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Schule > Politik und Wirtschaft > Wirtschaft und Arbeit > Facharbeit: Analysis of Shell in the oil market

Chapter 1: New Technologies:

Adaptations to Secure Future Energy Demand

Chapter 2: Socio-Cultural Aspects:
The “Green Strategy” for The Royal Dutch Shell Group

Chapter 3: Economic Analysis:
The Energy Market and Shell

Introduction
Energy has become so vital to modern standard of living that changes in the world energy market have an enormous impact on relationships between countries, national governments, organizations, households and individuals around the globe. With the beginning of the industrialization, coal has been the major energy source worldwide. Manufacturing processes, transportation innovations and other technological advances, which have been increasing the standard of living, have resulted in an increasing demand for energy. In the 1960s coal has been superseded by oil due to its higher performance and its variety of utilization possibilities. With further growing need of energy, the controversial prognostications of the oil exhaustion attract more and more the world’s attention. Facing an inevitable depletion of oil with yet only estimated points of time, the world has increasingly recognized the necessity of adapting energy supply, demand and therefore also consumption behavior in order to avoid the devastating impact of oil exhaustion on economy, environment and society. Especially energy supplying companies play an important role in attempting to solve optimally the problem of oil depletion. Focusing on the Royal Dutch Shell Group, the issue of oil depletion and its effects evoke the question of how this company in specific implements its adjusted strategic approaches in order to beneficially use emerging opportunities.
To obtain an answer, the issue is scrutinized from a micro- as well as macroeconomic view, which is always elucidated in correlation with Shell. Initially, emphasis is put on the technological side of the problem, including environmental considerations. Thereafter, a socio-cultural investigation discusses changing demographic factors and their impact on Shell’s strategic decision-making. Wrapping up the foregoing approaches, an economic analysis of the energy market displays the environment, in which Shell has to compete and implement appropriate concepts. Finally, the preceding analyses from different viewpoints lead to a conclusive evaluation of Shell’s market behavior and strategic goals.
“ Meeting the challenge of the increasing global demand for energy, whilst tackling the impact on our climate, will depend upon the industry’s ability to develop new technologies and deploy them together effectively. ”
(Shell, 2005)

