Production and Operations Management The relationship between the retail price of gasoline and global crude oil demand Crude oil is the primary raw material used in the manufacture of gasoline. This means that the demand of oil has a direct effect on the retail price of gasoline. If the global demand for crude oil increases, its price also rises. This means that the acquisition of the raw material used in the manufacture of gasoline will cost more than usual, and the effect of this will be an increase in gasoline prices.
The processing of crude oil is done through the refinery after which the product is transported to a terminal where it is delivered directly to the retail location or sold to wholesaler. The retail price that is set by refiners is of crude is inclusive of the price of obtaining crude oil, processing and transportation. The market price of crude oil may account for more than half the price of gasoline. Normally, transitions in the supply of oil have the potential of affecting short-term availability of gasoline. In case of some natural disasters like hurricane Katrina, the supply of crude oil reduces leading to a short-term increase in demand for gasoline.
This imbalance in the demand and supply of crude oil has a direct bearing on the prices of gasoline. Strategies for maintaining price at the pump without losing profits If the global crude production decreased by 10%, oil companies would face the risk of making losses if they maintained their pump prices. Such a situation forces many of them to increase their pump prices. However, a company can adopt strategies to enable it to maintain its pump prices without losing profits.
One of the ways in which Marathon achieve this is ordering crude oil in bulk. This will allow the company to enjoy discounts that are normally offered to those who buy products in bulk. This discount could be as high as 10% or more hence the company will still maintain its profits margins. Larger purchases enjoy larger discounts. Marathon can still enjoy the advantages of bulky buying even without stretching the limits of its usual buying. In order to achieve this, the company should form a buying co-op.
The company should join forces with many other oil companies. They should all order the same type of materials at a time so that they can enjoy quantity breaks. Daniel (2006) warns that a company should be careful not to over buy because the tying up of money in the commodity can result to problems of cash flow in the company. The company should also make detailed time studies for their internal processes so as to identify where they can reduce time.
This is important in reducing labour time and consequently, the money spent in the paying of overtime work. Apart from reducing labour time, the company can also hire employees at reduced hourly rates. This means that the company should only retain a few expertise meant to tackle more specific and sensitive issues of the company. The rest of the work should be handled by low-skied laborers who can be paid less compared to the experts. According to Karlgaard (2004), huge time savings can also be created by making small changes in the physical environment of the workplace for example, changing its layout.
As noted earlier, the selling price should always factor in other factors of production for example, the cost of acquiring of raw materials. Therefore, it is important that Marathon buys its crude oil from cheaper vendors. This will enable them to maintain their profit margins despite the generally high crude oil prices. The company should also reduce its expenses. The management should go through their overall costs and decide on what to trim out for example, it can relocate its office from a high-rent district to a low-rent district.
They could also share a building with other companies instead of renting it whole themselves. This means that marathon should analyze every aspect of its business and point out an excess spending. The effect of an additional moratorium on deep-water drilling US retail gas prices The six-month deep-water drilling moratorium imposed in June 2010 by President Obama stopped oil and gas grilling in the gulf region for some time. As a result of this, the forces of demand and supply worked work together to produce a high market price for gas.
The ban also led to the loss of many jobs. If another moratorium was to be imposed, the prices of gas in the US would rise tremendously due to resultant imbalance in demand and supply. This is because the majority of the people, especially, the urban dwellers use gas as their source of energy for domestic ad industrial energy. The consumers of gas could consider using alternative sources of energy that are clean and less harmful to the environment like electricity.
However, most of these are more costly to the consumer and therefore discourage their utilization. It is important that the government considers the imposing of another moratorium as necessary. This is because the new rules will make the drilling of oil and gas in the gulf region safer than before. It is also important to note that this ban is not permanent. Therefore, it is worth losing some months of operation and save the environment from disastrous gas leaks in the near future.
Such leaks could present more direct and indirect costs compared to the revenue lost during that time. Daniel (2006) reveals that such costs include billions of money used for clean up and millions paid for damage claims. The short-term ban comes with new requirements for those who want to drill exploratory wells. Such companies must prove that they have already planned for the appropriate steps they will use to contain a worst-case scenario than the one that happened in 2010. This was a case involving the largest oil spill in the US history, the company responsible being BP.
Under the new rules, mandatory independent inspection of the drilling process is done by a professional engineer. The engineer must also certify each state of the drilling process. Gas drilling companies are required to develop comprehensive plans to improve work safety and manage risks. Marathon’s statement on Health, Environment, Safety and Security Marathon’s statement on safety and security, and health states that the company conducts its business with regard to the safety and health of its neighboring communities, employees and contractors (Marathon Oil Corporation, 2010).
This statement is relevant in regard to the expectations of the oil industry because their actions present major health and safety threats to man and other living organisms. Every company must take care of the interests and the safety of the neighboring communities in the area their operation. Employees are an important part of any company. This means that every in all its business activities, a company should consider the health and safety of its employees. In regard to the environment, the company states that it is committed to minimizing its impacts on the environment by reducing emissions, wastes and other releases (Marathon Oil Corporation, 2010).
This statement is also relevant with respect to industrial expectations. This is because every company, especially those whose actions have a direct impact on the environment, should develop initiatives aimed at reducing their impacts on the environment. These include those that reduce the amount of wastes dispatched and toxicity of released wastes (Karlgaard, 2004). Companies should also employ the use of technologies that minimize the levels of emissions from several of their business activities.
Conclusion It is important that every firm develops its own core values that guide them in their approach to business. This is very important considering the fact that there is a relationship between the physical environment and business processes. Business processes impact on the environment and some of these effects could last for decades. This means every business must conduct a good production and operations management so as to ensure that their busies actions present most minimum effects to the environment. References Daniel, D. (2006). “Marathon Oil Company settles PCB Violations for $38,000”.
Online: http: //yosemite. epa. gov/opa/admpress. nsf/a883dc3da7094f97852572a00065d7d8/41aaa7c8ff6f554885257234006ce928!OpenDocument. Viewed on 6th July, 2011. Karlgaard, R. (2004) Peter Drucker on Leadership. Forbes magazine. Online: http: //www. forbes. com/2004/11/19/cz_rk_1119drucker. html. Viewed on 6th July, 2011. Marathon Oil Corporation (2010). Living Our Values. Online: http: //www. marathonoil. com/About_Us/Our Values/. Viewed on 6th July, 2011.