Oil Producing And Exporting Companies 1

Oil Producing and Exporting Companies

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Question A

The lucrative business of oil brought together oil producing countries that formed a body to protect

their interests. In 1960, five Islamic states, which were the founder members, that is, Iran, Saudi

Arabia, Kuwait, Iraq and Venezuela, met in Baghdad and formed the organization of petroleum

exporting countries (OPEC). These countries were bound to comply with rules and regulations that

were agreed by signing an agreement. To date, OPEC consists only those countries that produce

large amount of oil as their net income from oil exportation reflects. Later, other oil producing

countries joined OPEC and the members’ states increased to twelve. Jointly these countries have

continuously produced oil within their region and world (Ramcharran “97-106).

According to the organization’s obligations, any country willing to join OPEC can do so provided

they adhere to the agreed rules and regulations that are subject to the approval of the conference.

However, such state musts have congruent interest. Any member willing to withdraw from the

organization should give prior notice to the conference stating reasons for withdrawal. The notice

is only effective in another financial year. OPEC also considers the association with non-members

in its operation and as such, they can be invited to the organization’s conferences as observers but

they are not entitled to vote in matters pertaining the organization decision making (griffin “954-

963.).

Organization of petroleum exporting countries has three main parts. They include secretariat,

conference and board of governors. The conference is the most superior part, which makes vital

policies concerning the organization. The policies are enacted by voting by the majority of full
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members who are entitled to vote once. Although member’s countries are entitled to one vote in

policymaking resolutions, some countries have higher weight in their one vote. For instance, Saudi

Arabia, due to its high oil production. Any change in production levels in Saudi Arabia drastically

affect the market price across the world. Therefore, it is considered superior.

OPEC mission. Harmonize and unify oil policies to its member states ensuring stable oil market

to secure economic, efficient and regular supply to consumers, steady income to producers and

income to investors in the industry. OPEC’s Vision is to sustain the world oil prices and maintain

stable oil production. To attain the vision, the organization has strategies that are used for only five

years and then revised.

First, maintaining oil supply and stable prices in the world. OPEC through the member’s

conference meet to deliberate on the best oil prices around the world. In some cases, the

organization either reduces or escalates oil prices to ensure fair prices to both consumers and

producers. This is achieved by use of production quota tools where each member produces certain

amount of oil to maintain demand and supply at optimal level that is, ensuring that demand for oil

consumption does not exceed supply from producing members to curb exhaustion of oil wells.

Through this, the organization can perform its functions and carry its operations in ensuring stable

and affordable oil prices especially for non-oil producing countries.

Secondly, ensures there is steady supply of oil. This is effective through controlled production

ensuring that there is no shortage of oil in the market. Since it was found, OPEC has put in place

measures that will ensure steady supply of oil to avoid unnecessary shortages of this essential

commodity that can be used either directly or indirectly. The organization achieves this by

promoting efficient and application of advanced technology techniques, for instance control and
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automation for extracting to reduce excess production to meet market demand and reduce

shortages. (Ftiti “014-064).

OPEC also protects the interests of its member states from exploitation of market and other oil

producing countries and investors. Due its wide range of operations, the organization formulates

important policies to protect the interests of its member’s countries and can be applied to other oil

markets in the word. In protecting the member’s state interests, the organization controls and

ensures producing countries rather than intermediaries who may affect cost handle profits and less

profits are realized.

HOW MEMBERS COUNTRIES MAINTAIN OIL PRICES THROUGH CONTROLLED

PRODUCTION LEVELS.

