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Fall in oil prices

Describe about the Merging Strategies for Due to Fall in Oil Prices.

Introduction

Crude oil, also known as petroleum is a liquid found within the earth and it's composed of organic compounds, hydrocarbons as well as small amounts of metal ions. In essence, the hydrocarbons are the main constituents of oil and they account for between 50%-97% of the total crude oil although sometimes this might depend on the type of crude oil and the methods employed during its extraction. In other cases, organic compounds such as oxygen, sulfur as well as nitrogen. The stunning falling in prices of oil, in June 2014 up to February 2016, has been one of the most important global macroeconomic developments. This type sharp of fall can be compared to another fall in oil prices when the oil producing countries reversed their earlier production cuts which led to the outset of the global financial problems. It is, therefore, important to understand the major causes of price drops and their effects although, in most cases, the drops might be driven by increase supply as well as a decrease in demand. The recent price decline appears to be a mix of the two. This paper, therefore, explores the major causes of the decline in the prices of oil and the measures that various oil companies take to curb the devastating effects that come along with these issues.

Fall in oil prices

As a result in the slow growth of the emerging oil markets, for instance, the China there have been sharp drops in the prices across the board. This is because China has an ever growing Industrialization which is also compared to the high population and hence high likelihood of increased consumption of oil products. The drop in oil prices, however, has been significantly higher as compared to that of metals and food. Thus it could be suggested that the increasing rate of could be an important aspect that has led to a decrease in demand (Baumeister and Peersman, 2013.p.1090).  The macroeconomic models indicate that the effect of low demand and hence low oil prices on the global gross domestic product has been net positive. Although this increase could be significant, it is, however, less as compared to the past trends. However if the decline in oil market prices persists, the effects might be far much higher than it is off now.

In the developed countries, the effects of a fall in oil prices is passed to the consumers, in the other countries  such as India and China have taken advantage of this situation and therefore form the low oil prices as a basis to lower provided to their citizens on consumption of fuel so that they can strengthen their fiscal positions. Another important aspect is that a decrease in oil prices which is driven by the supply increases the world demand for oil. This occurs through the transfer of resources from high-saving oil producers to consumers who might have a higher tendency to spend.

Beneficiaries and losers from the price

The oil producing countries have been on most occasions forced to increase their spending while the oil consumer countries continue to repair balance sheets from the financial problems. Another aspect is that the decrease in oil prices has resulted in an enormous short-term decrease in terms of investment in the oil industry as a result of a decline in the with global investment in production as well as  exploration falling in conjunction with spill over to energy products. Sharp declines in investment in other commodity sectors have also contributed to overall slow global growth. Since the fall in oil price has had a big impact on the economy by having a significant contribution to the financial market instability, a further instability in the financing conditions of oil companies and oil exporters might have much more effects (Sadorsky, P., 2014, p.79).

A greater peril is exposed to the nations which heavily rely on upon settlements from subjects who work in oil economies. As such, conversion scale adaptability and a huge pad of hard money holds have helped in maintaining a strategic distance from an out and out monetary emergency. In any case, if the low cost is maintained, critical oil producers will turn out to be progressively helpless on the case that they can't make the essential financial changes in accordance with a lower value direction. The late scene underscores that over the more drawn out term, it is critical for oil exporters to differentiate their economies and sources of income so as to diminish the powerlessness to oil value instability.

For oil-importing propelled economies, the value of a fall in prices is an appreciated boost and gives a chance to fortify monetary versatility against capital fueling for some developing markets. It is an unmistakable aid for Europe and Japan, yet more blended for the United States which is both a vast buyer as well as a substantial producer. In any case, it is imperative for approach producers to proceed with arrangements that reinforce the long haul development capability of their economies (Wang et al., 2013, 1233). In spite of the fact that prospects costs propose that oil costs might continue to rise, it is imperative to get ready for the way that oil costs can ascend later on pretty much as pointedly and suddenly as they have fallen before.

Beneficiaries and losers from the price

The motorists and households are the greatest beneficiaries of a fall in oil and gas because it favors the lower-income groups. This is because on most occasions the costs of fuels take up a very large share of their more little earnings. The major losses are felt by oil business for starters as well as the countries which produce oil. Examples of the countries which suffer economic and political instability, as a result, include Nigeria, Venezuela, Brazil, Russia and Ecuador because they are the major oil producing nations. For instance, the impact of Western sanctions that occurred led a drop in Iranian oil production by approximately one million barrels a day. As a result, this sanction has thus blocked Iran from importing the latest equipment for extracting oil from the fields. If the sanctions are lifted, in the oil industry in Iran is likely to open the taps on production.

