of Oligopolistic Nature,” 2018). Thus, the proliferation of oligopolies has a contradictory impact on the functioning of the oil industry market.

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Future of Oligopoly in the Oil Industry

The above-mentioned factors predetermine the significant differences in the assessment of the future of the oil industry. First of all, the question of the number of oil reserves is essential. Statistical data on actual geological reserves of oil, published in various international and national publications, vary considerably (Jiménez-Preciado, & Venegas-Martínez, 2017). A thorough analysis of these sources suggests the most reliable and complete statistics on the probable oil reserves in 105 countries of the world (Jiménez-Preciado, & Venegas-Martínez, 2017). The total global reliable geological reserves of oil must have a steady upward trend over three decades even if there are significant deviations in the estimates for individual countries. The expansion of oil reserves at the end of the 20th century is related mainly to the detailed exploration work in already existing fields (Jiménez-Preciado, & Venegas-Martínez, 2017). As a result, despite a general reduction in the number of discoveries of new large oil fields and a decrease in the average value of their reserves, the total number of oil reserves in the already known and adjacent oil areas is noticeably growing. It also creates additional jobs and stimulates the development of oligopolies in the oil industry.

There are different points of view regarding the long-term prospects for the development of the world oil industry in connection with its provision of natural resources. There are radical assumptions that it will significantly lose its position in the first third of the 21st century and that the current century will be the era of alternative energy sources (Hawdon, 2017). Indeed, the world’s proven geological reserves and projected gas resources significantly exceed the oil resource potential (Hawdon, 2017). However, the specific features of alternative energy sources from the standpoint of their efficiency significantly narrow the scope of their application (Hawdon, 2017). Therefore, the oil will continue to play a leading role as the most convenient and highly efficient energy carrier.

To predict the future of the industry, it is vital to answer the question of whether the emergence of new efficient technologies for prospecting, exploring, and producing energy resources will lead to a noticeable increase in the volume of available oil reserves. According to pessimistic estimates, the oil industry has already spent billions of dollars on innovation. Thus, it is difficult to imagine a high-performance technology that would fundamentally affect the volume of oil production in the direction of their significant increase (Gevorkyan & Semmler, 2016). However, according to numerous optimists, the innovation revolution in oil production only starts unfolding (Jiménez-Preciado, & Venegas-Martínez, 2017). The existing technologies allow extracting from the field only about 30-35% of the total volume of oil available in it (Jiménez-Preciado, & Venegas-Martínez, 2017). According to the experts of the International Energy Agency, if investments in new technologies are maintained at the required level, there will be no drop in world oil production in the next two decades (Jiménez-Preciado, & Venegas-Martínez, 2017). Thus, the problem of depletion of world geological oil reserves in the foreseeable future is not critical because of the expected discovery of new fields and the use of scientific and technological advances that can increase the level of oil reservoirs, as well as enable commercially successful oil production by oligopolies.

Conclusion

Despite negative forecasts, the oil industry market in the form of oligopolies remains in demand in the long term. The oil industry market has historically been upgraded from a monopoly to an oligopoly. On the one hand, the proliferation of oligopolies stabilizes oil prices within the global economy and adversely affects oligopolistic companies, encouraging them to increase production costs. On the other hand, the oligopoly market stimulates the implementation of energy-saving policies and the introduction of innovations in the industry. The current trends in the oil industry market are the growth of geological reserves of oil, the creation of new jobs, and the attraction of investments. Thus, the oil industry remains the most convenient and highly efficient energy alternative.

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