Oil Producing And Exporting Companies 1Oil Producing and Exporting Companies Student Name: Institution: Instructor: Oil Producing And Exporting Companies 2 Question A The lucrative business of oil brought together oil producing countries that formed a body to protect their interests. In 1960, five Islamic states, which were the founder members, that is, Iran, Saudi Arabia, Kuwait, Iraq and Venezuela, met in Baghdad and formed the organization of petroleum exporting countries (OPEC). These countries were bound to comply with rules and regulations that were agreed by signing an agreement. To date, OPEC consists only those countries that produce large amount of oil as their net income from oil exportation reflects. Later, other oil producing countries joined OPEC and the members’ states increased to twelve. Jointly these countries have continuously produced oil within their region and world (Ramcharran “97-106). According to the organization’s obligations, any country willing to join OPEC can do so provided they adhere to the agreed rules and regulations that are subject to the approval of the conference. However, such state musts have congruent interest. Any member willing to withdraw from the organization should give prior notice to the conference stating reasons for withdrawal. The notice is only effective in another financial year. OPEC also considers the association with non-members in its operation and as such, they can be invited to the organization’s conferences as observers but they are not entitled to vote in matters pertaining the organization decision making (griffin “954- 963.). Organization of petroleum exporting countries has three main parts. They include secretariat, conference and board of governors. The conference is the most superior part, which makes vital policies concerning the organization. The policies are enacted by voting by the majority of full Oil Producing And Exporting Companies 3 members who are entitled to vote once. Although member’s countries are entitled to one vote in policymaking resolutions, some countries have higher weight in their one vote. For instance, Saudi Arabia, due to its high oil production. Any change in production levels in Saudi Arabia drastically affect the market price across the world. Therefore, it is considered superior. OPEC mission. Harmonize and unify oil policies to its member states ensuring stable oil market to secure economic, efficient and regular supply to consumers, steady income to producers and income to investors in the industry. OPEC’s Vision is to sustain the world oil prices and maintain stable oil production. To attain the vision, the organization has strategies that are used for only five years and then revised. First, maintaining oil supply and stable prices in the world. OPEC through the member’s conference meet to deliberate on the best oil prices around the world. In some cases, the organization either reduces or escalates oil prices to ensure fair prices to both consumers and producers. This is achieved by use of production quota tools where each member produces certain amount of oil to maintain demand and supply at optimal level that is, ensuring that demand for oil consumption does not exceed supply from producing members to curb exhaustion of oil wells. Through this, the organization can perform its functions and carry its operations in ensuring stable and affordable oil prices especially for non-oil producing countries. Secondly, ensures there is steady supply of oil. This is effective through controlled production ensuring that there is no shortage of oil in the market. Since it was found, OPEC has put in place measures that will ensure steady supply of oil to avoid unnecessary shortages of this essential commodity that can be used either directly or indirectly. The organization achieves this by promoting efficient and application of advanced technology techniques, for instance control and Oil Producing And Exporting Companies 4 automation for extracting to reduce excess production to meet market demand and reduce shortages. (Ftiti “014-064). OPEC also protects the interests of its member states from exploitation of market and other oil producing countries and investors. Due its wide range of operations, the organization formulates important policies to protect the interests of its member’s countries and can be applied to other oil markets in the word. In protecting the member’s state interests, the organization controls and ensures producing countries rather than intermediaries who may affect cost handle profits and less profits are realized. HOW MEMBERS COUNTRIES MAINTAIN OIL PRICES THROUGH CONTROLLED PRODUCTION LEVELS. The member countries of OPEC use various methods to maintain oil prices depending on the price level that is vital. In most situations, the individual countries use their gross domestic product if it is high, for instance, Saudi Arabia whose oil extraction and exportation is sufficient to affect the prices and maintain the price to point of its interest. Saudi oil accounts for about 22% of world oil in the market (Ftiti “014-064). This significant share in the market affects the price levels. If it is the policy