Petroleum Industry’s Ethical and Societal Overview

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Introduction

The petroleum industry has been a major driver for economic growth in the modern world. It has enabled states and economies to experience high levels of economic growth resulting in better living standards, especially in oil-rich countries. However, operations have been associated with a great deal of social costs. Negative impacts associated with the petroleum industry include degradation of the natural environment, high pollution, injuries, illnesses, deaths and oil spills. As a result of these problems, there has been a huge need for control measures, which would facilitate the mitigation of the social costs and harms. Companies are required to be as ethical and sustainable as possible (Watts, 2005). This paper provides the ethical and societal overview of this very important industry and begins by providing a short history of the industry. It also analyses the various corporate stakeholders and how companies respond to their issues. Other topics discussed include the industry’s role in its social, economic, and political setting, domestic and international ethics, ecological and natural resources and specific social issues. The paper concludes by offering a rating of the industry’s overall social responsiveness and accomplishments.

History of the Industry

Contrary to the perception of the majority of the people, the petroleum industry did not transpire overnight, yet it did not take decades to develop to what it has turned out to be today. Petroleum based goods were used in the early history of man, with applications ranging from explosive war artillery to curative ointments (Conaway, 1999). The industry began developing in different regions at different times. For instance, in Eastern Europe, a smaller form of the industry may have begun in 1854. In existence were small peasant-excavation shafts for accessing crude oil. As the industry continued to grow, the U.S. became the world’s top petroleum producer throughout the first three quarters of the twentieth century. In addition, five of the seven largest oil companies which have dominated the global petroleum industry between 1920s and 1970s were all American. The almost exclusive control of oil boosted its military and economic valor and made it possible for the U.S. and its partners to prevail during World War I & II, as well as the Cold War (Painter, 2012). After World War II, the global petroleum industry expanded rapidly. This expansion was contributed by discovery of many, low-cost reserves in other regions, such as Venezuela, and several of Middle East nations. The companies involved in this were from the United States and Europe, which came to be known as The Seven Sisters (Painter, 2012).

Nationalization of petroleum industries, which occurred during the 1900-2000 year period, was undeniably a historical event worth noting. Governments restored ownership of petroleum industries to the respective states. Their major motivations for this move were both political and economical. For instance, Mexico went on to protect national ownership of petroleum resources in its constitution. Other key petroleum producers including Iraq, Venezuela, Qatar, Saudi Arabia and Kuwait followed to nationalize petroleum industries between the years of 1950 and 1976 (Parra, 2004). Most people viewed this as a move by these countries to protect their own national interests and a move necessitated by the persistently increasing global price prices. Another key event in the oil industry’s history is the establishment of “Organization of Petroleum Exporting Countries (OPEC)”, in 1960.

OPEC included countries such as Arab, Iran, Iraq and Venezuela which were all oil producers. The organization is in charge of production as well as supply of oil and its products. It exercises indirect control over oil products’ prices thus has a very large influence on the industry and the global economy. The habit of generating artificial scarcity results in price increase, which adversely affects spending habits. In the mid 1990s, the world witnessed a very huge increase in the demand for petroleum products due to the rapid growth of economies, especially in Asia and the third world. As the current century started, reliance on petroleum had turned into an economic and corporate liability and a source of ecological troubles. Advancement of technology has aided in solving the issue by offering more effective methods of extraction which result into prolonged life of the reserves. A big number of competing petroleum corporations are currently in existence, some of which are BP, Total, EnCana, PETRONAS Petroleum Industrial Complex, Shell, ExxonMobil, and many others, both big and small (Painter, 2012).

Corporate Stakeholders and Response to Their Issues

Stakeholders include the people, groups, organizations or agencies that have an interest or stake in a business entity and capable of influencing or being influenced by the entity’s dealings, policies and goals. Stakeholders in the oil industry include the likes of customers, lenders, employee, governments and their respective agencies, shareholders, partners, trade unions, and the public from which the industry obtains the resources. The increasing need for businesses to achieve the endorsement by the aforementioned stakeholders plays a very crucial role in shaping corporate behavior (OGP, 2002). Each and every stakeholders want demonstrable reassurance that the oil producer is behaving responsively. This begins with trying to establish what the interests of each of the stakeholders are and proceeding to act on them. When making strategic decisions, it is advisable that they be involves and consulted on every issue found to concern them. It is believed that the expectations of the government, the workers, the unions and the society differ. Most importantly, companies need to satisfy every stakeholder while working to maximize shareholder’s return on investment (OGP, 2002).

