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Impact Of Oil And Gas Industry On The Economy

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Question:

Analyze the oil and gas industry, focus on the industry as a whole to the US economy. Then define the oil and gas industry. What would you define this industry? Based on what information and clues did you define the oil and gas industry?
 
 

Answer:

Introduction

Oil and gas is an important industry in the United States and the contribution to the economy is immense. Many people are employed in this particular sector and this sector employs a huge number of people. On the other hand, the impact is also felt on different other sectors. Recently, the oil industry is going through a slump and the prices of the oil barrels are going down. This report focuses on the impact of this industry on the overall economy and the comparison is made among the different companies.

Role of the Oil industry in the United States

United States produces about 5% of the total oil on a global scale and it employs a huge number of people. The oil industry consists of the refining, transportation, distribution and refining of the crude oil and the operations of the industry is divided into upstream, downstream and midstream. On the other hand, the operations of the gas industry can also be divided into downstream and upstream sectors. Gas consists of about 29% of the total energy consumed in the total economy (Wang). There is huge number of companies in the oil sectors and popular companies include, Chevron, Exxon Mobil, BP and Shell. Oil companies are involved in selling, distributing and refining of the crude oil and at the same time, the companies are also involved in the hedging and trading of the oil stocks (Brock).

In the recent wake of the decrease in the prices of the oil, this fell below $30 per barrel the companies faced severe loss. Most of the traders went for a short position regarding the fall in the prices of stock prices and many traders at the same time suffered huge losses. The unexpected reduction in the price of the oil stocks is because of the over-production of the oil and lack of demands for oil. This sector employs about 8.4 million peoples and 1.4 million jobs in indirect way (Geraci). The net labor income by the company, that is the aggregate of the capital spending, dividend income and operational spending by the company was $597.6 billion, which was about 6.5% of the total labor income of the United States (Macdonald, Stephen). Moreover, the total employment was about 5.7% of the whole US economy, the labor income was about 6.5% of the net economy of the United States. The state of California received the highest income from the oil industry and Texas gave highest number of employment in the US economy (Alexandersson).

Moreover, this sector helps in creating indirect employment to different other sectors like agriculture, mining, constructions, wholesale and retail trading and financial services. On the other hand, the capital investment impact of this company on other sectors like mining, agriculture, financial services and constructions is huge. Capital investment impact and operational impact helps to boost the whole of the economy and at the same time create a he number of employment opportunities in the United States. The similar impact is felt on the wages, dividend and labor incomes (Brock). The labor income is estimated at $203.6 billion, the capital expenditure income stands at $176.7 billion. The dividend payments by this company to the shareholders estimated at $32 billion and the capital expenditures made by this company was $527.6 billion (Knothe). From the above discussions it can be understood that the impact of this sector on the economy is huge and they helps in creating a huge number of employment opportunities.

Analysis of oil companies

The four main companies in the United States in the oil sector are Shell, Chevron. BP and Exxon Mobil. They are the competitors of each other and hold the majority of the oil market in US. These companies hold the top six positions of the United States.

Company

Total Equity ($ billions)

Exxon Mobil

170.81

Shell

162.87

Chevron

155.02

BP

98.387

Table 1: Analysis of the equity capital of the companies

(Source: Card, David and Alan)

Company

Total Assets ($ billions)

Exxon Mobil

349.49

Shell

340.15

Chevron

266.25

BP

261.8

Table 2: Analysis of the total assets of the companies

(Source: Rabe, Stephen)

Company

Net Income ($ billions)

Exxon Mobil

21.96

Shell

1.94

Chevron

4.58

BP

-          6.2

Table 3: Analysis of the total assets of companies

(Source: Bierbaum, Rosina, et al.)

In case of Exxon mobil, the dividend per share was $2.7, the market quotation for common stocks was $104.75, the total revenue of the company was $411,939 billion and the earnings per share was $7.60 (Anderson, Irvine). On the other hand, in case of Chevron, the earnings per share of the company were -35.39 cents in both the case of basic and diluted shares and the dividend payment was 5850.  In case of Shell, the earnings per share was 0.31 cents and the share capital of the company was 546 million. On the other hand, the earnings per share in case of BP, was -35.39 cents and this company incurred a loss of -6482 million in the current financial year. From the above data, it can be conclded that Exonn Mobil is way ahead of the competitors in terms of financial data (Annual Report 2016).

Recommendation

The time is volatile and uncertain for the oil industry, due to decrease in the prices of the oil barrels. It is important for the government to correctly hedge the oil prices and build a reserve of oil. Moreover, excessive shorting of the oil stocks by the traders will have an adverse impact on the economy and the government must intervene in this regard. On the other hand, the role of the different regulatory bodies like OPEC is very much important and they must take a neutral stand and take the whole of the economy out of the mess. Therefore, these steps will help the industry to improve their financial condition to recover the loss that they have faced recently.

Conclusion

After analyzing the report, it can be concluded that oil industry plays a dominant role in the economy of the United States and many people are employed in this sector. On the other hand, this sector provides indirect benefit to different other sectors as well. The oil industry is going through a bad phase due to the lowering prices of the oil barrels. The role of the government has become significant in the current scenario. Therefore, it has seen that the oil and gas industry influence the economical graph of United States that has recently decreased a little but the researcher has recommended some suggestions to gain their previous position again in the world business as a large industry.

 

Reference

Alexandersson, Gunnar. The Industrial Structure of American Cities (Routledge Library Editions: Economic Geography). Routledge, 2015.

Anderson Jr, Irvine H. Aramco, the United States, and Saudi Arabia: A study of the dynamics of foreign oil policy, 1933-1950. Princeton University Press, 2014.

Bierbaum, Rosina, et al. "A comprehensive review of climate adaptation in the United States: more than before, but less than needed." Mitigation and adaptation strategies for global change 18.3 (2013): 361-406.

Brock, James. The structure of American industry. Waveland Press, 2013.

Card, David, and Alan B. Krueger. Myth and measurement. Princeton University Pres, 2015.

Geraci, Joseph, ed. Sea mammals and oil: confronting the risks. Elsevier, 2012.

Knothe, Gerhard, Jürgen Krahl, and Jon Van Gerpen, eds. The biodiesel handbook. Elsevier, 2015.

Macdonald, Stephen. Petroleum conservation in the United States: An economic analysis. Vol. 5. Routledge, 2013.

Rabe, Stephen G. The road to OPEC: United States relations with Venezuela, 1919-1976. University of Texas Press, 2014.

Wang, Zhongmin, and Alan Krupnick. "A Retrospective Review of Shale Gas Development in the United States: What Led to the Boom?." Resources for the Future DP (2013): 13-12.

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