Case Study-1
LUKOIL is the largest oil company in Russia. The company is alsothe second biggest owner of proven resources in the globe. Thecompany was found in Moscow, Russia, the year 1991. As of 2019,LUKOIL produced 102.65 tons of oil. Currently, LUKOIL accounts formore than 19% of the total production of crude oil in Russia withits profits being USD 192 billion as of 2019. This report is aimedat discussing the trade strategies of LUKOIL as a privatizedexporter of crude oil and analyzing the various risks that may befaced by Russia as a key oil exporting country.
It can be identified that the current situation of the oilexports of Russia is that the country is in a competitiveadvantageous position over the foreign counterparts. Due to thehigh quantities of crude oil reserves present in the country, thenation has a natural inherent advantage related to havingsufficient accumulated oil resources. When observing the oil exportsystem of Russia, it can be identified that a large part of the oilexport in the economy is headed by the local countries likeKazakhstan and Azerbaijan. This information helps to establish thatthe Country Similarity theory can be used to explain the currentposition of the country as an oil exporter. This theory establishesthat the majority of trade carried out between a home country andother countries should be with the nations which are at similarpositions of economic performances as compared to the exportingcountry. The Porter’s diamond of national competitive advantage isanother main trade theory that can be used to explain the positionof Russia as an oil exporter. The demand for oil has increasedacross the world and continues to increase on an accelerated basis.In this scenario, Russia remains in a competitive advantageousposition due to the availability of high reserves of oil in thecountry.
Theories of trade that are not relevant for explaining theposition of Russia as an oil exporter are the Mercantilism theorywhich suggest the encouragement of exporting and discouragement ofimporting practices and the theory of countries which suggests thatlarge countries are self sufficient in nature which is not true incase of Russia because the economy is largely driven by exports.The PLC theory of trade is also irrelevant in this case because oilis considered as a natural resource that is more of a necessitythan a desire or luxury product.
Over the last decade, the oil industry in Russia has experiencemajor changes. The economy of Russia has experienced significantgrowth in its Gross Domestic Product (GDP) on a year on year basis.The majority of this exceptional economic growth in the country canbe accredited to the most valuable natural resource of the countrywhich is crude oil. The oil industry of Russia accounts for 25% ofthe total GDP of the nation and 40% of the export values in thecountry. Political factors that have affected the growth of the oilindustry include government regulations, quotas and embargosimposed by OPEC countries, trade sanctions, like the sanctionsimposed on countries like Iran etc. The economic factors thatlargely affect the global oil markets include the economicuncertainties caused by low economic performances of nations, lessdisposable incomes and Purchasing Power parity (PPP), high levelsof unemployment etc. which affect the oil industry and oil exportsat both macro and micro levels.
In spite of the tremendous success of the crude oil industry inRussia, the country is now looking for new strategies to reduce therisks associated with the extreme dependence on oil export and theheavy fluctuations of oil prices in the global markets. Due tothis, the major oil companies like LUKOIL are engaging in newinternational trade management strategies like foreign investmentand expansion as the ways of reducing the impacts of politicaluncertainty, fluctuating oil prices, changing export values andother risks related to the oil industry. It can be said that forboth LUKOIL and Russia as oil exporters, creation of competitiveadvantage would be the primary key for determining the level ofsuccess that Russian oil can achieve in the global oil markets. Thefact that Russia has much higher resources of crude oil than theother oil producing and exporting nations is definitely a source ofcompetitive advantage for the country but does not guarantee longterm success. For succeeding in the international trade markets,the Russian oil companies like LUKOIL should display greaterefficiency that would help them to create higher competitiveness.Foreseeing the profits and opportunities in importing and exportingactivities would be another key strategy to ensure the success ofthe nation as a viable trader. The use of the comparative theorycan uphold the oil exporting advantages. Since Russia produces massamounts of crude oil, therefore, it should prevent other countriesto occupy in the market with FDI (Foreign Direct Investment)strategies so as to protect the exporting economy and its naturalresources.
The relationship between exports and factor mobility is stronglyintegrated in the case of LUKOIL. The company use large amounts offinancial resources, equipment and trained human resources. Also,LUKOIL employs high amounts of investment efforts and capital inthe production areas which are most capable of making profits. Thecompany experiences high factor mobility in the export systems dueto the fact that it exports oil to various geographical locationsacross the world.
The roles assumed by the Russian government and the Cost Ricangovernment for using trade to achieve the national economic goalsare distinct in terms of the use of strategies and regulations. TheCosta Rican government has developed acquired skills and talentwithin the oil industry of the country. In contrast, the Russiangovernment has adopted the strategy of exploiting the globaldemands of oil by controlling on the surplus natural oil reservesin the country. Also, the Costa Rican government has transformedthe economy by using high technology manufactured products andunderplaying the export of natural resources. On the other hand,Russia has transformed the economy by shifting the control of theindustry from the state owned businesses to the more competitiveand efficient private enterprises.
To conclude, it can be said that there are many limitations inthe ways of performance and success in the global oil industry. Asfor companies like LUKEOIL, the main key to success would becompeting in the industry through strategies like efficiencyachievement in all parts of the supply chain including extraction,refining as well as distribution of oil. Also, the country and theoil companies should focus on protecting the natural resources fromforeign countries and companies which may try to exploit theseresources.
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Required Question
Question 01: The use of the comparative advantage theorycan support the oil exporting advantages of Russia. Justify youranswer.
Question 02: The Porter’s diamond of nationalcompetitive advantage theory can be used to explain the position ofRussia as an oil exporter. Justify your answer.
