Oil and Gas Industry - Marcro-Environment Elements

Oil and Gas Industry

Clayton Baates

Andrew Bondi

Dustin Barnett

Sasha Assi

Weihan Zhang

Marshall University

Executive Summary

Marcro- environment Elements

There are several significant macroeconomic factors that affect the oil and gas industry. The political state of operating countries, volatile oil and gas prices, and the costs associated with operating in the industry make up the bulk of those factors. As with any other industry, supply and demand also play an intricate role in determining the outlook for all firms in the industry.

The political factors in countries where oil and gas companies operate can include things such as regulations and restrictions.  The regulations and restrictions put in place can determine where, when, and how extraction can be undertaken by companies.  While some companies tend to gravitate towards wherever the bulk oil and gas is located, some still prefer to operate in countries where the political conditions are more stable. Political risk is thought to increase when oil and gas companies operate abroad (Beattie, 2017).

Most recently in the United States, citizens have seen political campaigns by candidates which address our changing environment, the effects of drilling on the environment, and what we can do to make the world a more sustainable planet going forward.  A large portion of Americans view the environmental degradation as a huge problem, which affects how our politicians and lawmakers operate in regards to the regulations put on the oil and gas industry.  The Clean Air Act is a new regulation that has mainly been positive for the gas drilling industry.  The goal of the Clean Air Act is to reduce the greenhouse gas emitted into the air.  However, some of the smaller companies in the United Sates cannot afford to adjust to the new demands by our government (Investopedia, 2015).

Interest rates imposed by governments can also have a major impact on companies in the oil and gas industry. This is because oil is considered a commodity, as it can be bought, sold, and stored. Therefore, when interest rates rise as a result of new government policy or different political shifts, it can harm the profitability of oil companies through increased storage prices (Frankel, 2014). Increases in interest rates decrease a firm’s desire to store inventory (oil for example) and it also encourages investors to switch out of commodities and into treasury bills (Frankel, 2014).

Taxes on the oil and gas industry are another driving factor in how companies price their goods. Higher taxes on the industry simply means higher prices for consumers, and lower taxes for the industry means that consumers will in turn pay a lower price for oil and gas.  During his time in office, President Obama called for a change in the tax treatment of the oil and gas industry.  He wanted to impose a higher “per barrel” tax that would be used to help with environmental initiatives (Wall Street Journal, 2016).  Although President Obama is no longer in office and it is unlikely his proposal will be carried out, this is an example of how political agendas and ideals can influence the costs and prices of the oil and gas industry.