Production and Operations Management Essay

BUS 508: Business Enterprise
11th August 2011
Analyze Marathon?s product process and determine which phase is open to the greatest number of efficiency improvements. Explain your rationale.

Marathon is among the top five crude oil refineries in the United States. It?s an integrated international energy company engaged in exploration and production of oil, sand mining, integrated gas, refining, marketing, and transportation operation. Marathon needs to upgrade a few of their refineries and pipelines in order to increase the production process of heavy crude oils, ( For example, once the Detroit Heavy Oil Upgrade Project is completed, the refinery crude capacity will increase from 106,000 bpd to 115,000 bpd. The upgrades will allow the Detroit refinery to process an additional 80,000 barrels of heavy crude oil per day ( The existing pipelines at the Detroit refinery do not have the capacity to transport additional volumes of crude oil to meet the refinery?s upgrade needs. Therefore a 1.5-mile pipeline will provide an alternative oil supply line to the refinery and provide extra security in the event of a supply disruption. Pipelines are the safest and the most efficient way to transport crude oil and other liquid petroleum products. They reduce traffic and pollution as well as provide economic benefits. Pipelines transport two-thirds of all the crude oil and refined products in the U.S. compared to three percent by tanker trucks. According to, currently 100,000 barrels of crude per day are transport to the refinery. Transporting the same volume of oil by tanker truck would require between 400 to 500 shipments per refinery day which would be a logistical nightmare and is not cost efficient for any company. Marathon Oil Corporation is a global corporation that is among the world?s leading energy companies. The company?s strategies lie in ?applying innovative technologies to discover and develop valuable energy resources, providing high-quality products to the marketplace and delivering value to all of the
Company’s stakeholders? (Marathon, 2008). Marathon produced a video entitled The Time it Takes to Provide America?s Transportation Fuels. The video, set in six phases, explains the process of gasoline production from its inception as crude oil to its processed products as gasoline and other petroleum products. A subsection of Phase one explains the world?s demand for oil and its projected growth. According to the video, it has been estimated that ?world oil demand will grow from 84 million barrels a day in 2009 to approximately 99 million barrels per day in 2030? (Marathon Petroleum Company, 2011, Phase one, World/U.S. Demand); and that the increase would ?require daily crude oil production of fifteen million barrels more than the current production? (Marathon Petroleum Company, 2011, Phase one, World Production). If this projection is correct, the U.S. must develop ways to increase crude oil production since ?less than 40% of the crude oil used in the United States refineries was produced in the U.S.? (Marathon Petroleum Company, 2011, Phase one, Marathon Crude Oil Supply).
Discuss the relationship between the retail price of gasoline and the world demand for crude oil.
The United States is a big retail gasoline market. There are more than 150,000 retail stations across the country; most locally owned and operated. Every day, tens of millions of Americans stop at a retail gasoline station, regardless of the daily increased gas prices. Whether it is cold, hot, rainy or windy; a retail customer has to fuel his/her vehicle. Because gasolines, as well as crude oil, are commodities that are traded worldwide, the price is determined by supply and demand. ?If the wholesale price of gasoline goes up, retailers have to pay more when they buy their next load. They raise their price to cover the increased cost of the new load? (Marathon
Petroleum Company, LLC, 2011). The gas prices fluctuate, depending on how high or low the demands for these commodities are. The cost of a gallon of gasoline is determined by production and operational management, federal and state taxes, refining and distribution cost, marketing, retail and profits. Gasoline prices fluctuate in local markets due to competitiveness, world events and disruption in the refinery process. The crude oil market and gasoline market are entangled. However, there are some instances when changes in their perspective markets are not comparable. The escalation of gasoline prices worldwide is under scrutiny because the cost of gasoline significantly impacts the budgets of consumers. The relationship between crude oil prices and gasoline cost at the pump appear broken. Retail prices for gasoline rise more quickly than crude oil and decrease much slower than crude oil. There have been instances when the price of crude oil held steady and at the same time the price of gasoline increase progressively. The increase in gasoline prices sometimes can be attributed to a slowdown in processing thus creating reductions of supply. World situations can disrupt the supply and demand which could affect the price of crude oil. Some crude oil price increases are temporary, while others reflect longer-lasting market changes. These future contracts are agreements that allow the investors to buy or sell oil in the future and for a specified price. ?Crude oil accounts for 55% of the price of gasoline, while distribution and taxes influence the remaining 45%. Usually, distribution and taxes are stable, so that the daily change in the price of gasoline accurately reflects oil price fluctuations. Occasionally, however, distribution lines are disrupted or are down for maintenance, which can sometimes make high gas prices even when oil prices are down? (Amadeo, 2011). The United States imports more than forty-two million gallons of gasoline everyday and U.S. demand increases at an average rate of 0.5 to 1% per year. At the same rate,
worldwide demand increases as well. ?The only real way to lower gas prices is to lower demand for gas and oil over a long period of time since the U.S. consumes 25% of the world’s oil. This has increased over the last twenty years, from 15 million barrels per day to 20.7 million barrels per day. A concerted effort might convince commodities traders, who have driven oil prices up 25% in the first quarter of 2008, that oil was a bad investment, thus allowing oil prices to return to pre-bubble levels? (Amadeo, 2011 ).
Explain what marathon could do to keep the price at the pump the same without losing profits if the prices of crude decreased by 10%.

