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The Oil Industry

Essay by   •  April 30, 2013  •  Essay  •  366 Words (2 Pages)  •  1,017 Views

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The Oil industry refers to large, vertically-integrated (i.e. from upstream to downstream), national and international oil companies. More precisely, this study is going to be mainly focused on the upstream operations of these companies. Upstream operations include exploration, development and production.

Using Porter five forces analysis, the conclusion is that the Oil industry is moderately to highly attractive with high competition inside the industry.

Threat of New Entrants: the oil industry is protected by high barriers to entry; therefore the threat of new entrants is almost nonexistent. Huge amounts of capital expenditure are necessary to perform the activities of major oil companies and large amounts of fixed costs are required for the development of oil fields and the installation of production facilities. Moreover, costs related to entering the industry include: drilling costs, oilfield services, skilled labour, scientific research, materials and energy. Given the high unit cost of exploration and production, only companies that operate economies of scale can survive. Apart from economic factors, government policies are a major impediment to step into the industry, as oil is a resource owned by the state, most countries only allow national companies to exploit it (or foreign companies in partnership with the national company). All these factors strongly discourage any potential new entrant.

Buyer power: the price of crude oil is determined on a global level by the law of supply and demand. The price of oil is the spot price of light crude as traded on the NYMEX (New York Mercantile Exchange). Over-the-counter transactions may also happen but at the market price. Consumers' willingness to pay is the only power buyers have. Only very large buyers of oil such as big countries (China, US) may influence oil prices.

Supplier power: suppliers are oil-rich countries (suppliers of oil fields), equipment & pipeline manufacturers, and oil-field services. Oil-producing countries bargaining power is evident when it comes to granting oil-fields-concession rights to international companies. In parallel, Oil companies, due to their size and the volume they buy exert much power over their suppliers of equipment and services, which are relatively small and not consolidated.

Substitutes and complements: oil is still an irreplaceable commodity, especially in transportation and industry. Several substitutes exist: coal, natural gas and re

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