Most raw petroleum trading nations are confronting testing times, for instance, Russia is intensely reliant on its oil incomes, with oil and gas which has a big portion of its income. The monetary approvals forced on Russia in the wake of the emergency in Ukraine have been as a result of the breakdown of the oil value prompting capital flight. Additionally, many Russian vitality organizations had acquired significant amounts of loans from European banks and money related organizations amid the years of high oil costs.

On the other hand, there has been a rise in traffic deaths because the low gas and oil prices have made it possible for any people to travel and hence increasing the risks of accidents on the roads. Experts have say that setting a generation roof may just have constrained worth in directing the oil costs. This is because a large portion of the greatest oil producers, including Saudi Arabia, are as of now pumping close top limit. There was a late shake-up in the Saudi oil industry, although it is however not clear what longer-term effect that may lead to in the oil industry. There is thus the need for oil-producing countries to keep consistent against the monetary strains (Turhan et al., 2013, p. 33).

The reasons for the present costs breakdown are not as emotional since there has been no significant world financial stun. In fact, the world economy is developing despite the fact that the recuperation is not as fast or as across the board. Following quite a while of relative dependability, offering ascends to certainty and interest in the oil and gas segment, real vulnerability is presently being reflected in organization monetary records. Although the mission of the oil producing countries is to stabilize the prices in the international oil markets, this time, little efforts have been noticed. During other times when the oil prices fell, this trade block used to intervene in the market through cutting the production rates in order to support prices.

For instance, powerless Chinese information keeps on bringing about the concern and development in Japan while the euro zone stays delicate. European economies are as yet pondering frail development and low swelling, making the risk exceptionally conceivable. On the off chance that family units in Europe and Japan are urged to spare by the possibility of less expensive products tomorrow and organizations delay venture for the same reason, then monetary development will go under further weight.

While producers have been seeing their revenues decrease and debt levels swell since June 2014, share prices of US shale producers have been steadily falling.  This makes the short-term outlook for many shale oil projects very challenging, and the prospect of bankruptcy for low-margin producers is quickly becoming a reality. This sector has been facing large funding challenges that can result in devastating and huge effects as far as production is concerned. The US shale sector's chief source of income is the debts because the producers heavily invest on cash as compared to what they earn and thus making up the difference through the issuance of bonds. This causes the growth of debt far much higher as compared to the cash which is realized in the form of profits from the oil investments (Turhan et al., 2013, p. 31).

As a result, no more investors and debt markets are willing to fund oil projects and this has greatly led to a large decrease in the number the shale projects in the United States. Once the shale projects fall at a higher rate than the conventional wells, the amount of oil production is likely to fall by far. Reports indicate that many of the loans issued in the year 2014 by banks were issued in oil and gas (Weijermars, R., 2015, p.403). This means that many financial institutions have a largely unrecoverable debt on their balance sheets in the oil industries.

These speculations are currently progressively in danger of default and could promote the weakening in the form of saving money industry and monetary markets all through Europe. Most oil producing countries have little space to move on account of their dependence on oil incomes to adjust national spending plans. They have no expansive remote trade stores to fall back on to support state use and the oil value breakdown has been exacerbated by existing issues, for example, sanctions, political insecurity, security, and defilement. Nigeria, for instance, has been as of late compelled to raise financing costs and debase its coin the naira.

The most evident effect of the oil cost breakdown on organization records is the expanded danger of hindrance of benefits. Lower oil value gauges imply that oil producers ought to expect lower future benefits in terms of profits. Quickly changing oil costs make it hard to judge the present estimation of benefits for speculation choices on capital distribution as well as balancing the sheets by oil companies. Organizations regularly apply forward bends in their valuation models which in turn take a gander at a scope of sensitivities and situations (Blanchard and Riggi, 2013, p. 1049).

As a result of decreased profits due to oil price collapses, the merger and acquisition activities are building, and oil-company management teams need to think of the best strategies to apply. Most commodity industries are prone to consolidation during the downside of the cycle, when supply surpluses accumulate, prices fall, and competition heats up.  Even though few deals have been executed so far concerning the mergers, there are possibilities of their increase as a result of increased vulnerability among the weak players in the oil business.