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It is possible for Marathon to maintain a steady price at the pumps and not lose profit. The key lies in Marathon?s development and use of integrated gas. According to the company?s corporate profile, ?Marathon’s integrated gas business adds value through the development of opportunities created by demand for natural gas. This business complements the Company’s exploration and production operations and opens a wide array of investment opportunities designed to add sustainable value growth? (Marathon, 2008 ). There are many options that Marathon can take to keep prices at the pump the same without losing profits. By ordering material in bulk, the company could competitively price their products to their consumers. However, the company must be careful and balance the amount of material that they purchase; ordering excess material can tie up funds unnecessarily and cause the company to lose income in the future. On the other hand, when you have the needed material on hand you will keep the loyalty of current customers, possibly gain new ones, and maintain brand recognition that they are known for. Also, Marathon might try reducing labor/man power time (work smarter
notharder). Cooperate offices should keep detailed accounts of time and how it is being used to see where they will be able to reduce time. They may want to take a look at their cost and see where things can be adjusted or reduced. Look at the employees and their job description. It is possible that they could hire an independent contractor to accomplish this task at a lower price, without the expense of paying for the insurance or additional taxes.

In June 2010, President Obama imposed a six month deep water drilling moratorium. Determine the impact of a continued moratorium on deep-water for retail gas prices in the U.S.

President Barack Obama suspended deep water drilling in response to the recent disastrous oil spill in the Gulf of Mexico. This moratorium allowed the administration of President Obama to properly investigate the spill and implement new safety requirements. Therefore, the United States oil companies would employ different strategies to remain competitive. United States oil companies will probably deploy their resources to foreign suppliers with whom they have joint venture arrangements for projects. Next, United States oil companies may establish oil industry mergers, alliances, and acquisitions in order to cut costs, especially amongst the smaller companies. Also, United States oil companies may invest in renewable resources and explore alternative fuels. Americans use between 20 and 21 million barrels of oil per day. That translates into 10,000 gallons per second. Currently, domestic production is about seven million barrels per day; roughly one-third of the consummation. About thirteen to fourteen millions are imported every day (Hofmeister, 2010). If the six month deep-water drilling moratorium were to extend, it would place a larger demand for imported oil, thus
allowing the retail gas prices to gradually increase. If the industry were permitted to drill both offshore and on federal lands however, this could significantly increase our domestic production. Deep-water drilling has been prohibited in over eighty-five percent of the United States outer continental shelf for the past thirty years by both presidential and congressional moratoria, and drilling on federal lands has been prohibited by federal regulation (Hofmeister, 2010).

Detroit Heavy Oil Upgrade Project. (2010). Retrieved August 9, 2011 from: http:/ www.detrioth
Marathon Oil Corporation. (2010). Annual report. Retrieved August 9, 2011 from: http://www.
Amadeo, K. (2011). Why gas prices are high. Retrieved August 9, 2011 from: http://useconomy.
Hofmeister, J. (2010). Why we hate the oil companies. New York, NY: Palgrave Macmillan.
Marathon Petroleum Company. (2011). The Time It Takes to Provide America?s Transportation Fuels. Available from: sources/the_time_it_takes/index.htm


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