Microeconomics Industry Description the Modern Day Economic

Microeconomics

Industry description

The modern day economic climate is extremely dynamic and challenging, revealing a context in which the economic agents are presented with both opportunities as well as challenges. One specific means in which they choose to respond to the challenges and seize the opportunities is represented by them joining forces through mergers and acquisitions. A particular merger of specific interest in 2011 is represented by the merger between Irving Oil Limited and Exxon Mobil.

Irving Oil Limited is the largest refinery in Canada and it focuses on refining and distributing oil and natural gas. It providers a wide array of products and 80 per cent of its output is exported to the United States.

"The company serves customers in eastern Canada and New England, marketing and distributing energy products such as gasoline, diesel, home heating fuel, jet fuel, and lubricants. It also provides natural gas to residential and commercial customers in New Brunswick. Irving Oil's more than 300,000-barrels-per day refinery in Saint John is Canada's largest refinery. The company exports more than 80% of its products to the U.S. (about 75% of Canada's gasoline exports to the U.S.). The refinery also accounts for 19% of the U.S.' gasoline imports" (Hoovers, 2011).

Exxon Mobil is an important leader of the oil industry. It is interesting to note that the company itself was formed as the result of a merger between Exxon and Mobil and that it has a strongly embedded reputation in the consciousness of the American people, being a direct descendant of the Standard Oil Company, owned by the reputable J.D. Rockefeller. In 2010, the company registered revenues of $383.221 billion and net incomes of $30,460 billion (Exxon Mobile 2010 Annual Report), following an ascendant trend and proving its financial strength even in times of economic recession when most economic agents are registering decreases in revenues and profits.

The United States Census Bureau reporting system does not reveal an independent oil and natural gas industry, and it is as such assumed that this petroleum industry is part of the utilities industry. In such a context then, the overall revenue of the industry is set at $584,192 million, employing 637,247 individuals, on a payroll totaling up to $51,653 million. In terms of the four largest firms, the following are noted:

There is a total of 1,008 establishments by these firms

The revenues of these four firms is of $73,081 million

They employ 66,701 individuals on a payroll of $6,636 million

At the level of the eight largest firms in the industry, the information below is of relevance:

There is a total of 1,421 establishments by these firms

The revenues of these four firms is of $129,090 million

They employ 137,513 individuals on a payroll of $12,978 million (U.S. Census Bureau).

The petroleum industry is highly complex. On the one hand, the players in the industry deal with socio-economic pressures common to all industries, but they also face the pressures of environmental stability and the need to reduce pollution and global warming. This instance creates additional strains and demands for the economic agents and forces them to invest more in conducting sustainable operations.

Demand of the oil and gas-based products is influenced by the general state of the economy, but since the main consumers are the automobiles and the households, demand is rather stable. In terms of actual competitive strategies, companies rely on operational efficiency to generate profitability.

"Most companies are local and operate a single "bulk station" (tank farm), although the large companies may operate a dozen facilities and serve several states. Large wholesale purchasers generally can negotiate bigger price discounts from suppliers and spread the cost of bulk holding facilities over a larger number of gallons" (Hoovers, 2011).

At a more detailed level of competition, an adequate stand for the analysis is represented by the five forces analysis of Michael Porter. Through these lenses, the following are noteworthy:

The barriers to entering the industry are fairly high, but it is difficult to pin point them as they differ based on the region. Some of them however include financial demands or legislative constraints.

The bargaining power of the suppliers is increased, and generically shared by a few companies.

The bargaining power of the buyers is limited as the prices of oil and gas are pegged to the costs incurred in their extraction, processing and distribution. Nonetheless, customers can choose the product to purchase based on its retail price, meaning as such that price sensitivity in the purchase decisions of customers force petroleum companies to implement competitive prices.

The threat of substitute products is still unclear. On the one hand, there are the natural resources, such as coal, whereas on the other hand, there are the alternative and renewable sources of energy, such as wind or solar energy. The alternative of natural resources is damaging for the environment, whereas renewable energy has yet to be globally available (Investoedia).

Finally, in such a context, the competition between the players in the industry -- the more important of them being Exxon Mobil, BP Plc., Chevron Corporation and Royal Dutch Shell Plc. (Hoovers, 2011) -- is intense and fierce.

2. In favor and against the Irving -- Exxon Mobil merger

The merger between Irving Limited Oil and the Exxon Mobil Corporation is debatable, with one side revealing positive arguments in favor of the merger, whereas another side revealing negative arguments against the merger. In terms of the arguments in favor of the merger, the following are noteworthy.

The combination of the resources from two different economic agents, including their logistics infrastructures, would materialize in increased operational efficiency and cost savings, which would in turn generate reductions in the retail price, to as such create benefits for the buyers and for the community

The unification of the two companies would create enhanced research and development budgets and would gather more talented staffs in this direction. This in turn means that the newly formed entity would be better able to conduct research and development operations, to create new products and to support environmental stability and sustainability.

Finally, through the centralization of the resources from the two companies, the newly formed entity would be better able to expand and to provide its products and services to a greater consumer market and as such serve the needs of more people, within and outside the United States.

The arguments mentioned above are generically pegged to the two companies entering the merger and they are formulated in an effort to convince the public that the merger is indeed beneficial for the entire community, not only for them, from a financial standpoint. Still, while through the lenses of the newly formed entity, the advantages are clear, the public could object to the merger, through the following arguments against it: