Gas Prices

High Gas Prices and Economic Turmoil

Today, the world is coming to terms with the reality of a global oil shortage. The petroleum which has constituted the dominant and exponentially consumed energy source of the last century is becoming scarcer and more costly. The race is on to determine the most practical substitute for this precious but environmentally destructive, politically inflammatory and economically pertinent resource, with such clean burning but as yet technologically inefficient alternative fuels such as ethanol, biodiesel and hydrogen cells all under empirical consideration. Other considerations are such renewable sources of energy as hydroelectric or solar power. And if regulated to determinable safety, a considerable increase on reliance upon nuclear power could help to alleviate our oil dependency. These alternative fuel references are intended to underscore the great imperative upon both businesses and world leaders to alter the course of industry, transportation and such specific sectors as automobile manufacturing in order to promote more sustainable, environmentally sound and economically rational solutions to our energy demands. They also have emerged as part of an active and intensive discourse on the subject of oil dependency and global petroleum consumption, both of which fly in the face of logic given the unstable nature of this key commodity.

Description of the issue:

The economic implications of high gas prices are far-reaching, but may be best observed on the cosmetic level based on that which has occurred in the American automotive industry. Here, there is clear evidence of the business imperatives which are driving the auto industry in its quest to be reborn. The historic collapse of Detroit in the United States is a signal of the shift in production strategy toward technological innovations which eschew our dependency on economical unwieldy fossil fuels.

So denotes the article by Fortune (2009), which reports that “overseeing Mercedes’ goal of a ‘path to sustainable mobility’ [top corporate conservationist Dr. Thomas] Weber has to ensure that Mercedes is able to offer future looking technology today and green machines for all our tomorrows. That’s a task that’s as wide and varied as the audience he helps shape cars for, Weber admitting that the company’s objective is: ’emission-free driving by means of electric drive with fuel cell and battery-powered vehicles.'” (Fortune, 1) This is a desirable goal for those with environmental and ecological interests to be certain. But in reality, the only way to rationally approach a change in the practices and policies of corporate industry is to promote the sheer economical justifications for diverging from petroleum dependency.

The economic effects of the dependency are based on the danger of relying upon a finite source of fuel. To this point, Whitehall (2008) demonstrates a pattern which denotes the close correlation between an increasing oil scarcity and a set of clear economic challenges. His findings show that over just a period of a year, the cost per barrel rose from just under 60 U.S. Dollars a barrel on the international market to upwards of 140 U.S. Dollars a barrel. The increase is a demonstration of how unreliable oil is not just in terms of its lack of sustainability but in terms of its negative economic implications, which associate it to dangers of economic inflation. (Whitehall, 1)

Of even more immediate concern to society is the increasingly recognized reality of global climate change. Indeed, a clear review of several environmental indicators which are only a few decades or years old also show beyond a reasonable doubt that global warming is real and is already making its increasing presence felt by human beings living today. With evidence come from the warming of the ocean’s temperatures, the toxic qualities of our waters, the reduction of needed marine animal habitats and the disruption of the marine and global food chains, we can see global warming or global climate change is occurring at a fast pace and that our lifestyle must change in order to slow and reverse its effects before it’s too late.

The website which was made to accompany to the globally lauded documentary, an Inconvenient Truth, gives the discussion a useful definition. The website tells that “carbon dioxide and other gases warm the surface of the planet naturally by trapping solar heat in the atmosphere. This is a good thing because it keeps our planet habitable. However, by burning fossil fuels such as coal, gas and oil and clearing forests we have dramatically increased the amount of carbon dioxide in the Earth’s atmosphere and temperatures are rising.” (Gore, 1) This is a straightforward explanation for a problem which, incredibly, so many people have claimed is unclear or does not exist. As the documentary shows, the scientific basis for this definition is well-founded and only denied by those who have economic gains or lifestyle conveniences that they wish to maintain.

Objective of the research:

The primary objective of this research is to proceed from the assumption that the fluctuations in gas prices have a negative impact on the global economy and with the imperative to prove this assumption. Therefore, a number of associations may be drawn between high gas prices and the inflationary cost produced by the commodity; between high gas prices and flagging economic models such as that of the American automotive industry; the opportunity cost of failing to use more economically efficient and cost effective energy production means; and the connection between environmental degradation and other costs to the economy in lost nature resource and negative public health impacts

Research method:

A consideration of Porter’s Five Forces should perhaps be considered an initial step in crafting a business plan for any of the major auto-manufacturers struggling in the current environment in constructing a path toward major organizational change. The Five Forces are useful for providing broad categories under which to classify the internal, external, contextualizing and innovative aspects of an organization or a projected organization. Somewhat more nuanced than the traditional SWOT analysis, Porter’s Forces help to deconstruct the same basic characteristics but with a more direct consideration of such inherent features as competition and market segmentation. As Porter offers, “the nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services (where applicable), and the jockeying among current contestants.” (Smit, 2000) it is Porter’s overarching position that a company will only succeed where it is capable of managing these distinct categories with preemptive vision and an intimate understanding of the company’s capabilities.

