Long-Term Investment Decisions
Cartels in the oil industry, just like in any other industry, have considerable power to adjust production levels and influence oil prices.
When oil firms are considering having mergers, government regulation becomes paramount. Cartels may overcharge their goods or services. Government regulation would be needed to promote public interests. Market economies are profit-oriented and may go to excessive length to increase profit margins. This situation is worse when there is only one cartel in the industry. In such case there will be a tendency to overcharging since consumers do not have choice range. Governments may alternatively introduce price support and price caps to help protect the final consumer. If cartels can only lead to the exploitation of the general public, governments introduce anti-trust laws that prohibit mergers. However, companies tend to cut secret deals.
The government will be expected to enforce contracts. There are occasions when companies filed cases against cartels over being sidelined in the decision-making process. Cartels have to act within their mandate. Furthermore, some members of a cartel may deliberately lower prices for goods or services, making other members of the cartel incur losses. This is one form of a fraud among cartels (Braithwaite & Drahos, 2000).
Government regulation would be needed to avoid fraud (Karagiannis, 2001). Proper laws have been designed to fight against fraud. However, some cartels and the constituent members may be involved in fraudulent acts, such as insider trading in the stock exchange. Cartel members may collude with stock brokers and other experts in convincing existing and potential stockholders to buy or sell shares. In the past, information has been prematurely given to the public, causing unnecessary speculation and undeserved advantages to some people. For example, if information regarding high profit levels and business expansion plans is revealed to a few potential shareholders, they may increase their stocks, giving them an advantage over other shareholders (Braithwaite & Drahos, 2000).
Regulation of oil cartels is critical to economic growth and development. Since affordable oil prices and increased availability lead to economic growth, governments need to establish measures to encourage consistency in production and stability in prices.
Oil prices affect the cost of producing goods and services. If production is affected negatively, there will be increased the likelihood of low unemployment, downsizing, increased product prices, economic inequalities, reduced money supply among other signs of stalled growth (Karagiannis, 2001). Tax credits are used when the need arises. Tax credits are reduced taxes that make the government meet part of the production and handling costs. Though cartels may set their own prices, a price ceiling would safeguard the general public against exploitation. Governments also set up production quotas to ensure consistency in production, thereby avoiding cyclical instability. They also offer direct subsidies to particular classes of producers or importers (Mises, 1998).
Economic interventionism would also ensure that pollution is controlled. It is a dangerous product of the free market. If cartels were allowed to carry on with their activities without being called upon to reduce pollution levels or meet part or all of abatement costs, the taxpayers would suffer from to the toxicity of the polluted environment and also increased pollution abatement costs. Recently, there have been oil spills in the Grand Bahamas and along the coast of the United States. The oil spills had several damages, including clean-up costs, suspension of the production process and destruction of a tourist coastline. Governments specify the kinds of equipment that should be used to handle sensitive products and byproducts. They also specify the desirable levels of emission and establish pollution permits, taxes and subsidies.
Rationale for Government Intervention in the United States
Market forces have often led to instabilities in the United States after they were fully left in operation and government intervention reduced. For example, the economic recession of 2008 was as a result of increased government spending and debt and reduced private expenditures. Government intervention has helped the country to recover. After the recession, ambitious capital development and social security projects, aimed at increasing the employment rate, promoting equality, and protecting businesses, were established. Some businesses such as the AIG were financed by the government in order to help to keep the huge number of employees at their jobs.
The government of the United States managed to elevate the low-entry barriers that existed within various industries. In the past, it had loaned or given grants to entrepreneurs to help them undertake expansion and recovery programs.
The government is committed to national and international objectives of a clean environment. It has established laws that regulate pollution. For example, the Clean Air Act requires some industries to obtain a pollution permit. Those industries that are covered include those that release excess of 10 tons of listed pollutants per year or over 25 tons of combinations of listed pollutants per year.
Self-Expansion Strategies and Effects
When firms in the oil industry decide to pursue a self-expansion program as an alternative to having a merger, they would be faced with several complexities. First, the firms will have to look for sources of capital for the expansion. Mergers enable firms to share their resources. Capital development is an expensive affair, and only firms that planned it well in advance will succeed in raising the required capital.
A self-expansion program will lead to reduced efficiency in the use of technology. Mergers allow firms to share technological ideas and use technology efficiently. With mergers employees with different work experiences come together and take advantage of voluminous information and become able to capture a large percentage of the market. The bigger management team is, the more likely it is to commit itself to performance, quality and brand recognition.
Conclusively, firms, intending to employ a self-expansion strategy, are disadvantaged because of lack of efficiency in the use of human capital, resources and technologies. Stockholders’ interests may be threatened since capital expansion does not transfer into efficiency or expansion of the target market; these are necessary for higher profit levels. Managers are primarily interested in keeping their jobs. Moreover, managers may also be motivated to control a large asset base. Finally, mergers cause middle-level managers to lose jobs or influence. Due to divergent interests, managers and stockholders may disagree over the running of a firm. As a result, convergence of interests will be brought about by the need to have long-term growth and profit; this could be an outcome of either mergers or self-expansion strategies. All in all, self-expansion strategies turn out to cause profit levels to drop drastically in the short-run.
There is always a need for government regulation in the oil industry and particularly to oil firms that are considering having mergers. Government regulation would be needed to promote public interests. Regulation of oil cartels is critical to economic growth and development. Since affordable oil prices and increased oil availability are necessary for economic growth, governments need to establish measures to encourage consistency in production and stability in prices. Economic interventionism would also ensure that pollution is controlled.
A self-expansion program will lead to reduced efficiency in the use of technology. The bigger management team is created through a merger, the more it is likely to take advantage of voluminous information and capture a large percentage of the market. Basically, it will most likely commit itself to performance, quality and brand recognition. Stockholders are interested in higher profit levels while managers tend to focus on job security, prestige and control of a large asset base. As a result, these different interests always clash. However, a need to have a long-term growth and profits is fulfilled by either mergers or self-expansion strategies.