Task One of the key factors affecting the prices of oil is its supply as the supply of oil is highly regulated in international market. Oil supply is controlled by large producers and there is a cartel also which is regulating and controlling the overall supply of oil at international level. One of the key reasons therefore is whether the supply of oil is actually constant and smooth or not as in the absence of uniform supply, fluctuations in it will create misbalance in its equilibrium supply level. Iran, one of the largest producers of oil in international market is being subjected to sanctions from US.
These sanctions have actually resulted into decline of Irani oil in the market thus creating an overall shortage in supply. This shortage however, is not being fulfilled by other producers as there has been relatively low but gradual increase in oil production by other players including Saudi Arabia, Venezuela and other global players. There is also a natural shift towards using fuel substitutes such as bio-diesel, compressed natural gas as well as LPG. Due to higher increase in the production of alternative sources of gasoline, demand for oil is decreasing.
Further, higher prices and low level of availability is also putting pressure on oil demand. Since oil is one of the leading sources of energy with countless uses therefore a consistent increase in oil prices and low level of supply due to regulated nature of the market is further pushing the prices up in international market. (Elder, 2012) As a result of this increase in prices, large scale manufacturing industries are shifting towards using alternative energy resources such as natural gas to run their manufacturing plants rather than use oil as an alternative resource.
(Berkow, 2012) This has further resulted into low demand for oil and thus forcing profits down for firms operating in oil industry. The presence of cheaper substitutes therefore reduces the overall demand for products of Shell Inc and resultantly its profits are decreasing. It is also critical to note that the downstream activities including drilling, refining as well as exploration are becoming costly too. Over the period of time, cost of downstream activities has increased whereas the relative increase in final prices has not been so.
This sharp increase in the cost of production may also have contributed towards the low profitability of Shell Inc. Global oil market is considered as inelastic in nature as global supply and demand of oil do not respond quickly to the increase or decrease in the production of oil. The overall oil exploration activities take years to materialize and hence show in-elastic trends. Task-II Externality is one of the critical concepts in economics and outlines that some costs or benefits may not be transmitted through the prices.
An externality however, is caused by a person or party which did not agreed with the actions. Traditional economic theory suggests that trade is a mutual exchange and one party to the exchange may not enter into the transaction if it believes that it may not benefit from the same. (Krugman, and Wells, 2004) What is however, important to understand the mutual exchange between two parties can also have an impact on third parties also? This voluntary exchange therefore creates externalities which can be either positive or negative in nature.
Theories of welfare economics suggest that voluntary exchanges often do not result into optimal welfare for all the parties involved in the transaction process. Externalities can be either positive or negative in nature and parties involved in voluntary exchange may benefit from both. Negative externality is considered as an external cost whereas a positive externality often translates into external benefits for the parties to the transaction. Negative externalities may result into costs due to various factors such as pollution, environmental damage. The cost of such externalities is jointly paid by the society as national resources have to be spent in order to clean up the environment. Positive externalities are the external benefits which may not be fully available to the parties to the transaction but to the society at large.
Due to positive externalities, the marginal benefit curve of the society as a whole is greater than the marginal benefit curve of the individual. Under the positive externalities, society therefore tend to benefit more as compared to the people involved in the mutual exchange of any good or service. There can be different externalities involved in the oil market including damage to the environment caused by oil spill.
Such spill will not only force a society to pay for its cleaning up but also the environmental damage, loss of productivity may also emerge as major costs which society as a whole has to pay. Damage to the environment due to normal burning of oil is another cost which creates pollution and society as a whole has to pay for the same. Due to the use of oil, however, mass transportation can take place and society as a whole can benefit from the speed and ease with which transportation can take place due to use of gasoline in cars and other vehicles.
Further, the use of gasoline also creates electricity, runs manufacturing plants and almost everything which requires mechanical energy to run. The reputation loss in Nigeria may be relatively low as Nigeria is not a mainstream market and world attention does not seem to go there. (Lawler, 2012). Being a developing and poor country, Nigeria may not be as important for the world as countries like US could be.
Further, the overall losses incurred due to spillage in Nigeria may be lower than what happened in US thus society as a whole might not have suffered the same degree of damage due to this oil spillover. Task-3 Pensions are given to the employees after their retirement in recognition of their services delivered during a particular period of service in a company. Normally companies pay pension if employees serve the organization till a particular period of time. It is critical to note that pension funds are developed through the contribution made by the employees as well as the organization. The overall purpose is to ensure that the employees maintain a particular standard of life after the retirement.
This is therefore given as an inventive to employees however, it is linked with the services offered for a particular period of time. Many organizations, in recent past, however, started to reduce their pension benefits or have abolished them for new employees. The actions of Shell Inc also seem to be directed in this manner as organization is facing strong pressures to maintain its profitability.
The gradual decline in the share prices of the firm as well as the low profit margins therefore may force large firms like Shell Inc. to curtail their costs. Contribution towards pensions therefore can be one of the costs which firms often look into in order to curtail. This not only results in better cash flows for the firm but also reduce the overall expenditure. The decision by the Shell Inc. to abolish its pension scheme therefore will hurt those employees who will be joining the firm in future.
(Inman, 2012) However, employees who are already on the payroll of the firm and qualify for the pension will continue to get the same. As such the overall arguments of McCluskey may not hold as the interests of the older employees are already secured. Though every employee may be beneficial to Shell Inc. ,. however the interests of those who already served the firm for a particular number of years should be prioritized. References Berkow, J. (2012) Rising gas prices could lead to slowdown in wider economy, spike in jobless rate: economist | Energy | News | Financial Post.
[online] Available at: http: //business. financialpost. com/2012/04/04/higher-gas-prices-could-cause-wider-economic-slowdown/? __lsa=55d9fa8d [Accessed: 25 Apr 2012]. Elder, B (2012) Shell suffers amid full-year results fears - FT. com. [online] Available at: http: //www. ft. com/cms/s/0/d1460702-3cf1-11e1-8129-00144feabdc0.html [Accessed: 25 Apr 2012]. Inman, P. (2012) Union attacks Shell as it closes final-salary pension scheme in Britain | Business | The Guardian. [online] Available at: http: //www. guardian. co. uk/business/2012/jan/05/shell-closes-final-salary-pension [Accessed: 25 Apr 2012]. Krugman, P. and Wells, R. (2004)Microeconomics. New York: Worth Publishers. Lawler, A (2012) Shells Nigeria oil spill gets muted response| Reuters. [online] Available at: http: //www. reuters. com/article/2011/12/23/us-shell-nigeria-leak-idUSTRE7BM1BZ20111223 [Accessed: 25 Apr 2012].