Customers

Any corporation has its own customers who ought to be valued very highly. They are the consumers of the company’s petroleum products, without whom the corporation may cease to exist. These customers have an absolute entitlement to fair business transactions. Their requirements and expectations are very different from those of employees, therefore, not entitled to receive similar consideration as employees. Customers always want quality products. Therefore, companies are required to adopt effective total quality management approaches which will ensure that they offer them nothing short of the best in terms of quality. Their needs have to be understood clearly in order to be met satisfactorily (Spence, 2011).

Employees

These happen to be some of the most important stakeholders in any petroleum producing company and the industry at large. They are the people who keep the operation of the company running. Employees’ expectations from the oil producer include the need to be compensated for services provided to the company. By providing labor, they expect to be paid in return. Also, employees are entitled to favorable work surroundings which guarantee their safety. The petroleum industry is known to be very risky especially during the excavation process. Most of the products are highly flammable, increasing the risks and dangers facing workers. Corporations have to undertake the necessary measures to ensure that each and every worker feels safe in the workplace. Failure to ensure this could result in very huge costs in case disasters occur (Spence, 2011).

The Wider Community

Most definitely, petroleum project have both direct as well as indirect impacts on the local communities. Therefore, they tend to have particular interests for being involved it the formulation and implementation of the projects. The same communities are the land-holders and greatly impacted by the operations oil production operations. In addition to that, native governments have also some interest in the projects. In order to regulate the social impacts, these indigenous communities have developed effective regulative systems. Therefore, the survival of the business in such regions will depend on how effectively it adheres to some of these regulations. Corporations ought to make it their job to ensure continuous interaction with the communities and also identify their expectation. This will provide a very strong basis for devising strategies for meeting these expectations. All this hassle is necessary to ensure that a corporation wins total support by the community, failure to which success may be impossible (OGP, 2002).

The Government

Oil Corporations deal with governments at provincial, national or state as well as federal levels in the major fields of regulatory supervision and civic policy affecting both current and future endeavors of the company. They work hand in hand with governments and their agencies, and also take part in active communication. Governments are mainly interested in fields of tax revenues, the environment and most importantly, the economy of a country. Almost every business transaction, project, or process involves some sort of governmental regulation, oversight or review. The existing kind of interaction fluctuates significantly depending on the kind of the business activity a company is engaged in and the regulatory framework applicable in the specific host nation. Substantial differences between regulatory requirements, which occur relate to social, economic and consultation impacts of business operations in different regions due to other differences, which exist in the legal basis, regulations implementation, the applicable enforcement standards, availability of oversight agencies, land and property acquisition, ownership and rights, and so forth (OGP, 2002). In order to be assured of smooth operation, it is the duty of management to make sure that the corporation is in conformity with the applicable regulatory frameworks of both their home countries and those of their host countries. Most of the requirements and policies adopted by different governments lack a sense of alignment. In other words, they differ considerably from on the nation to another. Clear understanding and consideration of the regulations are critical since they tend to have imperative cost implications (OGP, 2002).

Non-governmental Organizations

Currently there is a mass of public organizations, regulatory agencies, and non-governmental organizations dedicated to continuous observation and supervision of company doings in a gradually globalizing world (OGP, 2002). In the same way, the business world has witnesses an increasing number of regulatory mechanisms and codes of conduct which have to be obeyed. Most of these are unions and activist groups which are meant to fight for workers and the environment. Therefore, the petroleum industry has become a ground on which different guidelines are constantly developed by several organizations. Various non-governmental organizations have either direct or indirect influence on the activities of petroleum producing corporations. Through awareness campaigns or direct interactions with the relevant policy making bodies, stakeholders or agencies, these NGOs seek to influence the policies developed so as to make sure that they address various social issues satisfactorily (OGP, 2002).