1. Introduction
Oil is one of the most vital resources to human kind. Today this “black gold”, as it is widely known, covers a major proportion of the world’s energy supply, not only serving industrialized countries but driving upcoming economic growth in developing countries as well. However, the reserves of this essential resource are limited. By reason of this restraint, the future of oil still arouses controversial discussions pertaining to its impact on the world economy and on the standard of living. As crude oil becomes scarcer, new approaches to delay depletion and to reduce the world’s dependency on petroleum have to be conceptualized and implemented. Possible alternatives to the fossil-fuel-based energy supply are for example offered in a more environmentally-orientated attempt of providing energy through wind or hydrogen-fuel cells. On further consideration the question arises whether further emphasis on renewable energies and new, efficient technologies will help Shell to maintain its position as a major energy supplier in the future.
To obtain an answer, the issue of oil depletion and its impact on the Royal Dutch Shell Company have to be scrutinized and possible strategic alternatives need to be evaluated. This analytical concept initially puts emphasis on the issue of oil exhaustion, followed by an investigation of new technologies and their influence on Shell operations. Environmental implementations as well as the role of renewable energies will be examined thereafter, preceding a conclusive positioning of Shell’s strategy.
2. Approaches to Guarantee Future Energy Supply
The uncertainty of future demand and availability of oil is one of the most important factors of forecasting the development of oil prices, energy supply and need in general. Dealing with the prognosis of future demand and supply, there exist two contrasting views pertaining to the issue of oil depletion. The optimistic model is based on negative feedback loops (Tietenberg, 2000), which function as self-regulators in order to avoid the depletion of scarce resources. As oil supply becomes shorter, prices rise and therefore evoke a substitution and an income effect. This means that people are more engaged to switch to alternative fuels or reduce consumption leading to a change in quantity demanded which keeps oil from depleting. Opposing this view, the pessimistic approach conceptualizes dominating positive feedback loops (Tietenberg, 2000), which reinforce the vicious circle of oil scarcity. As population grows, demand and therefore oil consumption increase. Consequently, rising industrialization in conjunction with population growth leads to sooner resource exhaustion.
Supporting the pessimistic model, the Hubbert curve (Figure 1) displays a prediction of world oil depletion due to the resource’s non-renewable character. It estimates the peak of world oil
production around 2005. Furthermore, it depicts once again the limited availability of the scarce oil, which is consumed at an exponential rate. The fact, that discovery has peaked in the 1960s, implies that oil consumption exceeds new discoveries. Campbell (2002) elucidates this increasing gap between production and discovery: “We now find one barrel for every four we consume”. Nevertheless, the peak dates are only estimates and might not reflect exact future happenings, but the scarcity of oil and its inevitable depletion in the future can be supported by current findings. According to the Scarcity Principle (Bernanke & Frank, 2004), resources accessible to us are limited despite our needs and wants. Consequently, the increasing energy demand, covered through oil supply, will lead to the exhaustion of the vital substance. Although the models mentioned above are only assumptions accompanied by uncertainty, they allow oil companies such as Shell to adapt their strategies according to prognosticated trends.
In order to adjust the company’s activities to the future energy market, one major approach is to increase efficiency with new technologies. Philip Watts (2001), former chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group, stated that Shell was aware of the challenging prospects of oil. With the aim of adapting strategies to the forecasted energy environment, Shell has already been using its long-term energy scenarios for 30 years. These scenarios predict output to peak around the year 2025 followed by a short plateau period before production will decline after 2040 (Figure 2, page 4). Furthermore, Shell (Baird et al, 2001) alleges that, despite the relative decrease of new reserve discoveries, there are “still 650-690 billion barrels left to be exploited and added to reserves of about one trillion barrels”.
Shell’s future scenarios illustrate different possible timeframes in which oil depletion takes place, depending on the impact of different factors of the oil market environment. In order to stay competitive in a market in which the crucial resource becomes increasingly scarce, Shell needs to implement new technologies as a first step. According to the Low-Hanging-Fruit-Principle (Bernanke & Frank, 2004), all the large and easily accessible oil fields will be drilled first. As a result, methods for more technically demanding and intricate environments need to be innovated and utilized. The process of developing sophisticated technologies as well as their application in challenging areas require diverse expertise in technical, managerial and finance matters. Owing to this broad knowledge, current oil fields can be drilled more effectively, former drilled oil fields may recover and oil discovery can be facilitated. Especially during the 1990’s, growth in discovery was achieved as a result of the implementation of new technologies such as 3-D seismic data analysis, geophysics as well as monodiameter, horizontal and directional drilling (Woltjer, 2005). Different current Shell projects support this increased efficiency and reduced uncertainty concept. Important approaches are the secondary or tertiary recovery in which hydrogen, CO2 or chemicals are artificially injected in order to attain growth in recoverable reserves. As a result, conventional oil recovery can be increased from 35% to 45%, extending current global production for about 20 additional years (Brinded, 2005). Moreover, Shell was the first to operate in deepwater offshore with highly sophisticated technology in Nigeria. The oil sand project in Athabasca, Canada, depicts a further successful application of advanced technology in unconventional oils. Those projects, using most effective and sophisticated technology, are especially initiated by Shell’s strategy of “Drilling the Limit”™ (Moody-Stuart, 2000) in order to optimize production and to guarantee that efficiency is maximized. This approach implies the Efficiency Principle (Bernanke & Frank, 2004), stating that everyone can profit from efficiency achievement while the economic pie grows larger. With further advancing technology, the uncertain future of the energy market gives hope as new opportunities arise with technological progress.
Nevertheless, one needs to consider that increased production initiated by advanced technologies drives the depleting process of oil. Sophisticated methods and tools may ameliorate efficiency, but can certainly not change the exhaustion of the scarce substance. On the one hand, one has to be aware that opportunity cost of drilling oil today means less production tomorrow. On the other hand, the approach towards more energy-efficient equipment reveals major significance with regard to the opportunity of delaying oil depletion. Therefore, advanced technology aiming further efficiency, denotes an important strategic adaptation towards a successful position in the future energy market.
Despite high capital intensity, investments in new technologies and green solutions as adjustments to the energy environment offer promising future developments. A significant amount of investments is needed in order to finance research and development for equipment as well as for new discoveries. Profits of investing in a new project are higher, if the expected oil price is high. Woltjer (2005) elucidates this issue by stating: “Searching for oil is like a ‘gamble’, where the ‘chips’ cost hundred millions of dollars, and the ‘jackpots’ have billions or even hundreds of billions”. In the mineral industry, fixed costs and sunk cost beyond recovery take a major part of capital, irrespective of whether the exploration of estimated oil reserves is successful or not. Additionally, noteworthy costs arise due to resource transportation over long distances. The difficulty of predicting payoffs increases uncertainty and risk, which inevitably affects investment behavior. However, latest sophisticated technology reduces insecurity and allows Shell to conceptualize estimates with more accuracy, especially when dealing with exploitation matters. Therefore, investments in new technologies evoke also cost savings due to higher success rates of drilling attempts. The increased production efficiency allows oil companies to decrease marginal costs and, as a result, Shell can attain economies of scale, which are important in order to countervail the large initial investment sums for R&D, exploitation, constructing, etc. Furthermore, Shell engages in joint ventures with the aim of sharing and reducing insecurity as well as costs of developing new technologies. The EIA (2003) claims that innovative technologies have diminished uncertainty due to the more energy-efficient approach.
Porter and Van der Linde (1995) suggest that environmental standards can function as incentives for innovation. Since new approaches toward a green energy supply are often avoided owing to the uncertainty of benefits, environmental regulations absorb the doubt and hesitation and may even lead to a competitive advantage. For Shell, the implementation of the Kyoto Protocol conditions until 2012 represents a challenge in terms of using new technologies and following environmental restrictions. With the aim of altering the vicious cycle of global warming, the protocol stipulates an abatement of the discharge of carbon dioxide. According to Bär (2005), Shell’s investments in environmental issues have led to the company’s image expansion as Shell has adjusted its strategies into a new market segment in which more energy-efficient and low-pollution products are valued. Illustrating this new approach, the Royal Dutch/Shell Group invented a low-emission fuel mix consisting of diesel and a clean Gas-to-Liquid fuel. This Pura Diesel (Grieve, 2005), offered for example in Thailand, allows a reduction of the severe pollution problems there, which have an alarming impact on health issues. However, the fuel project is not only engaged in the imposed Kyoto conditions, but additionally enables full performance. This competitive advantage allows Shell to ask premium prices for its extraordinary fuel. In consequence of launching Pura Diesel, Shell has been able to attain an image of a more environmentally concerned energy market player and therefore gained further market share. Hence, engaging in environmental issues, such as the attempt to diminish greenhouse emission through further efficiency or sophisticated innovations, may not only result in technological and economic advancement, but in a positive image change or increased market share as well.
Facing the inevitable exhaustion of oil, renewable energies gain importance as alternatives in order to secure the future energy supply. Prognostications (Winter, 1995) reveal that by 2050 the world energy demand will have doubled. With the aim of satisfying this demand, renewable energies such as hydro energy, wind or solar power will achieve further significance and widespread acceptance as energy sources. Moreover, Shell scenarios predict that, due to advancing technologies and expanding utilization of these alternative energies, green energies will have equaled fossil fuel prices by 2020. As a result, employing these energy sources will become economical, which is currently a major constraint since the utilization of renewable power is accompanied by high capital intensity.
Shell managers are aware that investments in green energies will not always disclose payoffs right away, but reveal promising outlooks on the long-run implementation. To exemplify the economic use of alternative energies, Shell states that wind energy is currently the most economically feasible form of renewable energy. Further enhancement of turbine technology has decreased generating costs by “10% over the past 15 years”(Van den Bergh, 1996). Additionally, Shell expects the business of biomass energy to become progressively competitive in the next years. Launching its first biomass operation in Norway (Shell, 1999), Shell makes use of a promising opportunity in order to safeguard its future position in supplying energy. This approach is equally revealed in the attempt to implement hydrogen-fuel cells, which attract investments due to their emission-free use and high efficiency (EREC, n.d.). In general, growing demand for green energy encourages investments in developing substitutes. However, companies face efficiency restraints of renewable energy comparing those with fossil fuels. Due to the struggle of making renewable energy economic, financial support called “carbon-finance capital” (The Economist, 2004) attempts to motivate oil companies to invest in green energy. Therefore, Shell profits on the one hand from the financial support of subsidized alternative energies and on the other hand from the promising future outlook of renewable energies, which are predicted to attain a share of up to 50% by 2040 (EREC, n.d.). Consequently, green energy offers increasing incentives for Shell to maintain its position as a major player in the energy market as conventional oil reserves progressively exhaust.

