In this report, BHP Billiton has been chosen as a small business organisation to review the factors affecting its demand and supply functions, how changes to demand and offer during previous 2 yrs have affected BHP Billiton performance, opportunities and dangers future changes to demand and offer function might present to BHP Billiton. BHP Billiton is world's largest varied natural resources company. BHP Billiton's stock portfolio consist of finding, development and transformation of natural resources including iron ore, coal, manganese, copper, aluminium, nickel, diamonds, potash, uranium and petroleum. BHP Billiton has obtained unique position in the resources industry because of the proven strategy.
In this survey BHP Billiton's petroleum business has been considered for demand and supply analysis. BHP Billiton has been broadening its petroleum business in previous few years aggressively anticipated to high demand of energy in world market. Number 1 shows the entire world energy growth during last century and demand forecast for emerging market segments in next 2 decades.
Figure 1
As part of BHP Billiton, their petroleum business has the strong financial foundation which allows them to invest and extend through financial cycles and keep maintaining a long term view. They spend money on large jobs with multiple opportunities over a long duration to maximise its advantage value. During last five years in a row, they have invested near to US$2 billion in development capital.
Factors Impacting on BHP Billiton's Petroleum Demand and Supply
In petroleum world market, demand fuelled by millions of individual businesses and local users, while resource influenced by way of a few, specifically few nations and the business of Petroleum Exporting Countries (OPEC) cartel. This bring about an oligopolistic market for petroleum, resource is limited by the cartel to improve prices, and even non-OPEC countries do not always respond in logical way. Important changes took place in last few decades on the globe petroleum market, as control of petrol resources shifted gradually from the major essential oil companies to producing countries (Shojai 1995). However, during current 10 years new essential oil discoveries and lack of investment from many sponsor nations provided opportunities to major olive oil companies to combine again their petroleum market show.
The world olive oil market is the blend of varied entities and organizations that produce deliver and sell essential oil and other petroleum products. The planet oil market deals for engine oil products, any change in the entire world oil market affects the costing of engine oil and other petroleum products. The earth oil market can increase or reduce the price of essential oil and other petroleum products that can be purchased globally.
There are several factors which influence the demand and supply functions of BHP Billiton's petroleum business are discussed below at length.
Global Financial State
The world petroleum prices are linked to global resource and demand. The engine oil prices are motivated and associated with essential oil prices in world market. The engine oil prices in world markets have historically been at the mercy of substantial variants. BHP Billiton offers its essential oil at the prevailing market prices.
Due to recent global financial crises followed by a worldwide recession led essential oil prices free street to redemption from US$147/barrel to US$33/barrel in time 2008. The petrol prices retrieved in season 2009, however credited to financial doubt in global economy which relates to global economic development, particularly in the OECD economies, the demand for olive oil was low hence prices were slow. In the year 2010, when tough economy called to be over essential oil prices again started moving upwards. The demand for engine oil is now quite definitely affected by the demand comes from India and China. The affect of speculators and financial institution such as hedge money and other financial investment money also donate to price volatility.
The current cost-effective difficulties in USA may lead to lower olive oil prices and higher price volatility. The demand and supply volatility in global oil market has greater impact on financial performance of BHP Billiton. The impact of potential longer-term sustained good deal of essential oil and shorter-term price volatility creates higher risk on their financial performance. Their operating results and property principles will be materially and adversely damaged by unforeseen declines in the prevailing prices of petrol.
The ongoing uncertainty and impact on global economic development, particularly in the developed economies, may impact future demand and prices for oil. The influence of hedge and other financial investment cash participating in essential oil marketplaces have increased in recent years, adding to higher degrees of price volatility. The impact of potential longer-term suffered price shifts and shorter-term price volatility creates the risk that their financial and operating results and asset values will be materially and adversely influenced by unexpected declines in the prevailing prices of engine oil.
The marketplace pushes of supply and demand determine the price of engine oil. If demand develops or when a disruption in supply occurs, there is certainly upward pressure on prices. By the same token, if demand falls or there can be an oversupply of olive oil on the market, you will see downward pressure on prices.
Currency Exchange Rate Fluctuations
The World's essential oil trading money and BHP Billiton's olive oil business money is US Buck. However, BHP Billiton's engine oil business is influenced by a wide variety of currencies due to the geographical locations of their oil production and supply facilities based in various continents. The currency exchange rate fluctuation can have greater influence on their financial performance. When the dollar becomes much better, they may be benefitted by quite strong consequence however a weak dollars may have negative influence on their results eventually on impacting on demand and offer. In season 2010, money exchange rate in declining against almost all of the world currency. However the weak dollar may lead to higher petrol prices and greater inflation worldwide which may lower the demand for petrol because of its affordability and countries may look for option for oil which will have great impact on BHP Billitons financial performance.