Partners

Oil production is an activity with big, major projects which most corporations end up engaging the services of multiple companies. Well-known potential partners include other public and private local and international petroleum companies, local and foreign governments, and state-owned and controlled petroleum companies (OGP, 2002). In such cases, effective management of ethical and social issues becomes a challenge for many corporations resulting from differences in policies and strategies employed by each partner. In order to ensure that the social issues are addressed effectively, it is necessary for the allies to bargain and establish a mutual ground. Issues to be deliberated on include: aligning the ethical and social procedures and policies of the partners; formulating consistent approaches for resolving dissimilarities in nature and relevance of obligations; defining the capabilities of each of the participating partners; and many other matters which affect addressing of social issues (OGP, 2002).

Lending agencies

These are some other important stakeholders who are also involved in the industry. They also tend to have their own prerequisites and goals regarding the management of petroleum related social issues. In fact, some of them consider social issues a priority. Consider the Word Bank, which has made it its principal objective to poverty reduction. Also, highly involved in the matter is IFC (International Finance Corporation) which like the World Bank has a set of policies for making sure that no harm is done, either social or environmental harm (OGP, 2002). Compliance to the guidelines ensures that the corporations operate in an ethical manner. Major insurers and private lenders also have keen interests such that they have proceeded to adopt requirements relating to the social and environmental environment when offering their financial support. These include the likes of OPIC (Overseas Private Investment Corporation), and MIGA (Multilateral Investment Guarantee Agency) (OGP, 2002).

The Role of the Industry in Its Social, Economic and Political Setting

The Petroleum industry’s role in the economic, social and political settings has been evident for a long time in the US and the world in general. The industry has played these roles for quite a long time considering that a country, such as the United States, started using petroleum as an energy source since the nineteenth century (Painter, 2012). The petroleum industry plays a very crucial role when it comes to economic development although the constantly increasing fuel prices are a major limitation to economic growth. When talking about the economic implications of the industry, one can approach the topic by addressing matters such as the implications of the rising fuel prices, the shortages in oil supply, the industry’s linkage with other industries, and also the importance of investing in the supply of petroleum and its products in the performance of other sectors. Petroleum is the one of the most important inputs which goes into almost each and every other economic sector. Farming, manufacturing, mining and may other sectors depend on oil in one way or another. The price of petroleum also determines the prices of the outputs from those other sectors and drives economic growth and betterment of living standards (Spence, 2011). The rise of the United States to become world economic superpower was can be attributed to the oil business. The other economies, especially those in the Middle East which followed to experience economic growth, can associate this growth to the petroleum industry. The industry’s contribution to the national and global GDP is huge compared to other sectors (Spence, 2011).

The role of the petroleum industry in the social context can be summed up into what has recently come to be referred to as corporate social responsibility. As pointed out by Spence (2011), “modern CSR programs reflect the recognition that business, including energy business, does not happen in a social vacuum” (p. 60). Nowadays, petroleum companies operate in a much complex and broader social setting. Different expectations are held by different groups in the society and the company should assume the role of meeting these expectations. The expectations assume the form of regulations and ethical norms which are very crucial to a business’s long-term success in the industry. The importance of the social roles has significantly increased today, and CSR was not as popular as it is today. One is highly unlikely to find a single fortune 500 corporation which does not issue a type of CSR statement, either yearly or else. Many companies publicize their investment in social welfare, and sustainable business activities.

For instance, Nexen Inc. cooperates with local communities to distribute drinking water discovered in the process of oil drilling in the deserts (OGP, 2002). In other countries, when companies are licensed to carry out excavations in regions which are inaccessible, some governments may require them to build access-roads, dig wells or erect other social facilities. Generally, it is said that as corporations pursue their self-interests, they provide a vast number of social benefits to the surrounding communities. Therefore, it has become a requirement that a company ought to not only guarantee benefits to its shareholders, but also the society so as to be categorized as efficient or sustainable. Local communities benefit by finding employment opportunities, which are created by the need to hire workers to help in different functions in the production of petroleum. The wages, tax revenues and other benefits result in growth in the localities within which the oil plants are located (OGP, 2002).