Data analysis and observations:

For the established automakers, the threat of New Entrants bears necessary consideration as this may constitute the prospect of greater market segmentation for larger companies who fail to remain innovative in the face of changing technological demands. Particularly, foreign car manufacturers who have taken greater steps to improve fuel efficiency may represent a threat to the market dominance of domestic auto-giants.

Another force is the bargaining power of customers, which centers on the pricing creating in a broader marketplace. As such factors as resource availability, cost of operation and industry standards come to play a part, pricing of goods and services must acknowledge that in a segmented economy, the customer retains significant bargaining power. This is especially the case where alternatives become available to the costly petroleum-based strategy of auto-design. By contrast, where a company demonstrates the greatest of innovative dexterity, its singularity of product may actually reduce customer bargaining power. This is a perceptive way of viewing pricing decisions and those related to research and development.

The bargaining power of suppliers is a force which is actually changing substantially today due to the global market economy and the deconstruction of trade barriers. Here, the power to set prices previously retained by suppliers is eroding in the face of reduced costs of production opening in developing contexts. According to the research by Narayanan & Fahey, the study “highlights the need to turn the spotlight on laws governing rivalry, a relatively under-explored topic in emerging economies, and the effectiveness of different network strategies.” (Narayanan & Fahey, 2005) Distinctions from one market to another in terms of oil consumption bear a significant influence on this force.

Indeed, the increasing scarcity of oil, as demonstrated by the Whitehall source cited above, is promoting a price index which is increasingly less sustainable in the context of a consumer economy. The impact which this is having on both environment and economy coalesces into a condition which may soon be at an end. The world oil supply is genuinely waning, and in concert with a consumption pattern that is in many industrial contexts only growing to greater excess.

With respect to the threat of substitute products, Porter identifies such competitive considerations as the idea of diversifying markets in order to reduce this danger. The means taking on more fuel-efficient approaches to design that may counterbalance impacts imposed by the instability of oil markets.

This is also important in light of a final of Porter’s Five Forces, which compels the successful organization to assess the level of competition already present in an industry. This will require the evaluating organization to determine which competitors are already successfully entrenched in more innovative and ‘green’ auto designs, which are growing in market share for adopting such innovations and which are shrinking for failing to do so. The power of this knowledge should allow an organization to make constructive decisions about segmenting its own approach to a market which still depends on fossil fuels but which is also showing a will for change

Recommendations

The business imperative is therefore to make a change in practices that prefigures the inevitable tipping point toward the collapse of the petroleum industry. Indeed, “Weber tells us that the eventual electrification is necessary for a number of reasons. He says: ‘climate change is a fact,’ and that: ‘peak oil, maximum oil production could come as early as 2020.’ it’s this, as well as technological advancement and customer acceptance of alternatively powered vehicles that is pushing Mercedes ahead with its plans for an alternatively powered future.” (Fortune, 1)

Conclusion

This underscores a social imperative for industry leaders and automakers to participate more responsibly in the usage, manufacture and distribution of fuel efficient technology. In addition to the economic motives for a shift to more sustainable research and development practices, the environmental realities predicated by our dependency on oil suggest a clear need also for private sectors to proceed with a social conscience as they define future operational processes.

Works Cited:

Energy Information Administration (EIA). (2007). Country Energy Profiles. U.S. Department of Energy (U.S.DoE, 1). Online at http://tonto.eia.doe.gov/country/index.cfm

Fortune, K. (2009). An Insider’s View: Merc’s Future Green Technology. Yahoo! Cars. Online at http://uk.cars.yahoo.com/04082009/36/insider-s-view-merc-s-future-green-technology-0.html

Gore, a. (2006). An Inconvenient Truth. Paramount Classics.

Online at http://www.climatecrisis.net/thescience/

Narayanan, V.K. & Fahey, L. (2005). The Relevance of the Institutional Underpinnings of Porter’s Five Forces Framework to Emerging Economies: An Epistemological Analysis. Journal of Management Studies, 42(1), 207-223.

Porter, M.E. (1998). Competitive Advantage: Creating and Sustaining Superior Performance. Simon & Schuster.

Smit, P.J. (2000). Strategic Planning Readings. Juta and Company Limited.

Whitehall, J.K. (2008). Get on the Other Side of the Pump. Jutia Group. Online at http://jutiagroup.com/2008/09/12/get-on-the-other-side-of-the-pump/

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