Power Relations in the Oil Supply Chain

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Table of Contents

Introduction
Main body
Conclusion
Reference List

Introduction

Supply Chain Management [SCM] is a fundamental strategic management element not only in enhancing flow of products and services, but also in assisting organisations to cope with volatile business environments (Lin, Tsao & Lin 2013).

Power is a fundamental element in supply chain because it influences various actors. Cox et al. (2003, p. 3) define power as ‘the ability of a firm to own and control critical assets in markets and supply chain that allows it to sustain its ability to appropriate and accumulate value for itself by constantly leveraging its suppliers, competitors, and customers’.

Power in the supply chains originates from different places, which include mediated and non-mediated sources. The mediated sources relate to coercive and reward power, while non-mediated sources originate from the actions of the various links in the supply chain (Flynn, Morita & Machuca 2011).

The oil supply chain is characterised with diverse participants who possess varying degree of power. Some of the actors include firms, states, and labour interest groups such as the civil society and international financial institutions amongst others.

Barber (2010) emphasises that some sections within the supply chain may frequently fall under the control of one actor whose capacity of influencing the supply chain extends to both the downstream and upstream activities. The power held by the actors has the capacity of influencing the degree of relationship commitment within the supply chain.

This paper analyses how power relations by different actors in the oil sector impact and affect the oil supply chain. The paper is based on a number of analytical frameworks, which include Supply Chain Management [SCM], Global Production Networks [GPNs], and the Global Commodity Chains [GCCs].

Understanding power relations in the oil supply chain will provide the actors with insight on the potential impact of the power held by the respective participants. Ultimately, the actors will be in a position to develop an effective supply chain.

Main body

The state

Oil moves through an extensive Global Production Network [GPN], which is comprised of upstream, midstream, downstream, and back-stream processes. The power relations between these two actors lead to tension, which has considerable effect on oil’s geopolitics. For example, the major oil importers such as the European Union countries, the United States, and China have significant influence on the supply of crude oil (Bridge & Billon 2013).

States also influence oil production due to the power held with regard to ownership. States control resources in an effort to generate economic rent, which makes them oil proprietors. Subsequently, the power to explore underground oil is vested on the state (Bridge & Billon 2013).However, firms are provided with an opportunity to exploit the oil based on predetermined conditions.

For example, the UK national government owns all gas and oil resources both offshore and onshore. It ownership is based on the 1934 Petroleum Act. Subsequently, oil exploration firms in the country have to seek exploration licenses from the national government. Unlike the UK, the power to control oil exploration activities by the US government is only restricted to federal lands. Thus, firms have the right to explore and exploit oil reserves on private land (Bridge & Billon 2013).

The fact that oil resources are owned by the state increases the level of political influence within the supply chain. Political factors determine the nationality [local or foreign] of the firms that will be provided with an opportunity to access the oil resources. Furthermore, political factors also determine other conditions in the oil production process such as the financial and environmental conservation requirements (Bridge and Billon 2013).

National oil companies possess significant power with reference to oil production. It is estimated that the NOCs control world oil reserves, and thus they have the capacity to influence the flow of the oil through the supply chain. Examples of such companies include Saudi Aramco, Kuwait Petroleum Corporation, Venezuela’s PdVSA, and the National Iranian Oil Company.

Furthermore, the relative power held by the NOCs increases their ability to establish a balance within the supply chain. For example, during the time of oil crises, the NOCs can increase their production capacity, hence stabilising oil prices. For example, between 1970 and 1981, Saudi Arabia increased its oil production 3 times, hence establishing its dominance in the global oil supply chain.

Additionally, the US frequently requested Saudi Arabia to increase its oil production during the 2008 recession (Bridge & Billon 2013). Despite the fact that governments own oil resources, transnational and national oil companies can shape the political environment through their diplomatic relationships both domestically and internationally.

For example, ITT, which is a leading manufacturer in the US, pressurised the US government to halt the election of President Salvador Allende of Chile in 1970. Subsequently, firms’ power in establishing government-firm relationship shapes the oil supply chain by ensuring consistent oil exploration and production (Frynas & Mellahi 2003).

In addition to being oil proprietors, states also influence the supply chain through their regulatory power. The regulations imposed by governments vary. Examples of such regulations ensure that the firms’ operations adhere to the set standards (Lussier & Sherman 2013).

For example, governments in oil-producing countries have an obligation to ensure that the oil production processes comply with international commitments such as the United Nation Framework Convention on Climate Change. The framework aims at ensuring that the oil production process does not increase the rate of climate change (Bridge & Billon 2013).

Furthermore, governments implement national laws in an effort to control the production activities of the oil-producing firms. For example, the US government, through the Minerals Management Service [MMS], which is one of its federal agencies, stipulated strict guidelines that oil firms should follow in their oil exploration and production processes in the Gulf of Mexico.

