May 1, 2000

Falling R&D but stable investments by oil companies; why?; a study on R&D and investment in fixed assets in the oil industry

Declining R&D of oil companies due to low opportunities, high risks and mutual competition

Press release
Pollution due to the use of oil challenges technological development in the oil industry. Nevertheless, in the last decade the major oil companies and oil engineers actually dropped their world-wide real expenditures in Research and Development (R&D), even though their investments in equipment followed the growing sales.

CPB analyses this issue in Research memorandum 164, Falling R&D but stable investments by oil companies: why? A study on R&D and investment in fixed assets in the oil industry.

The study shows that the level of investments in production machinery is particularly related to the companies' profitability and creditworthiness. Regarding the R&D-programmes, however, oil companies mainly follow their competitors and in the last decade subsequently reduce their R&D-expenditures.

CPB mentions two main possible reasons for the declining research:

First, the current technology has become mature and offers only few opportunities for high returns on research. The drop in the number of patent applications confirms the receding opportunities. The decline in R&D-outlays is not compensated by higher productivity in research laboratories.

Second, the companies incur high risks if they would focus their research on renewable energy, because they do not know which technology is going to win. The low R&D-efforts in this field also appear from the few patent applications for renewable energy.

The vicious spiral of R&D-reductions is intensified by severe overlap in research efforts. The oil companies strongly protect their R&D-results so that their research fields largely overlap. If one company reduces its research efforts, the other companies may follow the first one without any loss in market share. The confidentiality of new innovations is mainly due to the unique production process of each company. Actually, the enterprises mainly compete on production costs. They have to protect and conceal their knowledge on self-developed production processes in order to survive the competitive struggle. The overlap in research also appears from patent data: the oil companies only apply for patents on similar research fields.

Spokesmen

Harold Creusen Read more
Dick Morks Read more

Read also the accompanying press release.

This study reveals that the level of fixed investments particularly depend on their financial strength, while R&D mainly relates to competitors' research and common expectations. The decline in R&D is initiated by common expectations. In the mature oil industry, companies foresee diminishing research potential within the current technology. This is also confirmed by the declining number of patent applications. The high risks of research on renewable energy may lead to wait and see behaviour instead of new research initiatives. Actually, oil companies have hardly applied for patents on renewable energy. The R&D decline is intensified by a dwindling R&D-race, which is due to a large overlap in research topics. The companies protect their research results because they largely compete on their unique technologies which embody their research results. The research overlap appears from patents: the oil companies apply for patents in exactly the same patent classes.

Contacts

Harold Creusen Read more
Bert Minne Read more

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