The member countries of OPEC use various methods to maintain oil prices depending on

the price level that is vital. In most situations, the individual countries use their gross domestic

product if it is high, for instance, Saudi Arabia whose oil extraction and exportation is sufficient

to affect the prices and maintain the price to point of its interest. Saudi oil accounts for about 22%

of world oil in the market (Ftiti “014-064). This significant share in the market affects the price

levels. If it is the policy of the organization to raise the prices, the individual country can increase

its production significantly affecting the market. The prices will in turn reduce to the country’s

interest. In a case where the OPEC reduces the prices which is not in accordance with the member

state interests, the country can reduce its contribution hence creating artificial shortage, which will

result to price increase per the desires of the member country. The mechanism used to maintain

oil price is use of Quotas in production of oil; members agree and deliberate on the appropriate
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prices to maintain. To achieve this, certain amount is set for a country to produce. The adherence

to this policy by individual member ensures the prices of oil remains at the point of their interests

through the production levels (Farah et al “707-740).

In respect to the functions of OPEC, it is clear that the organization has made great achievements

in safeguarding the interest of the oil producing nations, ensuring stable oil prices, reduced

environmental impacts associated with oil production, and constant oil supply despite some

challenges in some oil producing countries such as (political instability, retarded economic

growth). These are just a few achievements that the organization has been able to attain. The

success can be associated with its members who play an important role in producing the oil, the

member nations contribute about 44 % of the world’s oil in the markets and about 75% of the

world’s proven oil reserves.

Despite all the success and strengths portrayed by the OPEC, there has been a variety of problems

associated with the organization. There are cartels that protects the interests of the exporters only,

environmental pollution by oil exporting countries is rarely addressed by the organization, and

market price has not been standardized thereby oppressing other nations. With the

recommendation of renewable sources of energy, OPEC experiences challenges with marketing of

oil in markets, electrical vehicles for exportation as a means of transport due to its speed (faster)

and lacks congestion, and use of solar energy to run industries and home use as one of the problem

the organization is facing.

To conclude, OPEC has enhanced and promoted unity among oil producing nations. It has

therefore made it possible for the countries to engage in consultative discussions on the matters

concerning the environment and its outcomes. Pricing of oil and determining the best quantity and
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quality oil for the markets are some of achievements associated with OPEC. Hence, it is a useful

organization not only to oil producing nations but also to the rest of the world.

Question B

Multinational companies continue to penetrate various markets in various countries, with favorable

legislations. These companies have gained momentum in many countries, as a way of attracting

more investors to maximize profits. A firm only becomes a multinational company when it

acquires a subsidy either wholly or partially. It is often confused with foreign direct investment

(FDI) but in reality FDI is the only means by which a multinational company establishes itself in

another country. There are different ways that company can use to become a multinational

company. These methods, which reflect different forms for multinational companies, include

franchising, joint venture operations, acquiring a subsidiary in another country or establishment of

key projects (Foss et al “49-67).

The process of becoming a multinational company starts with analysis of different concepts in

understanding the market in a foreign country. The company applies foreign Direct Investment

avenues. In analyzing the market viability, the company may choose to employ Strength,

Weaknesses, Opportunity, and Threats (SWOT) analysis method to have clear information on how

the market operates. In evaluating strengths of the business, one has to consider what is viable and

useful to be applied to business abilities and cost leadership in its operation methods or controlling

essential input. Weaknesses aid business to self-examine what one requires to improve in order to

fit and compete in the market competitions. Evaluating the opportunity helps the business to

identify potential chances that occur along the way and give one the idea on how to venture in such
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opportunities. Threats in this concept refers to challenges that a multinational company is likely to

face in its operations in a foreign country.

Concerning the growth and expansion of multinational countries to Saudi Arabia, this can be

attributed to the favorable legislations regarding foreign companies’ entry into the Saudi Arabian

market. These countries exhibit different features as compared to local business in the same

country they operate because they are investors. First, due to their huge capital base, these

companies are able to enjoy economies of trade as compared to other local business in the host

country. The returns on capital are always high. With respect to the administration in these

companies, the management is always based on the headquarters of the company in the parent

country. Proficient managers due to the complexity of the business operations normally enumerate

managerial duties of the multinational company.

In this work, analyzation and comparison of one multinational company that deals with fast food

and one local fast food dealer in Saudi Arabia is focused. The analysis helps in understanding the

concept of entry as a multinational country in Saudi that also understands impacts of the company

to local businesses in Arabian market. The methods by which these companies use to penetrate the

market by McDonalds and Kudu are as follows.