of the organization to raise the prices, the individual country can increase its production significantly affecting the market. The prices will in turn reduce to the country’s interest. In a case where the OPEC reduces the prices which is not in accordance with the member state interests, the country can reduce its contribution hence creating artificial shortage, which will result to price increase per the desires of the member country. The mechanism used to maintain oil price is use of Quotas in production of oil; members agree and deliberate on the appropriate Oil Producing And Exporting Companies 5 prices to maintain. To achieve this, certain amount is set for a country to produce. The adherence to this policy by individual member ensures the prices of oil remains at the point of their interests through the production levels (Farah et al “707-740). In respect to the functions of OPEC, it is clear that the organization has made great achievements in safeguarding the interest of the oil producing nations, ensuring stable oil prices, reduced environmental impacts associated with oil production, and constant oil supply despite some challenges in some oil producing countries such as (political instability, retarded economic growth). These are just a few achievements that the organization has been able to attain. The success can be associated with its members who play an important role in producing the oil, the member nations contribute about 44 % of the world’s oil in the markets and about 75% of the world’s proven oil reserves. Despite all the success and strengths portrayed by the OPEC, there has been a variety of problems associated with the organization. There are cartels that protects the interests of the exporters only, environmental pollution by oil exporting countries is rarely addressed by the organization, and market price has not been standardized thereby oppressing other nations. With the recommendation of renewable sources of energy, OPEC experiences challenges with marketing of oil in markets, electrical vehicles for exportation as a means of transport due to its speed (faster) and lacks congestion, and use of solar energy to run industries and home use as one of the problem the organization is facing. To conclude, OPEC has enhanced and promoted unity among oil producing nations. It has therefore made it possible for the countries to engage in consultative discussions on the matters concerning the environment and its outcomes. Pricing of oil and determining the best quantity and Oil Producing And Exporting Companies 6 quality oil for the markets are some of achievements associated with OPEC. Hence, it is a useful organization not only to oil producing nations but also to the rest of the world. Question B Multinational companies continue to penetrate various markets in various countries, with favorable legislations. These companies have gained momentum in many countries, as a way of attracting more investors to maximize profits. A firm only becomes a multinational company when it acquires a subsidy either wholly or partially. It is often confused with foreign direct investment (FDI) but in reality FDI is the only means by which a multinational company establishes itself in another country. There are different ways that company can use to become a multinational company. These methods, which reflect different forms for multinational companies, include franchising, joint venture operations, acquiring a subsidiary in another country or establishment of key projects (Foss et al “49-67). The process of becoming a multinational company starts with analysis of different concepts in understanding the market in a foreign country. The company applies foreign Direct Investment avenues. In analyzing the market viability, the company may choose to employ Strength, Weaknesses, Opportunity, and Threats (SWOT) analysis method to have clear information on how the market operates. In evaluating strengths of the business, one has to consider what is viable and useful to be applied to business abilities and cost leadership in its operation methods or controlling essential input. Weaknesses aid business to self-examine what one requires to improve in order to fit and compete in the market competitions. Evaluating the opportunity helps the business to identify potential chances that occur along the way and give one the idea on how to venture in such Oil Producing And Exporting Companies 7 opportunities. Threats in this concept refers to challenges that a multinational company is likely to face in its operations in a foreign country. Concerning the growth and expansion of multinational countries to Saudi Arabia, this can be attributed to the favorable legislations regarding foreign companies’ entry into the Saudi Arabian market. These countries exhibit different features as compared to local business in the same country they operate because they are investors. First, due to their huge capital base, these companies are able to enjoy economies of trade as compared to other local business in the host country. The returns on capital are always high. With respect to the administration in these companies, the management is always