In the political setting, the role of the petroleum industry is apparent for anyone with a clear understanding of the background of the industry. The first and one of the most important elements is the creation of petro-states. From a political perspective, a petro-state is an organization of states which are famous for petroleum production. Another one happens to be the “oil complex” which, together with the petro-states, offers a core framework within which the petroleum industry’s politics can be clearly comprehended. For the past few decades, oil markets and industries have undergone major changes fueled in huge measure by the rising nationalization which occurred in most of the third world petroleum producers; which culminated in the creation of OPEC (Organization of the Petroleum Exporting Countries) (Parra, 2004). That is, the political role of the petroleum industry is seen through the creation new global institutions.

This is the origin of the oil complex which is a configuration of social and economic forces, in addition to political forces. Looking at the United States and it journey to becoming the world’s political super-power, the petroleum industry played a crucial role. As argued, by Painter (2012), the fact about the United States being the leading producer of oil sometime back was the force behind his global political dominance. The major companies, which could have been considered as enjoying the control of the entire industry, were all American. The much control advantage propelled United States to economic and military might; something which is believed to be the reason behind US’s triumph during the world wars, as well as the cold war. At some point, the Soviet Union and the US were the two major political superiors owing to the ownership of large oil reserves worldwide. Although the petroleum industry has been blamed for political turmoil in the past, it has also been associated with the increased need for political stability in war affected oil producing nations. Since the US believes oil to be a very crucial commodity to its economy, it is believed to be the reason for its active interest in restoring political stability in the Middle East (Painter, 2012).

Domestic and International Ethics

The issue of domestic and international ethics can be considered to be one of the many complications which have come around as a result of the increasing globalization (Yücel, Elibol, & Dağdelen, 2009). World trade has expanded greatly hence resulting in greater need for international ethics. However, this has not managed to eradicate the significance of domestic ethics applicable in host countries in which the oil companies are located. For multinational oil corporations, they tend to have operations in regions with different legal, social, political, and cultural environments. Therefore, it is obvious that they face different ethical problems. The moral understanding of the difference between moral and immoral tends to pose many ethical dilemmas not only to international marketers but also the domestic ones. In most of the national cultures, ethical standards tend not to be always clear or not defined. However, the ethical problems are considerably more complex in the global scene. This increased complexity is as a result of wider differences of value opinions, which exist between culturally diverse communities. An opinion of one cultural group may not necessarily be acceptable in another, or may be totally unacceptable. For instance, while business gifts are acceptable in some countries, they are not accepted in the United States. Giving high-value business gifts is generally condemned in the US. Therefore, any oil corporation anticipating to do business in the United States has to understand this. Failure to do so may result in huge cost consequences, which may also sabotage the company’s operations in the world’s biggest consumer of petroleum (Yücel et al, 2009). This supports the argument presented by Yücel et al. (2009) stating that from a keen evaluation of the ethical frameworks which exist in global markets from a macro-marketing perception, it is apparent that marketers will not at all times adopt unanimously accepted moral standards.

Ecological and Natural Resources

Considering the current development and progress of the global economy, petroleum has turned out to be very important source energy. The industrialized economies, as well as those undergoing industrialization, are all reliant on this commodity. As a result, every country has in some way initiated projects to discover this resource and find their own energy sources. Since the industry’s emergence, a lot of petroleum resources have been over exploited. The fierce competition has forced multinational corporations to move to high-risk regions including those in Africa (Watts, 2005). One thing associated with this industry is the extensive degradation of the environment. As argued by Watts (2005), problems attributable to petroleum corporations include water contaminations, serious illnesses, and ecological destruction and so on. Decades of oil drilling have caused serious problems, which have put in danger the lives many people and animals.

The exploration and extraction process is characterized by massive ground rearrangement, clearance of natural cover and so on. This affects the natural resources and also poses many health risks. Climate change is one ethical problem which the petroleum industry faces. Although there is a huge need for establishing a lucrative petroleum industry, the high carbon (CO2) releases cause major changes in terms of the climate of a given region. These changes turn out to be extremely injurious to the society and the ecological system. Pollution is an inevitable consequence associated with the very important petroleum industry, considering that restraining this form of pollution may have a negative implication on the profits of the company. Companies ought to be as socially responsible as possible to ensure that they conserve resources (Watts, 2005).

