Petroleum industry analysis

Supplier Power: Strong The equipment manufacturers are small in number, yet large in size. Therefore, a high demand from the oil and natural gas companies has naturally given them an advantageous position within the sector. Their highly diversified product portfolio has continued to emphasize their strong bargaining power with the oil and natural gas companies. Due to the specialized nature of the suppliers, finding an alternative supplier is difficult. This is probably why many oil and natural gas services companies have backward integrated their operations to reduce their supplier power.

Buyer Power: Strong

The buyers in this industry are individuals as well as institutions which enable only large purchases. The products in this industry such as crude oil or natural gas are relatively undifferentiated resulting which buyer can easily switch the supplier. Even, buyers are well knowing about suppliers, their prices and costs which makes buyer power strong to bargain. Moreover, relative cost of product to total cost also makes buyer power strong in accordance to definition given by grant. Only, end number of buyers constituting individual and institutional in respect to significance of oil and gas weakens buyer power within the industry.

Substitutes: Overall weak but growing

Shifting to alternative resources of energy such as coal, solar, wind and nuclear is the always been a prime area of research in global energy sector. But being a costly and time consuming option it makes substitutes weak to replace oil and gas products in energy sector. Moreover non availability of transportation and issues concerns regarding safety and disposing of waste make it difficult to consider it as full option in energy sector. However, limited availability of oil and gas resources demands attention for the availability of substitutes in this sector.

Threat of New Entrants: Weak Profitability in this sector is primarily achieved through economies of scale. The big names in the industry such as BP, Royal Dutch Shell and Exxon and Total are all large multinationals that are highly vertically integrated. The huge startup investments incurred and the permission from the national government to explore new fields is something that new entrants can’t easily overcome (Datamonitor, 2009).

However, if profit margins within the sector grow, it could make itself lucrative for cash rich companies (Grant). Faced with ambitious climate change targets, many governments, especially in developed countries are urging for greener energy. This could result in new entrants who focus on providing greener energy (Oil & Gas, 2011).

Rivalry: Strong With huge fixed costs and high exit barriers, the competition within the industry is intense. This is further fueled by the fact that the major players have very few activities in alternative fields. “The extent to which a group of firms can avoid price competition in favor of collusive pricing practices depends on how similar they are in their origins, objectives, costs & strategies.” (Grant – High competition in energy industry). By diversifying their scope of business beyond exploration, into refining and marketing of oil and natural gas, certain companies like Exxon are able to ease the forces of competition