Title: The OLIGOLOPY PETROTRIN

AIMS AND OBJECTIVES

The aim of this study is to get an evaluation of the day to day operations of The Oligopoly Petrotrin and determine the various factors that affect its operations.

METHODOLOGY
The relevant data that was needed to help me in this project was obtained via two different forms. They are:

Primary data: 1) I conducted a personal interview with the Manager of Client Interface. 2) I presented a pre-written questionnaire to the manager which he completed and returned to me. .

Secondary data: 1) I obtained information from an annual report handed to me by the Manager of Client Interface (G.O.P) 2) I used several textbooks to gather information on the various accounting theories and objectives. A list of these books can be found in the bibliography. .

BACKGROUND OF THE COMPANY

Petroleum Company of Trinidad and Tobago limited, Petrotrin, was incorporated on January, 21st 1993. Petrotrin was formed after a merger between Trintopec and Trintoc, two state-owned
oil companiesPetrotrin is a limited liability company that is wholly owned by the Government

of the Republic of Trinidad and Tobago. The companys registered office is located at the Petrotrin Administration building, Southern Main road, Pointe-a-Pierre, Trinidad, West Indies. The administration building house the companys chairman, president and managers. The principal activities of Petrotrin are to explore for, produce, refine, manufacture, buy and sell petroleum and natural gas and otherwise deal in crude oil and natural gas and petroleum products. They operate both offshore and on-shore Trinidad. Petrotrin currently employs forty- two hundred (4200) employees, with thirty-five hundred (3500) being permanent and the other seven hundred (700) being temporary. Petrotrins mission statement:- Petrotrin as the national petroleum company operates to optimize the returns from its resources for the benefit of its shareholders and the citizens of Trinidad and Tobago.

MARKET STRUCTURE
There are 4 main market structures: monopoly, perfect competition, and oligopoly and monopolistic. Petrotrin operates in a oligopoly market structure but shows some form of a monopoly. The features of Petrotrin are:1) They are a sole supplier of electricity. 2) They set the price of the electricity- however the good is subsidized by the Government of Trinidad and Tobago. 3) They experience Competition from other firms there are also few companies that operate in the same prospects as Petrotrin such as ; Atlantic LNG, and British gas company BG 4) There are strong barriers to entry into the market-, e.g. the cost of building a refinery to refine crude oil into useable fuels is very expensive and many companies can do this. 5) Highest concentration Ratio- Petrotrin owns the largest share of the local market 6) The factors of production are readily available to them. 7) Their aim is to maximize profits. 8) Its exhibits Collusive Behavior where it is the dominant price leader and also the leader of the oil and gas Oligopoly in Trinidad and Tobago . Their experience 2 types of profits : 1) Normal profit: - This is where the normal profit is included in average costs and minimum profits are required for the firm to remain in operation that is where they cover their total fixed costs. 2) Supernormal profit: - This is earned where average revenue exceeds the average cost of operations. Petrotrin earns super-normal profit as they are involved in the long run production

SCARCITY

Scarcity applies to everyone because there is not enough good or services to satisfy everyone wants.
N. Gregory Mankiw Principles of Economics,

IN the firm, Petrotrin, crude oil and gas can be

described as scarce as it is a non-renewable resource and will one day be exhausted. Scarcity uses concept of opportunity cost. This arises out of making the choice between two (2) goods or services. It is the second best choice given up in any particular situation between (1) and (2). Petrotrin is striving for efficiency though they are not completely efficient. A production possibility frontier (P.P.F) illustrates the relationship between gasoline and aviation fuel.

PRODUCTION POSSIBILITY FRONTIER

15

120

75

50

95

12

Fig. 1:- PPF curve showing gasoline and aviation fuel.

Point B, shows that 75 000 barrels of gasoline is being produced per day while 95 000 barrels of aviation fuel is being produced per day. In order to produce more gasoline less aviation fuel has to be produced. This is shown in Point B, where 120 000 barrels of gasoline is being produced per day and thus aviation fuel decreases to 50 000 barrels per day. The opportunity cost is 45 000 barrels of aviation fuel.

DEMAND

The theory of demand states that more of a good or service is demanded at a lower price and less at a higher price. Dr ,R Hosein Longman economics for cxc Some factors which affect demand are:1) Change in the price 2) Advertising 3) Changes in income 4) Change in population 5) Alternate energy Crude oil is a capital good, while gasoline is a consumer or capital good. Petroleum products are demanded from Petrotrin.

DEMAND CURVE for Petrotin.

