Oil industry includes corporations which are involved in the process of extracting, processing and supplying fuel to the customers. The dynamics of oil industry have been analyzed through Porter’s five forces model in the following section:
Threat of New Entrants
The oil industry is viewed as having low threat of new entrants. The reason behind this perspective is that setting up a petroleum company in a region needs massive capital investment. Setting up extraction units and developing global supply chain mechanisms requires a great deal of investment. Therefore, new entrants find it difficult to establish business in the oil industry. Apart from the financial barrier, the new entrants also have to deal with the presence of previously existing large scale petroleum companies, along with the public oil corporation. Regions which are categorized as dependent on oil based economy serve as the target area for carrying out oil extraction and processing operations. One of the challenges that the new comers can face is the volatile international politics and geopolitical tension in the oil rich regions (Hallmark, 2017). The fluctuating oil prices poses another risk to the business in petroleum sector, making the industry more difficult to enter for new companies (Hokroh, 2014).
Bargaining Power of Buyers
The buyers in the case of oil industry includes the people purchasing, fuel, petrol and other derivatives from the petroleum sector. The pricing of fuel and petroleum products is in the control of the oil producers, leaving little bargaining power to the consumers. A change in the oil prices necessitates altering the price of petrol and fuel globally (Clemente, 2018). An increase in the price structure of crude oil results in an increase in the price of gasoline on a global scale, affecting the consumers at an international scale. The consumers have to pay the price the oil suppliers are charging, having no authority to influence them to lower the prices. Therefore, it can be seen that the buyers in the oil industry have low bargaining power, while the oil producers maintain a great deal of control on pricing decisions.
Bargaining Power of Suppliers
The suppliers of the oil industry have moderate bargaining power. The suppliers in the oil industry are companies who are extracting the natural resource of oil from the oil fields. These companies hold a significant amount of power on the industry dynamics. In addition, the contracts which are formed with the governments of the regions where the oil is being extracted influences the bargaining power of the oil suppliers (Hokroh, 2014). The government can exert some influence on the corporate decisions. However, the oil based economies are dependent on the operations of these corporations so they can only exert control to some extent.
Threat of Substitute Products
The substitute product in the domain of oil industry is alternate means of energy that can be used to run a vehicle. There have been some changes in the transportation industry, owing to the introduction of electric vehicles that are not dependent on oil based sources of energy. However, the introduction of such vehicles has not indicated a major shift in the demand and consumption of oil based fuel (Clemente, 2018). The transportation industry continues to be largely dependent on gasoline as the key source of fuel for running the vehicles. As far as switching costs are concerned, price conscious consumers are hesitant in moving from gasoline to other sources of fuel (Clemente, 2015). Therefore, the oil industry can be viewed as having low threat of substitute products as people are likely to continue to use gasoline as a prime means of fuel.
Competitive Rivalry
There are some major oil corporations that have a stronghold on the international oil industry. A few of these companies are Shell, Conocophillips, Chevron, Exxon Mobil etc. who have significant stakes involved in the oil producing regions on a global scale. According to Chandler (2018) the presence of these few large scale entities make the oil industry show high level of competitive rivalry. Due to this intense rivalry, the profit margins are difficult to maintain as the companies have to match their price according to the competitor’s pricing as well as government’s regulations. Gaining access to oil deposits is another area which shows significant competition among oil companies (Fleisher & Bensoussan, 2015), resulting in high competitive rivalry.
References
Chandler, J.A. P. (2018). Petroleum Resource Management: How Governments Manage Their Offshore Petroleum Resources. UK: Edward Elgar Publishing Inc.
Clemente, J. (19 April, 2015). Three Reasons Oil Will Continue to Run the World. Forbes. Retrieved from https://www.forbes.com/sites/judeclemente/2015/04/19/three-reasons-oil-will-continue-to-run-the-world/#7cba0d2c43f9
Clemente, J. (27 June, 2018). The Link between Crude Oil and Gasoline Prices. Forbes. Retrieved from https://www.forbes.com/sites/judeclemente/2018/06/27/the-link-between-crude-oil-and-gasoline-prices/#543bd4a937db
Fleisher, C. S., & Bensoussan, B. E. (2015). Business and competitive analysis: effective application of new and classic methods. USA: FT Press.
Hallmark, T. (8 March, 2017). International Politics Is Always A Risk For Oil Companies, But Business Conditions May Matter More. Forbes. Retrieved from https://www.forbes.com/sites/uhenergy/2017/03/28/international-politics-is-always-a-risk-for-oil-companies-but-business-conditions-may-matter-more/#8295e5f29912
Hokroh, M. A. (2014). An analysis of the oil and gas industry’s competitiveness using Porter’s five forces framework. Global Journal of Commerce and Management Perspective, 3(2), 76-82.