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Political/legal Factors Exxon Mobile

Essay by   •  February 15, 2011  •  Case Study  •  1,835 Words (8 Pages)  •  1,515 Views

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Political and legal factors

Christian Birke

Factors in the political and legal environments appear to represent an important influence on decisions made within companies. It seems as though changes in this environment can directly affect company performance. With ExxonMobil operating in nearly 200 countries worldwide (ExxonMobil, 2001) the list of possible political and legal aspects appears to be endless. Importance should be given only to implications that can gravely affect operations. Making this choice of differentiation between significant and insignificant influencing factors may well be the most important decision to be made by ExxonMobil. Therefore the main question that arises is: What political and legal factors from the external environment affect decision making within ExxonMobil.

The first paragraph will begin by analysing and explaining the implications possibly brought about by the Kyoto Protocol. This is followed by a summary of environmental legislative aspects probable of being influential to ExxonMobil's decision making process. The analysis continues by stating various geopolitical factors and how they can exert influence on operating decisions ending with a conclusion that summarises the main aspects of the chapter and answers the thesis statement.

The Kyoto Protocol

The Kyoto Protocol is an international agreement, meant to counteract the effects of global warming and climate change, which could have serious implications for the energy industry. The treaty aims at reducing greenhouse gas emissions in the countries that signed it (Cliff Pearson, 1999). The increase in greenhouse gas emissions is said to be responsible for global warming which has serious consequences for the environment (Environmental Protection Agency (website), 2000). The first international initiative to deal with the climate change problem was the United Nations Framework Convention on Climate Change (UNFCCC) signed in 1992. The goal of this non-legally binding treaty was to maintain 1990 emissions levels by the year 2000. The Kyoto protocol that replaced the UNFCC in 1997 was signed by many countries including the USA and once ratified it would be legally binding (Cliff Pearson, 1999 / Platts, 2003). Emissions were to be reduced by 5% compared to 1990 levels in the years from 2008 until 2012 (Platts, 2003). The measures aim at reducing the emissions of gases such as carbon dioxide, nitrous oxide and methane all of which constitute by-products especially generated by the oil industry (EPA and Platts). For the Kyoto Protocol to be enforced it must be ratified by at least 55 countries constituting 55% of worldwide carbon dioxide emissions. Currently 70 countries have ratified the Protocol comprising 35.2% of emissions. Contrary to the USA that shows no intention of ratifying under the current administration, both Russia and Poland have assured their future ratification. In this case, the necessary criteria would be fulfilled for the agreement to be enforced (Platts, 2003). But doubts have recently been cast on Russia's position due to statements given by high Russian government officials (Reuters (CNN), 2003). The effects the Kyoto Protocol could have on business especially in the energy industry might turn out to be substantial. Changing requirements for the components of gasoline reducing the amount of sulphur may impose additional production costs (Platts, 2003). Rising energy costs might also reduce the demand for fuel, electricity and other oil related products which in turn could affect profits in the energy sector. These implications for the energy industry might help explain the continuous denial of the existence of global warming and human influenced climate change by ExxonMobil (Cliff Pearson, 2003). If the Kyoto Protocol is enforced it seems as though ExxonMobil would face changing patterns of diminished energy consumption which could force some rethinking in its operations, but it is not only international agreements like the Kyoto Protocol that may pose possible threats to the energy industry but national environmental legislative issues could do the same.

Environmental legislative aspects

National governments concerned with environmental issues might option for legislative environmental measures in order to force business into behaving in a more environmentally sound manner. One such measure in the USA is the Corporate Average Fuel Economy (CAFE) standard. First introduced in 1975 as part of the Energy Policy and Conservation act it required new cars to meet an imposed fuel economy rating measured in miles per gallon. Failing to comply with these standards can lead to high fines imposed on car manufacturers (Office of Automotive Affairs, 2002). Increasing this standard might lead car manufacturers to consider raising the average fuel efficiency of their fleet of cars in order to avoid possible fines. A consequence of this could be a reduced demand for gasoline possibly affecting the profits of oil companies. In mid 2003, the Senate in the USA voted against an increase of this standard avoiding further pressure on the automobile and energy industry (The Associated Press, 2003). In the European Union where the majority of member states already have enforced considerable taxes on oil an attempt was made at introducing a European energy tax in 1992 (Green Budget Germany, 2003). Although this attempt failed due to resistance by the Spanish and British governments (Reader p.30) EU finance ministers did agree on new minimum energy taxes in 2003. The intention behind such a European energy tax may be reducing the demand for energy and consequently for oil which can affect oil company profits negatively. But instead of imposing a large increase in these tax rates the finance ministers simply adjusted 1992 proposed rates to the level of inflation with very few new minimal rates for other products (Green Budget Germany, 2003). As the next re-evaluation of these tax rates will only take place until the year 2012 (Green Budget Germany, 2003) one might gain the impression that once again it was avoided putting too much further pressure on industry. In the USA senate is currently debating over an energy bill proposed by the Bush administration. Part of the bill consists of subsidies to the oil and gas industry as well as measures to accelerate the construction of new oil and gas pipelines (Greenpeace, n.d). In its original form the bill allowed for an opening of the Arctic National Wildlife Refuge to drilling incentives of various oil companies including ExxonMobil. But this issue was strongly opposed by the Democrats in the Senate and eventually dropped from the bill (Reuters, 2003). Another matter of this bill affecting

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