Fig. 2:-Graph showing demand for gas.

Price $

140 120 100 80 60 40 20 0 20 40 60 80 100

Quantity Demanded (103)

D1

D2

D1 shows that at $100.00 , 60 000 barrels of gas is being demanded at. D2 shows that when the price dropped to $70.00, 80 000 barrels of gas were demanded. The demand curve many be altered due to alternate sources of energy such as solar. This would cause a change in demand as they are substitutes available, leading to a shift in the demand curve from right to left that is from A1 to A2 as shown in fig 3.

Fig. 3 Graph showing a shift in the demand curve for gas due to alternate energy:
Price $

140 120 100 80 60 40 20 0 20

A2

A1

A2

A1

40

60

80

100

Quantity Demanded (103)

Price Elasticity of demand

Price elasticity of demand (PED) can be defined as the measurements of the change in quantity demanded as a result of the change in the price of the product or service. Dr ,R Hosein Longman economics
for cxc

.Gas is inelastic because there is no substitutes within the Caribbean.

Because gasoline is inelastic (PED<1), if the price should fall there will only be a small change in quantity demanded as in the Caribbean the is a lack of alternate energy technology and development. PED = % Quantity Demanded % Price This shows that the demand for gas is Inelastic as :
Percent change in the quantity demanded
Percentage Change in the price

is < 1

ie) Percent change in quantity demanded= 20 000 x 100 80 000 = 25% Percentage change in price = 30 x 100 70 = 42% Therefore elasticity of demand = 25% 42% = 0.6 since elasticity of demand is < 1 it is inelastic.

Some of the factors affecting the elasticity of demand are: The various uses of gasoline- all vehicles Whether the price is a necessity There are no substitutes for gasoline available at the moment in the Caribbean

Cross Elasticity of demand

Cross elasticity of demand (CED) deals with the degree in change in quantity demanded when the price of a related good changes. Dr, R Hosein Longman economics for cxc. Gasoline can be considered a joint demand because it is complement associated with automobiles. If the price of cars were to fall, more cars would be bought and therefore more gasoline purchased.

CED = % Quantity demanded Good A(cars) % Price of a related Good B (gasoline)

Gasoline and cars are complements therefore they have a positive sign. (+)

Factors Affecting profits For Petrotrin

P R O F I T S M A D E

2008

2009

Years of production

Figure 4 showing the changes in profit from 2008 2009.

Petrotrins financial performance mirrored that the global energy companies experienced rise in earnings. Petrotrin, being part of an oligopoly market structure experiences profits where

marginal revenue equals marginal cost, this is determined on the demand curve and unit cost on the average total cost curve this is represented in figure 6. In 2008 Petrotrin
had a net profit of 1.5 million dollars, in 2009 the profits increased, almost by 1 million dollars, to 2.5 million dollars. Since Petrotrin is a federal oil and gas company, the factors that affect the profit levels of Petrotrin are:

1) The recoverable reserves of oil and natural gas. 2) The number of wells drilled to recover the reserves. 3) The cost of production. 4) The time delay between sale of the lease and any production.

Cost and Revenue of Petrotrin

Average costs

Demand
Output of oil

SUPPLY
Supply is the quantity of a good or service offered for sale at a given price. . Dr ,R Hosein Longman
economics for cxc

E.g, Petrotrin supplies the international market with thousands of barrels of oil at a price determined by market forces. Some Factors that affect supply in Petrotrin are; 1) The numbers of other oil and gas companies in the sector. 2) The current state of Production technology. Petrotrin may be forced to supply oil and gas at a rate that they do not deem fit. They are therefore limited to supply only at a certain amount due to technological know how.
3)

The price of inputs ( ie) cost of production.

SUPPLY CURVE for GAS IN 2009

Price per Barrel of gas $

70 60 50 40 30 20 10 0 20 40 60 80 100 120
Quantity of gas Supplied ( 103 )

Fig. 5:- Graph showing quantity of gas supplied Q1 shows that 80,000 barrels of gas is being supplied at $50.00. Q2 shows that as 100,000 barrels of gas was supplied the price raised to $70.00 given appropriate spare capacity.This change maybe brought about when :

The long run

The long run is the length of time a firm needs in order to change the amounts of all the factors of production it uses. During the long run, output can be changed as the fixed factor can also be changed. Petrotrin operates in the long run production as they have expanded their operations as they now have bases in Pointe-a-Pierre, Santa Flora and Forest Reserve. Petrotrin has been operating in th long run since 1993 meaning that they have been in the long run period for eighteen (18) years.