McDonalds was initially formed as a restaurant, which later transformed to a hamburger dealer.

The company has today penetrated in over 100 countries over the world including Saudi Arabia,

with its delicacy in fast food. McDonalds has achieved great business opportunity in the Arabian

market, and the company has established itself in different towns of Saudi Arabia. The company’s

unique marketing strategies and production has enabled it to be recognized in the Arabian markets

as reflected by its high turnover from different branches in the country. McDonalds is well

recognized for its hamburgers around the world as well as in Saudi. Kudu was formed in 1988 as
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a fast food outlet having its headquarters in Riyadh. The fast food outlet is well known for

sandwiches, which are commonly consumed by Saudis. Dealing with fast food the business has

been able to diversify its activities with its various branches all over the country (Hafez &

Mohamed “6-24).

In respect to the two fast food companies: McDonalds and Kudu, it is clear to see the performance

of the two companies different in terms of the market shares, whereas McDonalds has created its

name worldwide, its legacy markets its products, selling in the Saudi market is therefore easier for

the company. On the other hand, Kudu has a special link with the Saudis, the sandwiches help it

to win and appreciate the royalty of Saudis.

Although the competition between the two businesses is deemed fair, the two businesses exhibit

uniqueness, McDonalds has a very strong capital base that has at times threatened the existence of

Kudu strength in the markets making it minor and can be forgotten. This reflects the threats that

other small fast food outlets are experiencing as they try to serve the market. Kudu and other fast

food outlets are in pursuit to win the market share though it is becoming hard every day especially

with establishment of multinational companies in the market. The impacts of these companies

include stiff competition to the local businesses due to their various advantages over the local

businesses. Multinational companies always face stiff competitive advantages such as cost

leadership and control of vital inputs. Local food outlets are left with dilemma of choosing the

most effective methods of coping with the competition posed by the multinational companies,

which deal with fast foods.

Multinational companies normally have large capital base as compared to local businesses, for this

case, when comparing between McDonalds and Kudu, McDonald have a very strong capital base

from the parent country, in times of economic crisis McDonalds is likely to survive over Kudu
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whose capital is anchored in Saudi Arabia and merely in Yemen. Collapse and failure of local

business would mean that the fast food industry is sabotaged which can easily leave the market at

their wish hence threatening the industry (Asad et al “402-412).

In conclusion, multinational companies have also brought some positive effects in the industry,

such as competition helps these businesses to invent and create ways to cope in the competitive

market. Such methods include value addition to their products that will benefit consumers.
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References

Asad Sadi, Muhammad, and Joan C. Henderson. "Franchising and small medium-sized enterprises

(SMEs) in industrializing economies: A Saudi Arabian perspective." Journal of Management

Development 30.4 (2011): 402-412.

Farah, Paolo D., and Elena Cima. "Energy trade and the WTO: implications for renewable energy

and the OPEC Cartel." Journal of International Economic Law 16.3 (2013): 707-740.

Foss, Nicolai J., and Torben Pedersen. "Transferring knowledge in MNCs: The role of sources of

subsidiary knowledge and organizational context." Journal of International Management 8.1

(2002): 49-67.

Ftiti, Zied, Khaled Guesmi, and Frédéric Teulon. Oil shocks and Economic Growth in OPEC

countries. No. 2014-064. 2014.

Griffin, James M. "OPEC behavior: a test of alternative hypotheses." The American Economic

Review 75.5 (1985): 954-963.

Hafez, Mohammed M. "Radicalization in the Persian Gulf: Assessing the potential of Islamist

militancy in Saudi Arabia and Yemen." Dynamics of Asymmetric Conflict 1.1 (2008): 6-24.

Ramcharran, Harri. "Oil production responses to price changes: an empirical application of the

competitive model to OPEC and non-OPEC countries." Energy economics 24.2 (2002): 97-106.
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