Water is a very important commodity in life. Petroleum industry sees water as equally important as the oil considering that companies handle more of it than the petroleum. The core operations utilize plenty of water, from production to the supply of steam. The water used for cooling purposes and maintaining reservoirs’ pressure is drawn from seas. The problem arises from the fact that most of this water is channeled back to the seas and other environments. Conflicting demand for this commodity has resulted in over-exploitation of available supplies. In addition to that, it has resulted in pollution, which has made some of the resources unusable anymore. In order to minimize the impacts, regulative measures have been devised which companies are required to follow, failure to which serious penalties are inevitable. Also in existence are many cultural resources where strict regulative measures have been developed to manage these resources. As oil exploration and extraction is being carried out, the corporations involved will find that some laws restrict interference with the resources. The cultural resources in this case will include historical sites, which have the remaining evidence of the existence of earlier human inhabitants and will comprise battlefields, shrines and maddens. Also, distinctive natural ecological features like canyons and waterfalls are also prevented from interference in the process of oil production (OGP, 2002).

Social Issues

While planning to launch petroleum production operations in a new region, every company’s management ought to anticipate facing a number of social issues. The need to have a clear understanding of these issues is increased by the need to adhere to the relevant regulatory requirements which have been instituted for the sake of addressing the same issues. IPIECA (International Petroleum Industry Environmental Conservation Association) being a voluntary not-for-profit-organization, is comprised of associations and oil companies at all levels to address some social issues such as human rights and health, social responsibility, sustainable development, climate change, and so on (OGP, 2002). In the recent times, some of the issues which have become visible in the petroleum industry have been discussed below.

Human rights

In the Universal Declaration of Human Rights, it is the governments which bear the primary duty to protect and encourage value for individual rights. Nevertheless, the extent and impacts of the petroleum sector in several states makes some petroleum corporations prominent organs within a given society. A lot of people rationally anticipate that the corporations will employ the power they hold to uphold value for civil rights. In this particular industry, human rights concerns arise in varying situations involving a broad diversity of interested parties. Civil rights in the petroleum sector are based on three different groupings: shared, direct and indirect responsibilities (Sykes, n.d.). The shared responsibility encompasses obligations which are directly linked to the company’s undertakings, but requiring some form of multiparty action by more than a few stakeholders. For instance, oil corporations ought to work in conjunction with local communities in addressing social matter including education, capacity building, skill development, as well as continuing economic progress in that particular neighborhood.

Shared responsibilities have been exercised in the past through collaborations between oil corporations with NGOs, governments, and other stakeholder partnerships. Direct responsibility concerns the obligations which are directly associated with the corporation’s business and production activities and with any other affair that the company exercises direct control. The petroleum producers are required to address issues such as the rights and conduct of their employees. In this case, the companies ought to be responsible for employees’ health, freedom, safety and so forth in the course of business. This obligation may extend to other people such as contractors who work within a corporation’s facilities. Indirect influence relates to the obligations which have an indirect interrelation with the operations of the petroleum producer, but which offer a company a chance to support the achievement of the desired result. Despite being without any legislative or electoral command, the petroleum corporations are essential in furthering the importance of human rights (Sykes, n.d.). They can engage other stakeholders in the matter and ensure that human rights are valued in the oil industry as well as in any other sector.

Labor and employment issues

Several international organizations exercise a great deal of vigilance in ensuring that rights of workers are respected as much as possible. For instance, the International Labor Organization expresses some of the widely recognized standards about worker rights. The requirements defined in the policies include the workers’ rights pertaining to the membership in various worker organizations and unions. Laborers are also required to be supplied with all the necessary information pertaining to their safety and health while at work as well as the safety of their families and children. Other sections also cover the issue of child and forced labor (OGP, 2002). Companies found to be exercising unfair and not-transparent human resource activities may find themselves in huge trouble. Most countries have strict laws to address fairness and transparency when it comes to the recruitment, development and management of human resource or employees. Besides, there is a huge possibility for labor unrest to occur especially resulting from disputes over pay, poor work environment, work contracts, termination of employment (OGP, 2002).

