BP is an oil company whose roots start back in Cleveland, Ohio in the 1870’s. BP has grown from a local oil company to now being a global energy group employing over 80,000 people and operating in over 100 countries worldwide. BP provides fuel for transportation, energy for heat and light, retail services, and petrochemical products for everyday items. They are all about finding oil and natural gas and have several brands that might sound familiar: BP, Castrol, Arco, Aral, am/pm, and Wild Bean Cafe.
The market structure of BP would fall under an oligopoly because there are a few number of firms in the oil and energy industry and also BP’s products are very differentiated from their competitors because they are specific brand names that are more popular among consumers. BP will also consider the prices of their rivals before changing their prices.
For example, AM/PM here in Reno is one of the gas stations with the lowest prices and therefore they look at their competitors in order to see whether they should increase or decrease prices depending on whether or not they are making money. BP also has a great deal of non-price competition going on and there are significant obstacles into getting into a market structure such as an oligopoly, a lot having to do with the standard oil trusts and all the government regulations on an industry such as this one (Economics Basics).
In the year 2000, scientist and BP turned their thought to the future and saw that the climate changes were threatening the earth. This was going to be an obstacle for the company because it was now important to find safer ways to provide energy. BP then decided to find new low-carbon energy forms to reduce the amounts of carbon in the atmosphere and started making and investing their time into solar power, wind, natural gas, and bio-fuels.
By doing this, the company grew even larger and became a company that embodied energy in all its major forms. They of course have their major competitors which are Exxon Mobil, Shell, and Chevron (BP Global). These are the competitors that they have to watch and make sure price decreases from these companies are followed. Like I said before, they rely on mutual interdependence in order to price their products accordingly.
One of BP’s biggest obstacles is the recent oil spill in the Gulf of Mexico which is one of the biggest in history, harming the wildlife and ecologically sensitive coastlines. BP is trying to find ways to cap off the oil leak which is deep down under the ocean and because of this spill, BP is under criminal and civil investigations and their stock has plummeted. This oil spill has, and still is, affecting their profits.
They haven’t exactly had an easy ride along the way. They have had oil spills before and were even fined $22 million for illegally dumping hazardous wastes on the Alaskan North slope which violated the Comprehensive Environmental Response and the Compensation and Liability Act. In 2005, the company also pleaded guilty to violating the Clean Air Act and were fined $50 million along with a three year probation. They have also had to deal with OSHA (Occupational Safety and Health Administration) trying to fine them $87 million, the most in OSHA history for not fixing the 270 safety violations that had been found and also finding 439 new violations (BP Wikipedia).
The company has had many set backs along the way, but at the same time economic and competitive factors have contributed to this firms success. The economy today is in a very bad state and people are looking for cheaper prices and better ways to conserve energy.
BP has taken this into consideration and the demand for their products increases because they are able to decrease their prices, mainly gas prices, and find new ways to conserve energy. They sort of have a price leadership because they have set the bar for their competition to lower their prices. Some could argue that they do this because they are trying to drive out their competition, also known as predatory pricing and is illegal.
They have also been able to have the upper hand in the industry due to their early finding of oil in Persia and also being able to work with different companies and countries in order to advance their technology and find better oil resources. Since BP is able to reduce their costs of production by finding newer sources and building more efficient oil processing plants, they increase their supply and at the same time the demand for their product increases because they reduce their prices. Their products also are becoming more available which increases the supply.
For this company’s market structure being an oligopoly, it’s important for them to keep track of their competitors and make sure that they do have products that are different from anyone else. They make sure that they stand out among their competitors and find ways to improve their products and set an affordable price as well.
Their market structure makes it very important for them to be competitive since there are so few firms. People only have a few choices for where they want to buy their gas and if the price is right, they will drive that extra distance for the more affordable. People will also look to BP because of their advances in solar power, wind, natural gas, and bio-fuels. Many people recognize the effort BP is putting in to making the earth “healthier,” and that drives people into making better choices and buying products that are ecologically friendly.
This company is still making a profit, although it has incurred major losses by being fined $7.7 billion in respect to the Gulf of Mexico spill. This quarter they have made a profit of $1.8 billion compared with a loss of $17 billion in the previous quarter and a profit of $5 billion in the third quarter of 2009.
All together they incurred a loss of approximately $39.9 billion from the Gulf of Mexico Spill, but BP says that their previously announced divestment program was making good progress and that they are financially turning around from the horrible past six months they have had to endure from the spill. They state that their strong determination from everyone at BP is getting them on the right track to make things better and they are taking things more seriously (BP Global).
I believe that this oil spill is a huge obstacle for BP, but since their profits are rising again, it shows me that they are doing everything they can to fix the problem. They need to continue to fix their big problems, including their little ones, in order to maintain their position as one of the biggest oil companies in the world. If BP continues to have that positive attitude and keeps striving to find new ways to improve the quality of life, then people will back them up. If they keep standing out as one of the best oil companies in history and their products work for people, then people’s demand for their products will ultimately increase and they will continue making profits.
Obviously one of the main points of an oligopoly is that they have many obstacles and as you can see from the few issues I have stated above, BP has struggled throughout the years. I don’t believe that BP will be threatened by any “new” competition because they have their roots so deep and are so established. Their future lies in the hands of the people and in the new technology yet to be discovered or invested into. BP’s competitors are going to have to keep up with BP and visa versa.
As soon as BP starts to incur losses and not make any profits, that’s when you will know they are in trouble because even the biggest oil spill in history isn’t bringing them down. I think their future prospects for their firm is very high and that they will continue to thrive.
BP PLC. BP Global | BP. 2010. Web. 01 Dec. 2010.
“Economics Basics: Monopolies, Oligopolies and Perfect Competition.” Investopedia.com – Your Source For Investing Education. 2010. Web. 16 Feb. 2011. .
Schepp, By David. Business News, Stock Quotes, Investment Advice – DailyFinance. 2010. Web. 01 Dec. 2010. .
“BP.” Wikipedia, the Free Encyclopedia. 2010. Web. 01 Dec. 2010. .