The need for new regulations was motivated by the deep horizon spill that occurred in the Gulf of Mexico in 2010 (Bridge & Billon 2013). The regulatory power held by the state can also influence the supply chain by limiting trade relations between various actors in the oil supply chain, such as firm-government relations due to different reasons such as security (Fagan & Munck 2009).

The US government restricted companies domiciled in the US from engaging in oil trade activities is some countries characterised by acts of terror and human rights abuse. In 1995 and 1997, the US banned its citizens and firms from engaging in trade activities with the Sudanese and Iranian oil sectors respectively. Furthermore, the EU increased its sanctions on the Iranian oil sector in 2010 (Bridge & Billon 2013).

Firms

The global oil industry is characterised by well-developed Global Commodity Chains [GCCs], as evidenced by the existence of inter-organisational networks established by major oil companies. Some of the well-established oil multinational companies include British Petroleum, Total, Exxon, Chevron, and Shell. The oil companies link states, households, and enterprises to the commodity.

Moreover, the oil companies collaborate with one another in their operations (Bridge & Billon 2013). The major multinational oil companies command a significant position within the oil GPN and have a powerful influence on the supply-chain management components because of their ability to influence the price.

In an effort to enhance their power within the supply chain, the multinational companies started adopting the concept of consolidation in their SCM processes. One of the strategies commonly adopted involve the formation of mergers and acquisitions.

Consequently, the major industry players [Total, Exxon, ConocoPhillips, Shell, BP, Chevron, and ENI] have continued to be the most profitable oil producers despite the fact that they hold a comparatively small proportion of the total global oil reserves (Bridge & Billon 2013).

However, the power relations of the vertically integrated oil giants is increasingly being challenged by other players such as the largest National Oil Companies [NOCs] such as Venezuela’s PdVSA, China National Petroleum Corporation, Saudi Aramco, Exxon, and the National Iranian Oil Company.

Moreover, the entry of small global players such as Spain’s Repsol YPF, the Russian Lukoil, OMV of Austria, and the Chinese Sinopec is increasingly affecting the dominance of vertically integrated companies (Bridge & Billon 2013). Actors within the midstream supply chain segment such as transportation, refining, and storage companies are influencing power relations within the supply chain.

These players comprise an essential link within the global oil networks. The high rate of technological developments within the oil industry has remarkably improved the power of these actors in a number of ways. For example, innovation of large and ultra-large crude carriers in the 1960s and 1970s has improved the efficiency and effectiveness of the transportation companies in distributing crude oil across different continents.

The transportation companies have significant power within the supply chain due to their compliance with chokepoint and trunk route requirements, which are critical factors in the global oil supply chain. Similarly, firms in the refining sector also possess significant power in the oil production chain. The refining companies influence the supply chain for they link the market with the oil sources.

Furthermore, refining companies are critical in establishing a balance between the oil demand and supply sides (Bridge & Billon 2014). The supply chain is comprised of independent actors such as independent oil producers (Inkpen 2010). The independent oil producers operate alongside major oil producers such as Saudi Aramco.

The independent companies are increasingly venturing into high-risk areas such as Iraq and Somalia [Puntland] in order to explore oil. The independent actors have significantly reduced the dominance of the major players due to their increased investment in oil exploration. For example, UK-based independents, Crain Energy and Tullow Oil, have increased oil exploration in areas that had been ignored previously such as Africa (Bridge & Billon 2014). Chinese companies have also increased their oil exploration in Africa since the beginning of the new millennium (Obi 2008).

War and Oil prices

The oil supply chain is influenced by diverse geopolitical factors. Examples of these factors include war. Spero and Hart (2010) affirm that oil has continued to be a fundamental component in the global economy since the 1900. Subsequently, different countries have tried to establish international economic governance systems in an effort to control oil demand and supply.

The existence of political instability especially in the oil-producing countries affects the flow of oil within the supply chain. Available literature cites different cases of political instability in the world that have remarkably affected oil prices. The major world economies such as the UK, China, and the US have been involved in the history of war especially in the oil rich regions.

For example, the UK and the US were largely involved in the Persian Gulf crisis. Some of these countries have adopted militarisation policy in an effort to gain significant power within the oil supply chain (Jones 2012). The involvement in such war is motivated by the need to protect friendly oil producers (Jones 2012).

The need to influence the oil producers has increased internal and external threats within the oil producing countries, as evidenced by civil wars and the emergence of militia groups. For example, the entry of Chinese oil companies into the Niger Delta in Nigeria in 2006 led to the emergence of a youth militia group dubbed the Movement for Emancipation of the Niger Delta [MEND], which was largely comprised of Ijaw youth.

MEND engaged in terror activities in an effort to block the entry of the Chinese companies (Obi 2008). The war in Iraq has considerably affected world oil markets due to a reduction in the volume of production. For example, the invasion of Iraq in 2003 reduced the volume of production from 1.3 million barrels per day to approximately 600,000 million barrels per day (Schumer 2008).