3. Conclusion
In conclusion, investments in new technologies, adaptations to environmental issues in order to create competitive advantage and a further emphasis on renewable energies offer promising future outlooks for Shell. Despite perceived risk and corresponding high costs, these approaches provide the company with the opportunity to strengthen and safeguard its current position as a credible energy supplier in an environment of oil depletion. When implementing new strategies to reduce oil’s share of energy supply, the acquainted experience with green energy allows Shell to create a competitive position in the future market in which energy supply will be focused on renewable energy. With increasing exhaustion of fossil fuels, Shell therefore needs to put further emphasis on renewable energies, as efficiency-increasing technologies cannot serve as long-term solution. In pursuing the aim of meeting the challenges of energy supply, Shell is able to maintain its position as a major player in the energy market owing to its future-conscious adjustments.

References

Bär, Julius (2005). Renewable Energies – Investment Topic with Potential. Retrieved on 26 November 2005 from:
http://www.juliusbaer.com/runappl.cfm/doc_4019?wm=a(302)&dp=a(dl)d(2122)&ext=.
Baird, Euan, Campbell, Colin J., Frowd, David, Hore-Lacy, Ian, Longwell, Harry J.& McMullan, John T.(2001). Shell dismisses fears of oil scarcity within next 25 years. In Before the Wells Run Dry. Retrieved on 26 November 2005 from: http://www.feasta.org/documents/wells/contents.html?one/panel2.html
Bergh, Maarten van den (1996). News & Library. Charting a course - preparing for the oil and gas business of the 21st Century. Retrieved on 26 November 2005 from: http://www.shell.com/home/Framework?siteId=media-en&FC2=&FC3=/media-en/html/iwgen/news_and_library/speeches/1996/chartingacoursepre_10171432.html
Bernanke, Ben S., Frank, Robert H. (2004). Principles of economics (2nd ed.). New York: McGraw-Hill