based on the headquarters of the company in the parent country. Proficient managers due to the complexity of the business operations normally enumerate managerial duties of the multinational company. In this work, analyzation and comparison of one multinational company that deals with fast food and one local fast food dealer in Saudi Arabia is focused. The analysis helps in understanding the concept of entry as a multinational country in Saudi that also understands impacts of the company to local businesses in Arabian market. The methods by which these companies use to penetrate the market by McDonalds and Kudu are as follows. McDonalds was initially formed as a restaurant, which later transformed to a hamburger dealer. The company has today penetrated in over 100 countries over the world including Saudi Arabia, with its delicacy in fast food. McDonalds has achieved great business opportunity in the Arabian market, and the company has established itself in different towns of Saudi Arabia. The company’s unique marketing strategies and production has enabled it to be recognized in the Arabian markets as reflected by its high turnover from different branches in the country. McDonalds is well recognized for its hamburgers around the world as well as in Saudi. Kudu was formed in 1988 as Oil Producing And Exporting Companies 8 a fast food outlet having its headquarters in Riyadh. The fast food outlet is well known for sandwiches, which are commonly consumed by Saudis. Dealing with fast food the business has been able to diversify its activities with its various branches all over the country (Hafez & Mohamed “6-24). In respect to the two fast food companies: McDonalds and Kudu, it is clear to see the performance of the two companies different in terms of the market shares, whereas McDonalds has created its name worldwide, its legacy markets its products, selling in the Saudi market is therefore easier for the company. On the other hand, Kudu has a special link with the Saudis, the sandwiches help it to win and appreciate the royalty of Saudis. Although the competition between the two businesses is deemed fair, the two businesses exhibit uniqueness, McDonalds has a very strong capital base that has at times threatened the existence of Kudu strength in the markets making it minor and can be forgotten. This reflects the threats that other small fast food outlets are experiencing as they try to serve the market. Kudu and other fast food outlets are in pursuit to win the market share though it is becoming hard every day especially with establishment of multinational companies in the market. The impacts of these companies include stiff competition to the local businesses due to their various advantages over the local businesses. Multinational companies always face stiff competitive advantages such as cost leadership and control of vital inputs. Local food outlets are left with dilemma of choosing the most effective methods of coping with the competition posed by the multinational companies, which deal with fast foods. Multinational companies normally have large capital base as compared to local businesses, for this case, when comparing between McDonalds and Kudu, McDonald have a very strong capital base from the parent country, in times of economic crisis McDonalds is likely to survive over Kudu Oil Producing And Exporting Companies 9 whose capital is anchored in Saudi Arabia and merely in Yemen. Collapse and failure of local business would mean that the fast food industry is sabotaged which can easily leave the market at their wish hence threatening the industry (Asad et al “402-412). In conclusion, multinational companies have also brought some positive effects in the industry, such as competition helps these businesses to invent and create ways to cope in the competitive market. Such methods include value addition to their products that will benefit consumers. Oil Producing And Exporting Companies 10 References Asad Sadi, Muhammad, and Joan C. Henderson. "Franchising and small medium-sized enterprises (SMEs) in industrializing economies: A Saudi Arabian perspective." Journal of Management Development 30.4 (2011): 402-412. Farah, Paolo D., and Elena Cima. "Energy trade and the WTO: implications for renewable energy and the OPEC Cartel." Journal of International Economic Law 16.3 (2013): 707-740. Foss, Nicolai J., and Torben Pedersen. "Transferring knowledge in MNCs: The role of sources of subsidiary knowledge and organizational context." Journal of International Management 8.1 (2002): 49-67. Ftiti, Zied, Khaled Guesmi, and Frédéric Teulon. Oil shocks and Economic Growth in OPEC countries. No. 2014-064. 2014. Griffin, James M. "OPEC behavior: a test of alternative hypotheses." The American Economic Review 75.5 (1985): 954-963. Hafez, Mohammed M. "Radicalization in the Persian Gulf: Assessing the potential of Islamist militancy in Saudi Arabia and Yemen." Dynamics of Asymmetric Conflict 1.1 (2008): 6-24. Ramcharran, Harri. "Oil production responses to price changes: an empirical application of the competitive model to OPEC and non-OPEC countries." Energy economics 24.2 (2002): 97-106. Oil Producing And Exporting Companies 11