Oil distribution and transportation systems in Marathon

Production and Operations Management

Marketing is an important function and acts a key contributor in success of any product. A good marketing strategy can make a not so good product become a blockbuster while a bad marketing strategy can put an excellent product down the drain. Marketing is an amalgamation of various elements that lead with different aspects of getting the product to the consumer. One of the major elements of this marketing mix is the product placement. Placement involves determining where the product will be sold and how will be it be transported to that selling point in a manner that efficiently reaches the potential consumer and is profitable to the company. Over a period of time, various channels of distribution and transportation methods have evolved depending upon the nature of product and suiting the other external requirements of the region where the product is supposed to be transported. Not all distribution methods and transportation methods suit every product. Each product has its own requirements and similarly each geographical region also has its own requirements.

Crude oil, also referred to as 'black gold' is one product that is the key demand of any and every country around the world. Some countries, who own the reserves, produce it while a large remainder of the world imports the oil from the oil producing countries. More than fifty percent of the major oil reserves are located in the Middle East, while the rest of the minority of reserves is located in other parts of the world. Besides Middle East, major exploited oil reserves are located in Canada and Mexico. The recent oil spill in the gulf of Mexico from a deep sea oil well owned by the British Petroleum has raised serious environmental concerns as far as distribution and transportation of oil is concerned. The recent oil spill is seen as one of the world manmade disasters in the history and its impact on the environment are speculated to last for centuries. Moreover, the infamous oil spill not only damaged the natural environment of the affected region, but also incurred huge losses to the British Petroleum. The damages that were imposed on British Petroleum are one of the highest corporate fines ever paid and as a consequence British Petroleum had to close down its operation and sell its assists in many parts of the world.

This paper evaluates the oil distribution and transportation system of Marathon, the largest oil product company in the United States of America.

Transportation Time

As mentioned earlier, Marathon is a pioneer oil company of the United States of America. It has the largest oil distribution system and oil transportation fleet and owns fifty percent of the oil pipeline in the United States of America. United States of America is one of the largest consumers of oil in the world and most of its oil demand is met by imported oil as the local oil reserves do not have capacity to meet the country's huge demand. A large part of U.S. oil demand is met by imports from Middle East (Shojai, 1995.). However, after the North American Free Trade Agreement came in force, United States of America shifted its dependence of oil import from Middle East to Mexico and Canada. This enabled United States of America to reduce on its shipping, handling and other transportation costs as the two trade allies were geographical neighbors and oil transport became much cheaper. Having said that, the increasingly growing demand of oil did not allow USA to become completely dependent on one single source and thus, it still continues to import oil from the Middle East.

Much of the imported oil is transported into the United States territory using the Very Large Crude Carriers (VLCC), which cannot be handled by the local port facilities. As a result, oil is discharged from these super tankers into the Louisiana Offshore Oil Port (LOOP) pipeline, 50.7% of which is owned by the Marathon Petroleum Company (Marathon Petroleum Company, 2009). From LOOP, the oil is further transported to oil refinery, from where it is further transported to oil retailers and stations through road tankers and railcars. The whole procedure can take a time period of 30 to 50 days depending upon the mode of transport used. In general, a longer transportation time would mean an increase in distribution cost. If we study the whole production process, from the time oil gets into LOOP to the time it gets to the final consumer, we notice that most of the production time is consumed in offloading the product from the transport container into the storage or from the storage into the transport container. This means that Marathon can reduce a significant amount of time if it reduces it handling time. This can be done by using transport and storage containers that takes lesser offloading or discharge time. For example, a road tanker takes only 15 minutes to load while a rail car may take two to four hour to load. While the capacity of a road tanker is twice that of a road tanker, within two hours time four road tankers can be loaded, which makes it twice the amount that is loaded in rail car (Scazzeiri, 1993). This will reduce the time by a considerable amount.

Deep Water Drilling Moratorium

Following the devastating oil spill in the Gulf of Mexico, President Obama imposed a six-month moratorium on deep water drilling. This created immense problem for oil companies in the United States of America as more than 35% of America's crude oil supply is sourced from deep water drilling. The major question for the companies was how to remain competitive under such circumstances. Of course, with the ban imposed, companies were forced to depend on other more expensive sources of oil, which would directly mean an increase in production cost. This in turn would be replicated on the final retail prices in form of an increment in price that would question the competitiveness of the oil producing companies.

Since Marathon is the largest oil producing company in the United States of America, in order to remain competitive, it can try to achieve economies of scale and making its operations more cost efficient so that the increased cost of purchasing crude oil could be offset by reduction in other production costs. There is an immense margin of cutting down on marketing, distribution and storage costs. Since Marathon is a company large enough, it can easily afford to increase dimensions of its container so that the storage volumes can be increased. Similarly using a cost efficient mode of transport is another way of reducing a significant amount of costs as transportation cost is also a major proportion of total production costs.