Brinded, Malcolm (2005). Integration. The key to meeting energy challenges. Retrieved on 26 November 2005 from:
http://www.shell.com/static/media-en/downloads/speeches/mbrinded_doha.pdf
Campbell, Colin J. (2002). Peak Oil: An outlook on crude oil depletion. Retrieved on 26 November 2005 from: http://greatchange.org/ov-campbell,outlook.html
EIA (2003). The National Energy Modeling System: An Overview 2003. Retrieved on 26 November 2005 from: http://www.eia.doe.gov/oiaf/aeo/overview/residential.html
EREC (n.d.). Renewable energy scenario to 2040. Half of the global energy supply from renewables in 2040. Retrieved on 26 November 2005 from: http://www.censolar.es/erec2040.pdf
Grieve, Peter (2005). Externalities & Decision Making. Lecture on Economics and Business course, November 17. Maastricht: Faculty of Economics and Business Administration, Maastricht University.
Linde, C. van der, Porter, M. (1995). ‘Toward a New Conception of the Environment-Competitiveness Relationship’. In Journal of Economic Perspectives (Vol. 9, No. 4, pp. 97-118).
Moody-Stuart, Mark (2000). Drilling the limit. Retrieved on 26 November 2005 from: http://www.shell.com/home/Framework?siteId=eandpen&FC2=/eandpen/html/iwgen/how_we_work/finding_producing_oil_gas/zzz_lhn.html&FC3=/eandpen/html/iwgen/how_we_work/finding_producing_oil_gas/finding_producing_oilandgas_10171225.html

Shell (1999). News & Library. Shell announces biomass investment in Norway. Retrieved on 26 November 2005 from:
http://www.shell.com/home/Framework?siteId=media-en&FC2=&FC3=/media-en/html/iwgen/news_and_library/press_releases/1999/shellannouncesbiom_10101918.html

Shell (2005). News & Media releases. Integration is key to increasing global production, says Shell. Retrieved on 26 November 2005 from:
http://www.shell.com/home/Framework?siteId=media-en&FC2=&FC3=/media-en/html/iwgen/news_and_library/press_releases/2005/integration_is_key_21112005.html
The Economist (2004). Climate change. Welcome to Kyoto-land. Retrieved on 26 November 2005 from: http://atkeison.org/home/news/news_Economist_WelcomToKyotoLand_20041009.cfm.html
Tietenberg, Tom (2000), Environmental and natural resources economics, fifth edition, Addison-Wesley, Chapter 1, pp. 1-10.
Winter, Francis de (1995). Shell: Rapid Introduction of Alternative Energy. In NRC Handelsblad. Retrieved on 26 November 2005 from: http://www.hubbertpeak.com/debate/hubshell.htm

Watts, Philip (2001). Energy Needs, Choices and Possibilities - Scenarios to 2050. Retrieved on 26 November 2005 from:
http://www.shell.com/home/Framework?siteId=investor-en&FC2=&FC3=/investor-en/html/iwgen/news_and_library/press_releases/2001/shelllooksto_10101102.html
Woltjer, Geert (2005). Technology, demand and supply of oil. Lecture on Economics and Business course, November 10. Maastricht: Faculty of Economics and Business Administration, Maastricht University.
The “Green Strategy” for The Royal Dutch Shell Group: Socio-Cultural Aspects

Introduction:
The socio-cultural environment is one of the contributing factors for companies in making important decisions, such as marketing, advertising and the product portfolio. Factors contributing to this topic are demographic changes over the time, levels of education, changing customer preferences and additional to that modifications of values and lifestyle in the society. Demographic developments affect every organisation in our environment, since the demand for any kind of product or service changes directly with the social progression. The economist David Boddy stated in his book “Management: An Introduction”, that a firms’ location decision and the product portfolio is straightforward related to the education and skill level and the constantly varying consumer taste changes (Boddy, 2002). For a global acting company like The Royal Dutch Shell Group it is of vital importance to react on these social changes, to see future opportunities and to find ways of dealing with carbon dioxide emission. These three problems lead us to the question whether The Royal Dutch Shell Group should implement a “green strategy” in the future, or keep the emission of environment polluting gases like carbon dioxide. This article mainly discusses the subjects of demographic changes, education, energy consumption and the evolution of values in our society. After discussing the mentioned factors, it will be concluded whether The Royal Dutch Shell Group should establish a “green strategy” or whether this is not advisable.

Demographic Changes:
The world population has increased dramatically in the twentieth century; to be precise it has augmented from 1.6 billion to 6.1 billion people in an unexpectedly short amount of time. The populace of the world apparently will increase to 9.3 billion people by 2050. In the last half century the world has experienced the highest population increase in the time span of one year history. This can be explained by low mortality rates, mostly in under-developed areas of the world. In the late 1980’s, 86 million persons were incremented which was the highest rate recorded. This is a clear sign for a population shift in geographical terms. Currently 80 percent of the world population comes from underdeveloped regions, often referred to as the Third World. In the 1950’s these regions held 68 percent of the population. 97 percent of the annual population that come to the world, which are 77 million, are in fact in underdeveloped regions. In effect, migration from underdeveloped countries to developed countries is essential. Immigrant families from underdeveloped countries are frequent and of great importance to developed countries, as for instance Germany, in which nine percent of the population are Turkish. It is generally expected that the world population will reach its pinnacle during the 300 years yet to come and then begin declining again. This is anticipated to be a slow and uneven process. Indeed, the substantial growth in population the world has seen is disturbed by diminishing fertility rates. The average birth rate has declined from 4.9 births per woman in 1965 to 2.7. For the year 2006 a birth rate of 1.2 is foreseen. These facts contribute to the high age average we are witnesses of today. These numbers are also to be expected to reoccur in the future. Currently, one out of ten persons is 60 years or above, by 2050 one out of five will be in that age group and by 2150, no more than less than three generations from now, one out of three people is foreseen to be 60 years or older. The majority of people of 60 years and older today are women, to be precise 55 percent of this age group. (United Nations, 2001)
Naturally, this tendency is linked to regional factors. In this context the difference between Europe and Africa can be highlighted, being an extreme comparison. In Africa, one out of twenty persons is 60 years or older, whereas in Europe one out of five belongs to this age group. Additionally, life expectancy is a lot higher in the developed countries than in underdeveloped ones. This is due to better conditions and, as shall be illustrated subsequently, education rates which are a lot higher in highly developed countries than in underdeveloped ones. Persons in higher developed countries are expected to live up to 78 to 92 years, in underdeveloped countries it is 74 years of age in the present. This phenomenon it described as a “demographic revolution”, which is said to be as influential as the Industrial Revolution which took place in England in the 18th century. This revolution suggests that revolutionary thinking is demanded since this has a major impact on the entire world population. The influence of the aging population must be given the deserved position in governmental works. Governments are faced with financing the older population, despite decreasing resources. The working class is decreasing with the steadily sinking population between 18 and 60 years of age. Additionally, a rearrangement in capital markets and labour, services and traditional support is needed due to the situation. The “demographic revolution” additionally affects other sectors. The Royal Dutch Shell Group should strongly acknowledge the age increase when making market mix decisions. The board of the company should rethink that a big part of their audience is 60 years old or older and that this rate most probably will increase in the near future.

Education:
In further reflection, the field of education can be closely linked to the demographic situation.
Indeed a wider spread of education amongst persons has had a strong impact on fertility rates which have decreased in the long-term perspective. As mentioned above, high fertility rates are mostly to be seen in underdeveloped countries where education is less widely spread. Education is essential to all countries over the world. It is education that makes economic growth possible, even more so in the context of low wage economy since to foreigners it is more profitable to invest in economies with highly skilled workers who are paid at low cost. Additionally, gender equality, social progress and other targets can be aimed and achieved.

Energy Consumption/Changes of Values:
Since the 18th century and the Industrial Revolution energy has provided better lifestyles and economic activity (Opello, 1999). This is a significant factor to economic development and growth. Nevertheless energy is currently divided unequally in the world. 60% of the accessible energy is distributed to developed countries. Mainly the use of fossil fuels may possible a high growth in global emission especially to that of carbon dioxide and hence the creation of the greenhouse effect, this provoking global warming. The yearly global outcast of carbon dioxide is now four times what it was in 1960. Were these tendencies to be continued in the near future, the risk of global warming rising sea levels, reduction in agricultural yields and the spread of vector borne diseases can become of threatening nature.
According to the United Nations Environment Programme of 1999, “Immediate stabilization of atmospheric carbon dioxide concentration at present levels can be achieved only if emissions are immediately slashed by at least 50 percent and further reductions thereafter” (United Nations, 1999), states the United Nations Environment Program. This does not show the significance of the situation. Nevertheless even the population has started to deal with this situation and has become more economical in their energy use. Various experts warn in the media that the impact on nature will be very trivial. We can see this for instance in the cinematographic appliance of nature catastrophe films such as “The Day after Tomorrow” by Peter Emmerich. As was stated by the Environmental Monitor a huge proportion of people interrogated in 27 countries show certain concern for the environment. In Europe 46 percent of the population are quoted to have serious concern about their environment (European Commission, 1999). However, even in developing countries there is an increasing concern for the environment. Attendance towards more environmental-friendly behaviour can be detected, even in these countries. Nowadays almost all European parliaments have a “green” party which is oriented towards more environmental-friendly politics. The German “green” party “Die Grünen” has been active in politics since 1998. This can prove profound changes in western countries’ attitudes. Environmental concerns have augmented steadily for the last few years. If this would not be the case there would be no room for such a trend. Peoples of the world are beginning to realize that energy and the production thereof can have negative effects on the world. Some even recognize that the expenses taken for this sort of energy are far higher than its benefits. Consequently, higher prices for energy have to be set. Moreover governments have introduced highly disapproved taxes for fuel and energy in reaction to this movement. Such taxes’ aim is to develop a higher recognition of the people towards the danger of such implements. This can be very well seen in example of the German “Ökosteuer”. Most probably the quick and energetic rise of alternative sources for energy, as, renewable energy sources, has influenced the consumers’ awareness of the threat. These substitutes are very beneficial and have made prices more flexible and showed high influence on consumers’ choice of product. In addition we can deduct a clear trend towards these new sources of renewable energy. In particular the European Union emphasises on this development. For these certain reasons The Royal Dutch Shell Group has to react on consumers’ different pretensions and on their new attitude towards energy. By taxing oil-related products we can predict that the demand for those products will constantly fall. The role of a major company like The Royal Dutch Shell Group and their attitude towards renewable energies will affect the consumers’ buying decision increasingly.