BHP Billiton's operating costs are affected by the currencies of these countries where essential oil production facilities can be found and also by those currencies in which the costs of brought in equipment and services are driven. The Australian money, UK pound, US dollar etc will be the few most important currencies influencing operating costs of BHP Billiton. They present their financial results also in US dollar and their borrowing and holding cash currency is US buck. Hence the fluctuations in US money will have a substantial effect on BHP Billiton's financial performance.
Demand from India and China
Despite the global financial crises commence in season 2007, adopted for downturn, Indian and Chinese market shown better resilience, which let oil prices rise in 12 months 2009 upto US$ 80/barrel. India and China has emerged as a global consumer for olive oil demand for their people. The India and China have become a significant source of global demand for olive oil production. In 12 months 2009, 16% of total global engine oil demand fuelled from India and China by themselves. The demand from European Europe and US (OECD economies) for oil has been driving global olive oil demand over the past decade. Now the oil demand from Asia particularly India and China are major driving a vehicle factors for higher olive oil prices. There sustained development of GDP more than 9% even during the peak of recession brought the olive oil prices from US$33/barrel to currently US$ 83/barrel. The strong economic progress and infrastructure development in India and China in past year has led higher demand for petrol. BHP Billiton is a major trading partner with India and China because of its other commodities such as iron ore, copper, aluminium etc, which gives them edge over others. Their built in marketing offices incorporate all the functions necessary to control product marketing and circulation from the point of development to last customer delivery.
However a slowdown in economical expansion of India and China's may bring about lower prices and lower demand for oil, therefore reduce BHP Billiton's profits. In response with their increased demand for essential oil, India and China are ever more seeking proper self-sufficiency in engine oil, including assets in existing businesses or new innovations in other countries. These opportunities may adversely impact future oil demand and supply balances and prices which hamper the financial performance of BHP Billiton.
World Political Occasions Including War
BHP Billiton's petrol business is multiply across many continents. The olive oil is predominantly within parts, where there are higher chances of conflicts. Majority of the essential oil producing countries are facing severe politics and commercial instability. BHP Billiton also runs in emerging markets, which may entail additional risks that can have an adverse impact upon the profitability of their operation.
There are various risk factors are associated with engine oil supply and needs. These included, increase in pressure between Iran and USA credited to Iran's nuclear program, possible warfare between Arab Nations and Israel, insurgency in Nigeria, political infighting between Russia and Ukraine, possible terrorist episodes in OECD countries or emerging nations, civil unrest due to high inflation, nationalisation of possessions, renegotiation or nullification of existing agreements deals, leases, permits or other agreements, and changes in laws and regulations and policy, and also other unforeseeable risks. In many developing countries and conflict zones, there's a greater threat of corruption anticipated to high profit margin in petrol business and participation of civil servants in this profitable business. Because of the any of the abovementioned risk related to petrol development may greatly affect the BHP Billiton's source and demand scenario and ultimately impacting their financial performance. Any oil business like BHP Billiton's oil business is a long-term investment which, require long-term fiscal stability.
Due to recent global financial crises, many governments presently facing extra burden of credit debt and funding commitments and they may necessitate extra sources of revenue and cash. Hence they may put additional rates of taxation, higher royalties or source taxes to a level which become unviable for creation of engine oil. If this eventually others BHP Billiton gets additional earnings to shortage in source however if any of the BHP Billiton's procedure affected by these kind of hostile situation it may negatively impact the financial results and decrease the anticipated future comes back and overall degree of prospective investment in those countries.
In BHP Billiton's care, the existing Petroleum Resource Rent Tax (PRRT) in Australia will be long to all or any Australian oil and gas projects, like the North Western Shelf. This legislation is proposed to be created into Australian parliament in late 2011, and then for the commencement night out of the new taxes regime to be 1 July 2012. Any potential increase/cut down in taxes changes in the future may impact their financial performance.
Oil business could be severally damaged by new federal legislation, such as control buttons on imports, exports and prices. Increasing requirements associated with regulatory, environmental and interpersonal approvals can potentially result in significant delays in construction and could adversely impact after the economics of new coal and oil projects, the extension of existing functions.
Natural Disaster and Calamities
Most of the petrol creation facilities are associated with risky of threat. BHP Billiton have its exploration, creation, manufacturing, control and logistical procedures in many geographic locations both onshore and offshore. These operational functions may be subject to operational accidents such as dock and shipping occurrences, fire and explosion, loss of power supply, railroad incidents, lack of well control, environmental pollution and mechanical failures.
Their businesses and geographic locations may also be subject to surprising natural catastrophes such as earthquakes, overflow, hurricanes and tsunamis. The impact of the events may lead to disruptions in development and lack of facilities more than offsetting premiums kept and adversely affect their financial results and potential customers.