The present atmosphere of low costs likewise fits a lot of deals that need to be made especially for the survival of oil organization. Therefore the use of mergers is required essentially to keep up generation levels and earn back the original investment through cost sharing (Fattouh et al., 2016, p. 236). The organizations in the best position are those with solid balance sheets, which can gain either bothered resources or those sold after different mergers. The oil organizations that made enormous exchanges before or amid the oil value fall are the ones to look for monetary record stress. For instance, Spanish organization Repsol expanded its net obligation levels essentially but was later forced to sell its non-center resources especially the gas business to EDP Group which takes after a comparable offer of resources for Gas Natural Distribution and Redexis.

Shell has also announced that it will dispose its asset in an effort to balance the company's books of records as well as the debt after recent acquisitions and mergers. But the debt fears connected to the late product cost will undoubtedly confine the number and craving of bidders. Along these lines, while this arrangement making is helping various organizations survive the low costs and liquidations of over-utilized organizations can be normal. Additionally, it merits recalling that the shortcoming in the oil cost has suggestions for organizations, as well as for states, as well. Saudi Arabia, the world's second-biggest oil maker has felt the crush of falling costs, which have prompted its thought of selling its national oil organization, Saudi Aramco to raise capital.

Shell has posted a weighty fall in benefits in its first arrangement of results since its super merger with BG Group as the oil goliath keeps on being harmed by low unrefined costs (Abdelrehim et al., 2015, p. 142). Shell then merged with BG group so as to have a solid begin off and a quickened conveyance of the cooperative energies from the securing at a lower cost. The finishing of the BG bargain fortified Shell's procedure and quality against the scenery of colossally difficult times for the oil industry (Reboredo et al., 2016, p.4). At the point when oil costs hit a trough, history focuses on a probable vitality industry reaction: mergers and acquisitions. Brokers are wagering on it because BP PLC offers hopped after a mysterious client guaranteed rival Royal Dutch Shell PLC was going to make an offer. The oil-field-administrations industry, which endures when low costs decrease oil-organization spending, has delivered the principal enormous arrangements this year with their customers cutting spending on generation.

Low costs could put some little and medium-sized organizations into a troubled circumstance that constrains them to either empty property to raise money or offer out totally. Past combinations occurred after a drawn out droop in rough costs and frequently amid a time of feeble vitality securities exchange valuations.

Conclusion

It is, therefore, important for oil companies to seek alternative options to curb the negative effect that come along the recently experienced low oil prices in the market. Even though mergers could be an alternative, then the companies that merge and absorb others should take close consideration so that they may not plunge into losses.

References

Abdelrehim, N., Maltby, J. and Toms, S., 2015. Narrative reporting and crises: British Petroleum and Shell, 1950–1958. Accounting History, 20(2), pp.138-157.

Baumeister, C., and Peersman, G., 2013. The role of time‐varying price elasticities in accounting for volatility changes in the crude oil market. Journal of Applied Econometrics, 28(7), pp.1087-1109.

Blanchard, O.J. and Riggi, M., 2013. Why are the 2000s so different from the 1970s? A structural interpretation of changes in the macroeconomic effects of oil prices. Journal of the European Economic Association, 11(5), pp.1032-1052.

Fattouh, B., Poudineh, R. and Sen, A., 2016. The dynamics of the revenue maximization–market share trade-off: Saudi Arabia's oil policy in the 2014–15 price fall. Oxford Review of Economic Policy, 32(2), pp.223-240.

Reboredo, F.H., Lidon, F., Pessoa, F. and Ramalho, J.C., 2016. The fall of oil prices and the effects of biofuels. Trends in biotechnology, 34(1), pp.3-6.

Sadorsky, P., 2014. Modeling volatility and correlations between emerging market stock prices and the prices of copper, oil and wheat. Energy Economics, 43, pp.72-81.

Turhan, I., Hacihasanoglu, E. and Soytas, U., 2013. Oil prices and emerging market exchange rates. Emerging Markets Finance and Trade, 49(sup1), pp.21-36.

Wang, Y., Wu, C. and Yang, L., 2013. Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries. Journal of Comparative Economics, 41(4), pp.1220-1239.

Weijermars, R., 2015. Shale gas technology innovation rate impact on economic Base Case–Scenario model benchmarks. Applied Energy, 139, pp.398-407.

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