Conclusion:
An overall change in global society can be deducted in conclusion. Decreasing fertility rates, increasing energy consumption and higher levels of education contribute to an actual non-positive situation. The Royal Dutch Shell Group will be obligated to rethink their position and their impact on modern society and on its environment. An important step to reach “long-term, high-return investments” (van der Veer, 2005) is to encourage new possibilities and access to renewable energies. Renewable resources will have a greater impact on the product-mix and a company like The Royal Dutch Shell Group should see the opportunities in this market. Implementing a “green strategy” must be a major goal for The Royal Dutch Shell Group since people will become more frequently confronted with environmental problems through media. A natural catastrophe as it was seen in New Orleans in August 2005 enhances public awareness when facing environmental issues. People are concerned about their future and the future of their children. The “Green strategy” is thus highly advisable to The Royal Dutch Shell Group since it could not only raise their economic situation but furthermore increase in sentimental value to its customers. This can help ensure a stable position in a highly competitive market, also in the future.

References:
Boddy, D. (2002), Management – An Introduction (2nd ed.). New York: Prentice Hall
United Nations (2001), The Concise Report. New York Retrieved on 6. December 2005 from: www.un.org/esa/population/publications/concise2001/C2001English.pdf

Jeroen van der Veer (2005), Shell’s strategy to fuel the future. Retrieved on 6. December 2005 from:
http://www.shell.com/home/Framework?siteId=media-en&FC2=/media-en/html/iwgen/news_and_library/speeches/2005/zzz_lhn.html&FC3=/media-en/html/iwgen/news_and_library/speeches/2005/jvdv_speech_lausanne_11112005.html
Opello, W. C., & Rosow, S. J. (1999). The Nation State and Global Order. A Historical Introduction to Contemporary Politics. London: Lynne Rienner
European Commission (2005), Retrieved on December, 4, 2005 from: http://europa.eu.int/comm/index_en.htm
The Energy Market and Shell
-Economic Analysis-
Universiteit Maastricht
Faculty of Economics and Business
Maastricht, 6th of December 2005
Ostmeier, Emmanuel FH
ID. 247251
International Business (IB 103)
Academic Writing Skills
Group 15
Tutor: David Sadeli
Language Tutor: Study Switcher
Main Assignment

Introduction
Energy is a scarce resource. As is it is the purpose of this paper to analyze the energy market, also with respect to Royal Dutch Shell Ltd it is important to bring in the economic perspective. If the energy market is perfectly competitive and simply a place where energy is traded why is there such a special interest for that market? What are the rules of the game in the energy market, what consequence does that have for Shell today and for the future? History shows that obviously there must be more factors than the demand and supply model that have to be considered when analyzing the energy market. The economic perspective requires scrutinizing the market about its basic technical functioning and the inferences that can be drawn from the analysis. The main purpose of this part is to focus on the facts that really influence the energy market in economic terms and what that implies for Shell. Clearly the demand and supply model (Perloff, 2004) must be at the heart of the energy market. There is also the factor of scarcity and the depletion of fossil resources, which account for most of the supply in energy, that play a role. Another important issue deals with the possibility of substitutes in the energy market. Finally all these inferences are not extraneous to Shell, a company renowned as being a key player on the energy market and on the oil market even more. What economic environment does Shell face and what are the economic opportunities?