In any market situation, resource and demand imbalances make a difference prices in both the short and permanent. If the source is disrupted, as it was after Hurricanes Katrina and Rita in 2005, short term demand for the product may go over the supply on hand and put upward pressure on prices. Consumers worldwide may observe a growth in essential oil prices due to shortage in supply. Because of these natural calamities there may be imbalance between resource and demand. These natural disasters put upward pressure on prices, as source gets affected but demand remained high.
Health, Safeness, Environmental and Community Legislation
Risk related to essential oil ingestion has initiated various legislations and regulations by different governments and organisations like US in work to keep environment clean and decrease the emission of carbon gases greatly influencing the demand for engine oil.
Various countries have put an extra tariff and tax in effort to lessen the consumption of oil. Because of recent oil leak in Gulf of Maxico from BP's offshore oil program has initiated a tougher regulation on deep normal water engine oil exploration. The permitting requirement for oil infrastructure can also affect its demand.
As BHP Billiton is a significant producer of carbon gases due to its olive oil business. Their oil operations are carried out both onshore and offshore. The oil industry is highly governed industry by health, safe practices and environmental laws and regulations. As much regulatory requirements and safety procedures are constantly expanding, BHP Billiton may be exposed to unexpected and increased litigation, compliance costs and unforeseen environmental rehabilitation bills. Potential health, protection, environmental and community situations which could materially impact their businesses include aircraft situations, light vehicle happenings, explosions or essential oil leaks, incidents affecting mobile equipment, get away of polluting substances, community protests or civil unrest.
Longer-term health effects may arise scheduled to unanticipated place of work exposures by employees or site contractors. These effects may create future financial settlement obligations. These potential compliance costs, litigation bills, regulatory delays, rehabilitation expenses and functional costs could negatively impact our financial results.
Alternative Energy Source
The increased demand for olive oil has led to increased development of crude. This circumstance in recent years has led to existing reserves being depleted at an accelerated rate. As BHP Billiton's olive oil revenues and revenue are related to olive oil development, hence their results and financial conditions are directly related to the success of their exploration and acquisition efforts, and their potential to replace existing reserves.
There are extreme uncertainties inherent in estimating coal and oil reserves, and geological, technical and financial assumptions that are valid during estimation may change significantly when new information becomes available. The impacts of the global financial meltdown may impact economic assumptions related to reserve restoration and require reserve restatements. Reserve restatements could negatively affect their results, financial condition and potential customers.
Future Outlook
As world market dealing with recent recession, hence the demand for petrol is picking up. More demands for engine oil is fuelling up from BRICS (Brazil, Russia, India, China and South Africa) countries as well as US. However BHP Billiton has followed a balanced procedure towards global overall economy in short term.
In time 2010, the appearing economies such as BRICS are exhibiting great potential for expansion. However in these countries inflation became a major issue. Just as these countries, economical growth has picked up its full rate, their respective governments are now focusing towards inflation control options.
Chinese government has recently implemented growth calming measures to control the rapid enlargement of current economic climate. China has tweaked its fiscal coverage towards a far more balanced approach; use led growth somewhat than investment dependence development. These procedures may slow down China's development and ultimately affecting demand for essential oil.
On the other side, Indian market has adopted more balanced methodology. There demand led by huge infrastructure development may fuel for higher demand of engine oil. The
However the doubt continues to surround the developed world as government authorities adjust fiscal plans following a amount of significant stimulus and succeeding upsurge in sovereign personal debt levels. Significant general public spending slices and higher taxes have been announced in Europe, however are yet to be totally carried out, implying the inevitable negative impact on development from fiscal consolidation remains ahead. Commercial output, a key measure of economic activity, remains well below earlier peaks regardless of the positive impact due to re-stocking that now appears largely complete. In the absence of any extra inventory modification, improvement in end demand is essential to operate a vehicle overall economic growth.
In the short-term and long lasting, BHP Billiton can loan company upon its huge reserve of essential oil and its production capacity which might prove as an integral factor in maximising their profit and producing better financial cause its olive oil business. The search for olive oil will be keep growing from expanding countries which keeps essential oil prices higher. Overall the demand for petrol will be higher hence BHP Biliiton can get strong growth for its oil business in long term. As long-term prices determined by the marginal cost of supply, BHP Billiton's position at the low end of the cost curve is likely to underpin strong margins and better financial performance.
Conclusions
Appendix A: Reference point List
Fluor Firm - Annual Survey and Financial Assertions 2008 & 2009
Foster Wheeler AG - Total annual Article and Financial Assertions 2008 & 2009
www. rauters. com / finance
www. businessweek. com / companies
www. ft. com / companies
www. yahoo. com /finance
