The estimate of growth in US GDP over the past quarter has been revised upwards to 8.2%.
(a) How would this news affect capital investment and budgeting decisions in the petroleum industry? Give some examples and explain. Comment briefly on the past decisions made in the industry, leading up to the current situation.
(b) Would the growth in petroleum firms' capital expenditure tend to coincide with the growth in GDP? Why or why not?
(c) How will the recent economic growth affect the sources and cost of external capital (comment on the IPO and bond markets), and how will this in turn affect decisions mad by firms,
GROWTH IN US GDP AND EFFECT ON CAPITAL INVESTMENT AND BUDGETING DECISIONS IN THE PETROLEUM INDUSTY
The GDP or the gross domestic product of a country is a measure of the market value of all goods and services produced in the USA. The upward growth of the GDP imploes that the per capita income of USA has gone up. Also, the total GDP means the economy's overall size, which is an important determinant of the total market. This simply means that petroleum industry is likely to increase its capital investment in oil production and processing and have larger budgets for expansion.
The financial aspect of why the capital budgeting goes up is that the estimates of internal rate of return, net present value, profitability index, payback period and accounting rate of return improve with an expanding GDP.
RECENT EXAMPLES OF EXPANSION BY OIL COMPANIES
We take a few examples of the company BP its investment in projects include 'Furnace Remediation Project', Chocolate Bayou, Texas, US Gulf Coast, USA,'Texas City Clean Fuels" Texas City, TX, Texas, "PTA Debottlenecking Program", Cooper River, South Carolina, "Cherry Point Clean Fuels" Seattle, Washington, 'Clean Fuels' Washington DC, USA.
Apart from these projects of other companies include, ExxonMobil, "Global Procurement Support" and Pennzoil Products Co. "Pennzoil Crude/Vacuum Revamp", Rouseville, Pennsylvania.
From the past experience as well as current observations we conclude that the increasing GDP triggers increase in exploration and extraction to the refining process, chemical by - products, specialty chemicals and retail gas distribution centers. It has been observed that at almost every stage including planning and feasibility, engineering and design, ...