Market scrutinized
Demand and supply are the core determinants of any market price. On the market itself suppliers try to maximize their respective profits actually defined by Perloff (2004, p.150) as “the difference between revenues and cost”. To really maximize the profit “a firm sets its output where its marginal revenue equals its marginal cost”(Perloff, 2004, p.236) so that profit is maximized at the quantity where marginal cost equal zero. The shutdown decision comes into consideration as soon as quantity and price that maximize profit were determined. The shutdown decision will cause firms that sell under average variable cost in the short run or below average cost in the long run to cease activities under such conditions (Perloff, 2004). The above-mentioned conditions apply both to oligopolistic and perfect competitive markets. An oligopolistic market is characterized by the fact that market participants retain a certain degree of power. The firms in such a market can to a certain degree set prices and consumers are price takers. Those firms generally gain profits not only in the long run but also in the short-run because they can set prices above marginal cost (Perloff, 2004). This is not the case with competitive market structures. In that framework suppliers are price takers so that their behaviour would have no impact on both supply and demand of the market. In the case of perfect competitive market the supply curve of the individual supplier is the same as the marginal cost curve above the minimum average variable cost in the short run (Perloff, 2004). The market supply is then the aggregate of the different individual supply curves. At equilibrium, that is where demand and supply curves intersect, we find the equilibrium price and quantity (Perloff, 2004). The supply curve becomes a horizontal line in the long run since fixed cost are considered zero. This long run supply curve lies at minimum average cost. In theory the supplier is able to sell infinitely many output at minimum average cost (Perloff, 2004). Considering the demand side of a market we will see that there is no basic distinction between oligopolistic and perfectly competitive markets. Demand is defined as the “quantity demanded at each possible price, holding the other factors constant”(Perloff, 2004,p. A-34).
Income effect, substitution effect and utility are among the factors that also have effects on both competitive and oligopolistic markets. Another important factor when considering a market is the elasticity. In a competitive framework the elasticity is going to be larger in the short run and will decline towards the long run (Perloff, 2004). That is clearly not the case for oligopolistic markets because there are no pricing and production differences in long and short run (Perloff, 2004). In other words in a competitive market quantity becomes delimited and prices become constant in the long run. For participants in an oligopolistic market the variable long and short run does not have any effect. The knowledge about these differences of market structures are absolutely required to correctly analyze both the energy market in general and the oil market in particular.

The energy market
In the energy market you will find many different segments that are considered as distinct markets. Among them are the electricity, gas and oil markets. Those are distinct markets; still they provide similar goods and function in a comparable fashion. Among them we choose the oil market to be considered more closely for the purpose of analysis. The market structure is a strong determinant of how prices and quantities vary. Considering Perloff (2004) and his definition of perfectly competitive markets, we quickly realize that the oil and to a lesser extend the energy market are more of an oligopoly structure. The oil market involves only a few participants (Clô, 2001) and there are major differences in market power. The same holds for the energy or electricity market. As it is commonly known on the oil market there is an oligopoly, a few participants have strong market power. Those participants do not engage in strong competition so the analysis concludes that the oil and the energy markets are monopolistic. Accordingly a monopoly involves “a group of market participants that explicitly agree to coordinate their activities” (Perloff, 2004) this is clearly the case with the OPEC (IEA, 2005) in the oil market and to some extend in the electricity and gas market. The OPEC is said to influence the oil price by its market power (IEA, 2005) The same is said about multinational oil companies such as Shell, BP and Exxon Mobile (IEA, 2005) that control most of the downstream chain to the customer (Perloff, 2004). Another fact that adds to the monopolistic structure in the oil market and in the energy market in general is the inability to find substitutes in a sizeable amount (EIA.2005). In the long run this might be possible but intuitively it is obvious that there is danger of new technological lock in (Perloff, 2004) when switching from on technology to the other. The substitution might still come around because of another structural feature of oil-, gas markets and the electricity market as well. The good traded on these markets is finite and therefore limits the generated profit. The Substitution effect (Perloff, 2004) comes into play in both oil and energy market as soon as the limitation of supply increases the equilibrium price in the market. That is why more expensive substitutes might become affordable. The fact that worldwide economic growth accelerates needs for oil and energy increases the gap between supply and demand makes the substitution effect even more plausible. The demand and supply model is useful for accurately explaining the energy market though still a multitude of external factors not included in the model have a considerable influence. Be it political or jurisdictional prescriptions or other exogenous factors the effect is similar. Equilibrium prices on the energy market fluctuate not only because of supply and demand. One exogenous factor that has great influence on the energy market is technology both in upstream and downstream markets (IEA, 2005).
The energy market: The implications for Shell
All the implication and economic surroundings shape the oil supplier Shell. It is therefore crucial for Shell to be involved in this evolution. The economic intuition for Shell is quite simple. In the short run the main business in the oil market is quite secure for Shell, it is easy to predict supply and expected demand will be, revenue to be gained is quite known, too. In the long run Shell has to deal with a much more dramatic issue. The base for its main business is not sustainable. (Shell, 2005) Oil’s availability in the long run is not at all guaranteed. Therefore Shell has to think about diversifying the portfolio of activities, possibly into the energy sector, in order to get knew secure basis on which to stand upon. To stay in business Shell may exploit and expand its knowledge and capabilities in the energy sector by gaining control over other sources of energy, by being an innovator and first mover in economic terms. Shell can challenge the monopoly and try be the most advanced supplier that offers the most efficient supply. Shell might diversify into the business of providing energy from renewable sources as we have already suggested. This diversification must go hand in hand with a stronger focus on the core business of being a provider, not only of oil but also of a mix of goods and services in the energy sector. Capacities and capabilities should be reoriented towards finding towards future energy needs and requirements. In the near future the need for energy will increase in an ever-increasing pace (IEA, 2005). Therefore being an innovative, powerful and solvent company Shell gives the opportunity to gain more and more market share and to sustain by serving the customers well with a mix of energy that is exactly tailored for them. Setting the technology would enable Shell to be at the heart of this change in the energy market and therefore gain the greatest benefits by having a considerable control over the main technologies and the required knowledge or expertise of the market (Shell, 2005), as it is extensively explained in the first Chapter of this paper. The economic weight of Shell is clearly enough to gain critical power upon entering new segments of the energy market, additional synergies and economies of scale (Perloff, 2004) could be ripped off through the expansion into fields related to Shell’s current activities such as drilling, geology, chemical logistics etc. Substantial investments must be allocated to understanding how the future market will form and Shell has both the human and financial capital to cope with this change (Shell, 2005).

