The oil and gas industry consists of three domains including upstream, midstream and downstream. These areas are linked with different parts of the operations in the industry, ranging from exploration to marketing of the products. The PESTLE analysis of Oil and Gas Industry outlines the dynamics of the environment and the way it creates challenges or opportunities for the industry players.
Political Factors
The oil and gas industry is highly vulnerable to the changes happening in the political domain. Political crisis in the form of instability, or extreme cases such as war can make it difficult to maintain a steady flow of operations in the industry. The Russia and Ukraine war has resulted in higher prices of oil as there were concerns about a possible shortage of crude oil supply (Liang & Thomas, 2022).
There are companies that are managing global operations, and changing political climate and increasing hostility creates challenges for the management. Disruption in supply of crude oil is one such impact of geo-political crisis. Moreover, the emerging political tension due to Russian war has led to the management’s speculation over seeking alternative suppliers of crude oil.
Regulations pertaining to oil and gas industry are applicable on the businesses in the sector. Government regulations can affect the way the industry performs as there can be restrictions on engaging in exploration operations. In addition, OPEC influences the production and pricing processes of the firms in the oil and gas sector, while government tax also effects pricing.
Economic Factors
Overall, the economic prosperity drives a higher demand for oil and gas based products. Fuel is one of the basic commodities that is regarded as an essential part of the households and businesses. High oil price, inflation, unemployment indicate economic turmoil, which effects the consumption of people and also creates complications for organizations.
Higher fuel price and energy cost means that people will have to use a higher amount of their income to manage their transportation and cope with an overall increase in inflation (Elliott, 2023). Moreover, pandemic had led to increase in unemployment and layoffs. These factors have created additional economic pressure on the household and reduced their buying power.
Inflation also affects the operational expenditure of the oil and gas companies as a higher price of material pushes the prices higher. This price increase needs to be balanced out by the management. The production process and transporting the finished goods to the market incurs a higher cost due to the increased fuel prices.
Social Factors
The population growth is a positive factor in the external environment of the oil and gas industry. Increasing population means that there would be a higher demand for oil based products. Moreover, industrial and urban development creates market opportunities for the companies as there is a rise in demand of fuel by households and businesses.
Another social factor that has implications for the oil and gas segment is the overall economic affluence of the population, which is linked with the use of vehicles by households. When people have high purchasing power, they buy vehicles and use them for traveling, which sustains the sales of fuel and bring steady profits for the oil companies.
Significant social changes can affect the way people behave, which determines the demand of oil. For example, pandemic has changed the way social interaction and traveling was being managed. Due to social distancing, people were preferring to stay at home and there was an evident decline in the demand of oil, while the production of oil was also negatively affected (Silverstein, 2020).
Technological Factors
Artificial intelligence has benefited various industries, oil and gas industry also being an example. This technology has enabled the companies to bring a higher degree of optimization to the drilling operations. In addition, AI has been assisting these companies to achieve a higher degree of efficiency through improved inventory and supply chain management (Sircar et al., 2021).
There have also been technological developments that assist the oil and gas companies to integrate automation as a part of the upstream processes. Along with that, digital technology has supported the firms to make improved decisions pertaining to cost management and increasing their output.
Legal Factors
The licensing requirements need to be fulfilled by the oil and gas companies in order to carry out with their operations. The management is required to have the permit for conducting exploration related activities. Government has the authority to restrict the exploration by declining to give permit to the companies as seen in case of US oil companies (Stevens, 2023).
Occupational health and safety laws area at the center of the operations of this sector. The companies have to make sure that health and safety standards are being followed and the related quality standards are implemented. For example ISO/TS 29001 defines the quality perimeters that have to be incorporated by the oil and gas companies.
Environmental Factors
A major threat to environment arises out of oil spills, which can be damaging to the marine life. The oil and gas companies have to make sure that the transport of oil is carried out with all the related quality standards. Some major oil companies have been a part of the oil spill issues, which resulted in financial penalty on these firms.
Besides the oceans, oil companies operations effect the overall environment as it contributed to pollution. Impact of oil production on environment by the leading oil corporations has also resulted in litigations by US cities and states (McGreal, 2021). The key notion in the litigation was the role these firms have played in environmental degradation linked with fossil fuels.
Oil and gas companies have taken remedial actions to limit the environmental harm causes by their operations. For instance, greenhouse gas emission from oil companies have been controlled through the use of relevant technologies. Moreover, firms in the sector have invested in solutions that lower the level of wastage and allow them to utilize the water resources more effectively.
Conclusion
The oil and gas industry is heavily influenced by the macro-environment factors ranging from political climate to the environmental factors. Some recent development such as Russia Ukraine war and pandemic had a notable effect on the industry dynamics. Overall, the industry has been able to maintain its favorable dynamics, gaining support from OPEC and regional governments.
References
- Elliott, L. (2023). Why are oil prices rising and what does it mean for inflation? The Guardian. Retrieved from: https://www.theguardian.com/business/2023/apr/03/why-are-oil-prices-rising-opec
- Liang, A. & Thomas, D., (2022). Ukraine war: Oil prices fall back after cap on Russian crude kicks in. BBC. Retrieved from: https://www.bbc.com/news/business-63855030
- McGreal, C. (2021). Big oil and gas kept a dirty secret for decades. Now they may pay the price. The Guardian. Retrieved from: https://www.theguardian.com/environment/2021/jun/30/climate-crimes-oil-and-gas-environment
- Silverstein, K. (2020). COVID-19 Is Killing Oil and Gas But the Virus Could Also Poison Renewables. Forbes. Retrieved from: https://www.forbes.com/sites/kensilverstein/2020/04/06/covid-19-is-killing-oil-and-gas-but-the-virus-could-also-poison-renewables/?sh=4eea8d6565cf
- Sircar, A., Yadav, K., Rayavarapu, K., Bist, N., & Oza, H. (2021). Application of machine learning and artificial intelligence in oil and gas industry. Petroleum Research, 6(4), 379-391.
- Stevens, H. (2023). Why Biden’s oil policies upset both oil companies and environmentalists. The Washington Post. Retrieved from: https://www.washingtonpost.com/climate-environment/interactive/2023/biden-oil-drilling-permits-willow-project/