ABSTRACT
Oil companies in the Aberdeen offshore oil service base display high degrees of vertical disintegration. The average external procurement index was calculated in Chapter 3 to be over 91 per cent, which implied that less than 10 per cent of the intermediate inputs used in offshore oil gathering (exploration, development and production) were produced ‘inhouse’ by the oil companies. Three main reasons were put forward for the oil companies’ choice of the market over inhouse production. First, many of the intermediate input markets used by the oil companies were perceived by them to be competitive in the sense that the markets were populated by a good number of competitors (for example, see Table 3.8).Secondly, the oil companies’ choice of vertical integration was constrained: as the requirement for an input was often either for a limited quantity or for a relatively short period of time, the amortization of fixed costs would have been unduly burdensome. The solution was to turn to the market to procure these inputs. An alternative solution of selling surplus output produced inhouse to other oil companies seems to have been precluded because it is not possible to isolate the transaction from a potentially costly exchange of information.