Conclusion
Obviously the Demand and Supply model is a consistent explanation scheme for the energy market; still it must be highlighted that a multitude of other influences exist. The Energy market clearly lacks different features of a competitive market and can therefore not be considered an efficient allocation process. Clearly efficiency is a key issue in this context. Because of the scarcity of fossil energy sources posing a threat not only to the market participants, Shell for example, but also the demand side of the energy market will have to adapt to situations of increasingly scarce fossil energy. The efficiency can only be gained if both sides of the market demand as well as supply change and follow a path of technological evolution that has been described already. The demand side will search for new possibilities of producing and supplying energy. The supply side will try to use energy as efficient as possible and will try by means of technology to be more independent from the supply side. Next to technology, the future of energy consumption makes the changes in markets and technology more urgent than ever, since demand increases steadily. That concerns Shell as a supplier and the better change is anticipated and elaborated the better off will the company be as a whole. Clearly through the inside knowledge of markets and the structural barriers to entry Shell has already a strong position in the market that needs to follow a path of evolution so that today’s strength becomes a powerful asset for tomorrow.

List of References:
Clô, A. (2000). Oil economics and policy. Norwell: Kluwer Academic Publishers.
Crémer, J. & Salehi-Isfahani, D. (1991). Models of the oil market. Amsterdam: Harwood Academic Publishers GmbH.
Energy Information Administration (2005). World Oil Market and Oil Price Chronologies:1970 – 2005. Washington D.C.: Energy Information Administration. Retrieved December 2, 2005 from: http://www.eia.doe.gov/cabs/chron.html
Energy Information Administration (2005). Renewable & Alternative Fuels:1970 – 2005. Washington D.C.: Energy Information Administration. Retrieved December 2, 2005 from: http://www.eia.doe.gov/fuelrenewable.html
International Energy Agency (2003). Key World Statistics 2003. Key World Energy Statistics. Paris, France: International Energy Agency.
International Energy Agency (2005). World Energy Outlook 2005. Paris, France: International Energy Agency
Organization of Petroleum Exporting Countries (2003, October). Market Indicators September 2003. Market Indicators. Vienna, Austria: Organization of Petroleum Exporting Countries. Retrieved December 1, 2005 from: http://www.opec.org/NewsInfo/mi/pdf/MI092003.pdf
Perloff, J.M. (2004). Microeconomics (3rd int. ed.). Boston: Pearson Addison Wesley.
Shell International Limited (2005). Shell Global Scenarios Executive Summary. London, United Kingdom: Shell International Limited. Retrieved December 2, 2005 from
http://www.shell.com/static/royal-en/downloads/scenarios/exsum_23052005.pdf
Shell International Ltd. (2005) Shell Global Scenarios. London, United Kingdom: Shell International Limited
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Shell‘s strategic concepts in the world energy market

Figure 1:
Campbell, Colin J. (2002). Peak Oil: An outlook on crude oil depletion. Retrieved on 26 November 2005, form: http://greatchange.org/ov-campbell,outlook.html

Figure 2:
Bär, Julius (2005). Renewable Energies – Investment Topic with Potential. Retrieved on 26 November 2005, form: http://www.juliusbaer.com/runappl.cfm/doc_4019?wm=a(302)&dp=a(dl)d(2122)&ext=.

New Technologies:
Adaptations to Secure Future Energy Demand
Universiteit Maastricht
Faculty of Economics and Business Administration
Maastricht, 27. November 2005
Study: International Business
Writing Assignment: Main paper
Table of Contents
Introduction

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