Applied Economics for Managers: Oil Market Analysis Report

This report presents an applied economic analysis tailored for managers, specifically focusing on the oil and gas industry, with ExxonMobil as a case study. It begins by examining market structures, identifying the oligopolistic nature of the industry and the dominance of major players. The report then delves into supply and demand dynamics, highlighting potential risks such as production cuts and slowing global consumption, as well as the positive correlation between crude oil and natural gas prices. A key section focuses on pricing strategies, emphasizing the role of price elasticity of demand in determining revenue and profit, and recommending strategies for price adjustments. The report concludes with an executive summary that synthesizes the key findings and recommendations, including the importance of cost reduction and efficient resource management for enhanced profitability.

Running head: APPLIED ECONOMICS FOR MANAGERS
Applied Economics for Managers
Name of the Student
Name of the University
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Table of Contents
Step 2: Supply and demand graph...................................................................................................2
Potential supply and demand risk in the global oil market..........................................................2
Step 4: Pricing strategies.................................................................................................................3
Step 5: Executive summary.............................................................................................................4
References........................................................................................................................................5

2APPLIED ECONOMICS FOR MANAGERS
Step 2: Supply and demand graph
The structure of market depends on degree of competition in the market which in turn
determined by the number of buyers and sellers. The four common market structures are perfect
competition, monopoly, monopolistic competition and oligopoly (Cowell, 2018) The oil and gas
industry in which ExxonMobil operates is an oligopoly market. Oligopoly market is considered
as a market structure where small number of firms enjoy significant market power. Because of
acquisition in the industry, the market is dominated by four largest companies. These are
ExxonMobil, ConocoPhillips, Chevron and Marathon (news.exxonmobil.com., 2019). The big
four companies hold approximately 80 percent market share in the industry. Among these
companies, ExxonMobil holds the largest share with share being approximately 41 percent.
Potential supply and demand risk in the global oil market
Demand and supply risk are real risks to the oil and gas companies. Financial crisis and
other macroeconomic factors are the source of potential risks to the global oil market. The
current global economic condition suggests that global oil market is likely to undergone a U turn.
The supply side risks originate from likely fear that of production cut by OPEC and sanction of
United State against the producers of Iran and Venezuela. On the demand side, the likely risk has
been realized in terms of slowing global consumption and possibility of global recession. The
weak economic growth in the global economy has built up lower expectation of global oil
demand (Gloystein & Varghese, 2019). The global demand has been forecasted to be slow down
due to trade disputes between China and USA. The trade war between US and China is likely to
trigger an economic recession in the global economy. Global demand and supply of oil therefore
now are facing potential risk of a downward movement causing oil prices to move downward as
well.

3APPLIED ECONOMICS FOR MANAGERS
Correlation between crude oil price and gas
Crude oil price and gas are likely to be positively correlated. The positive correlation
seems to be logical as natural gas is a byproduct of crude oil. That means as the price of crude oil
increases, price of gas increases as well and vice versa (Boersma, 2015). The statistical analysis
reveals that there are periods of positive correlation but the correlation is limited.
Step 4: Pricing strategies
In deciding pricing strategy elasticity of demand plays an important role. Price elasticity
of demand measures the percentage change in quantity demanded due to percentage change in
price of the good. Demand is considered as relatively elastic when percentage change in quantity
demanded exceeds the percentage change in price. Demand is regarded as relatively inelastic
when percentage change in quantity demanded is less than percentage change in price. Revenue
of a price gets affected following a change in price and this in turn depends on the relative
elasticity of demand. In case of elastic demand, a fall in in price is beneficial for the company as
resulted increase in demand due to decline in price exceeds the proportionate increase fall in
price causing revenue to decrease (Baumol and Blinder, 2015). In case of inelastic demand,
increase in price helps to increase revenue as increase in price offsets the decline in demand
resulting in an increase in revenue. As obtained from data on crude oil price and sales, the price
elasticity of demand for crude oil is highly price elastic in nature. Consequently, an increase in
price results in a large decline in quantity demanded causing revenue and profit to decline. This
is the reason why revenue and profit falls when price increases by 1 cent from $2.749 to $2.759.
On the other hand, revenue increases with a decline in price from $2.759 to $2.739. Therefore,
the company should take the strategy to lower price. However, price should be lowered

4APPLIED ECONOMICS FOR MANAGERS
considering the aspect of profit maximization. At price $2.729, profit declines. Henceforth, while
declining price the company should consider the objective of profit maximization.
Step 5: Executive summary
The analysis has been made to develop an economic analysis for supporting short run and
long run investment planning, enterprise valuation, portfolio evaluation, merger and acquisition,
strategy and competitor analysis. ExxonMobil is one of the dominating firms of oil and gas
industry in United State. The skill gap analysis has been done to improve specific skills of
workers. The economic analysis has been done following the standard economic theory of
demand, supply, elasticity and profit maximization. The oil and gas industry in United State
follows structure of oligopoly market. With increase in global oil demand, there is an expansion
in demand increasing both equilibrium price and quantity increases. The elasticity of crude oil is
highly price elastic in nature. This implies proportionate change in quantity demanded larger
than proportionate change in price. Firm therefore losses by increasing price. In order to increase
revenue by 10 percent the company should lower its price. The profitability of the company can
be enhanced by lowering cost of business. Resources can be used efficiently and cost can be
reduced by adapting effective waste management technique. To lower the cost of delivery and
distribution, the firm should adapt an efficient logistic and supply chain management system.
Lowering price and strategies to reduce cost can help the company to perform efficiently in
future.

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References
Baumol, W.J. and Blinder, A.S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Boersma, T. (2015). Energy security and natural gas markets in Europe: Lessons from the EU
and the United States. Routledge.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Gloystein, H., & Varghese, A. (2019). Oil demand growth grinding to lowest in years as global
economy stalls. Retrieved from
https://www.reuters.com/article/us-global-oil-demand/oil-demand-growth-grinding-to-
lowest-in-years-as-global-economy-stalls-idUSKCN1TD0Y
news.exxonmobil.com. (2019). Oil and Gas Council Names ExxonMobil 2018 Large Cap
Company of the Year and Explorer of the Year. Retrieved from
https://news.exxonmobil.com/press-release/world-oil-and-gas-council-names-
exxonmobil-2018-large-cap-company-year-and-explorer-ye