Corporate Social Responsibility and Sustainable Development

Being an extractive industry, it is indisputably associated with a great deal of environmental degradation. A lot of social, environmental and economic considerations are made with an objective of achieving sustainability. In order to succeed, companies have adopted corporate social responsibility (OGP, 2002). Mere consideration of social and environmental impacts and employing technical solutions has been found to be insufficient when it comes to the management of the social expectations. CSR has been found to effectively consider stakeholder interests and ensure accountability for the implications of a corporation’s operations to customers, workers, contractors, suppliers, the environment and the whole community. Involvement in corporate social responsibilities is more than adhering to the statutory requirements as companies have taken the initiative to go into it voluntarily. Most of them have devised effective strategies aimed at bettering life’s quality for employees, their families, and the local societies (OGP, 2002).

Rating of the Industry’s Overall Social Responsiveness and Its Accomplishments

The oil corporations have progressively directed their awareness towards taking suitable measures to ensure that their business undertakings are as sustainable as possible. More determined than ever before, the petroleum industry is in the frontline in the development of effective models for operating in socially and ethically accountable manner (World Petroleum Council, 2002). In fact, it has been setting an example from which other industries can learn. Individual companies have devised strategies for achieving sustainability. For instance, Shell underwent rebranding and change of management recently with an objective of focusing on becoming more concerned with being socially responsible and sustainable. On the other hand, BP has been in the forefront with its “Beyond Petroleum” initiative. Through this strategy, the corporation aims to invest more in renewable energy sources and also remain sustainable. Also, BP has been highly involved in other social issues such lobbying for human rights in Columbia, supporting a campaign dubbed “Publish What You Can” and other initiatives. Generally, the attention given to corporate social responsibilities nowadays in the petroleum industry is very high. As argued by Spence (2011), “it appears that most investor-owned oil and gas companies have reached the conclusion that their long-term best interests will be served by paying greater attention to the needs and wants of external stakeholders, and their environmental and social legacy in the places they do business” (p. 84). Lessons learned for past experience where companies have ended up paying reputational costs for being unethical and socially irresponsible have pushed the industry to greater levels of sustainability. Having been convinced that environmental lobby groups are not resting any time soon, most companies have decided to avoid risking their reputation and operating licenses.

Conclusion

In conclusion, one can say that the need for ethical and social responsiveness will remain to be important in this industry. Being one of the major drivers of economic growth, which is also associated with a great deal of social costs, effective strategies have to be devised to ensure sustainability and social responsibility. This begins by establishing what each and every stakeholder expects from the corporation. Understanding the expectations provides a good basis for devising strategies and policies which would meet the expectations of each of them without failure. Each stakeholder (employees, customers, the government, partners, NGOs) has a different set of expectation and requirements which have to be satisfied. As mentioned, the industry has so far made a lot of effort to become as sustainable as possible.

References

Conaway, C. F. (1999). The petroleum industry: A nontechnical guide. Tulsa, Okla: PennWell.

OGP. (2002). Key Questions In Managing Social Issues in Oil & Gas Projects. OGP & IPIECA. Report No. 2.85/332.

Painter, D. S. (2012). Oil and the American Century. Journal of American History, 99(1), 24-39.

Parra, F. R. (2004). Oil politics: A modern history of petroleum. London: Tauris.

Spence, D. B. (2011). Corporate Social Responsibility in the Oil and Gas Industry: The Importance of Reputational Risk. Chicago-Kent Law Review, 86(1), 59-85.

Sykes, R. (n.d.). Pillars of the Industry: Oil and Gas Industry Efforts on Behalf of Human Rights and Sustainable Development. TWA (The Way Ahead). Web.

Yücel, R., Elibol, H. & Dağdelen, O. (2009). Globalization and International Marketing Ethics Problems. International Research Journal of Finance and Economics, ISSN 1450-2887, 26, 93-104.

Watts, M. J. (2005). Righteous oil? Human rights, the oil complex, and corporate social responsibility. Annual Review of Environment & Resources, 30(1), 373-407.

World Petroleum Council. (2002). Corporate Social Responsibility: A First for the Oil Industry. Rio de Janeiro. Web.

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