The decline in volume of production destabilises the demand and supply balance, which pressurises oil prices upwards. Schumer (2008) further corroborates that a 1% decline in volume of oil production leads to a 10% rise in oil prices. Oil prices are also affected by the behaviour of the leading international oil companies, which are commonly referred to as the ‘Seven Sisters’ (Spero & Hart 2010).

Some of the areas in which the firms collaborate include the development of exploration and refining technologies. Furthermore, the oil companies also engage in long-term supply agreements in an effort to dominate the supply chain. Furthermore, the ‘Seven Sisters’ refrain from price competition, which enhances their capacity to influence the price of oil.

Furthermore, the engagement in price management has enabled companies to minimise competition from other entrants (Robinson & Rainbird 2013). The integration of oil producing countries under the Organisation for Petroleum Exporting Countries [OPEC] has significantly increased the dominance of the major oil producers in controlling prices (Spero & Hart 2010).

The chart below illustrates the influence of the ‘Seven Sisters’ and OPEC on oil prices between 1915 and 2010. The ‘Seven Sisters’ dominated oil prices between 1915 and 1970s, while OPEC dominance persisted between 1970 and 2010 (Spero & Hart 2010). However, over the past decades, OPEC has been criticised by the civil society for being a cartel within the oil industry due to the rapid movement in oil prices (Inkpen 2010).

The influence of the ‘Seven Sisters’ and OPEC on oil prices between 1915 and 2010

Source: (Spero & Knight 2010)

Civil society and financial institutions

Despite the relaxation of the conservation commitments, governments enforce strict regulations on the conditions within which such exploration and production should be conducted (Bridge & Billon 2013). Furthermore, the civil society has remarkable power in influencing oil exploration and production. For example, the civil society affects oil exploration and production in regions characterised by unique biodiversity.

Oil companies have extensively been criticised by different civil society organisations for their role in increasing environmental pollution, hence heightening the rate of climate change. Over the years, international financial institutions have been extensively involved in conflicts with oil companies due to their performance with reference to human rights coupled with developmental and environmental dimensions (Bridge & Billon 2013).

Commercial banks provide financial support to oil companies in the course of implementing their oil exploration and production projects. For example, financing of the Baku-Tiblisi-Ceyhan pipeline project was undertaken by 15 commercial banks (Bridge & Billon 2013).

Conclusion

The global oil industry is characterised by diverse actors with varying degree of power. Some of the major participants include the state, firms, the civil society, and financiers. The role of the actors across the global production network and supply chain varies.

However, their actions have a remarkable impact on the oil supply chain. States possess significant power with regard to ownership of land, and thus they affect oil exploration and production. Furthermore, states also influence the efficiency of the supply chain through their regulatory capacity.

Firms in different sectors of the GPN, such as production, refining, and distribution, influence the supply chain through the adoption of vertical integration strategies. For example, the formation of mergers and acquisitions has characterised the oil industry in order to gain dominance in the global oil supply chain.

The oil supply chain is affected by different other geopolitical factors such wars, which threaten oil production, hence leading to increment in global oil prices. The civil society and financial institutions have a remarkable impact on supply chain activities. Therefore, in a bid to develop an efficient oil supply chain, it is imperative for the different actors to establish positive relationship commitment.

Reference List

Barber, E 2010, Strategic approaches to domination in supply chains, University of New South Wales, Canberra.

Bridge, G & Billon, P 2013, Oil, Polity Press, London.

Cox, A, Ireland, P, Lonsdale, C, Sanderson, J & Watson, G 2003, Supply chains, markets and power; mapping buyer and supplier power regimes, SUNNY Press, London.

Jones, T 2012, ‘America, oil and war in the Middle East’, Journal of American History, vol. 1, no. 1, pp. 208-218.

Fagan, G & Munck, R 2009, Globalisation and security; an encyclopaedia, Praeger Security International, Santa Barbara.

Flynn, B, Morita, M & Machuca, J 2011, Managing global supply chain relationships; operations, strategies and practices, Business Science Reference, Hershey.

Frynas, J & 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- 2010, Thunderbird School of Global Management, Glendale.

Lin, Y, Tsao, Y & Lin, S 2013, Proceedings of the institute of engineer’s Asian conference 2013, Springer, Singapore.

Lussier, R & Sherman, H 2013, Business, government and society essential; strategy and applied ethics, Routledge, New York.

Obi, C 2008, ‘Enter the dragon? Chinese oil companies and resistance in the Niger Delta’, Review of African Political Economy, vol. 8, no. 117, pp. 417-434.

Robinson, P & Rainbird, H 2013, ‘International supply chains and the labour process’, Competition and Change, vol. 17, no. 1, pp. 91-107.

Schumer, C 2008, War at any price: the total economic costs of the war beyond the federal budget, Diane Publishing, Chicago.

Spero, J & Hart, J 2010, The politics of international relations, Wadsworth Cengage Learning, Boston.

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