Porter's Five Forces Analysis of Oil and Gas

1. Bargaining Power of Buyers:

Powerful buyers have the ability to reduce prices, demand better quality
or more service thereby increasing costs and play industry participants
off against each other, at the expense of industry profitability. Major oil
companies outsource much of their field operations to oil and gas
service companies. As buyers, oil companies are in a powerful position
to bargain prices, demand better quality or additional service. Oil and
gas companies seek to obtain rights to invest in exploration and
production areas internationally. These rights are acquired through
buying a percentage of another company’s right or through participating
in licensing rounds. In this highly competitive environment, oil and gas
companies join together and form a Joint Venture. Joint Ventures are
formed primarily for three reasons: 1. Gain more market power (buyer) 2.
Reduce or share risk 3. Acquire or share information Moreover, oil and
gas companies form Joint Ventures to overcome political and/or legal
impediments or to meet host country requirements. As Porter suggests,
increases the buyer’s negotiating leverage relative to competitors which
leads to increasing the buyer’s power.

2. 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 government of the regions where the oil is
being extracted influences the bargaining power of the oil supplier. The
government can exert some influence on corporate decisions. However,
the oil-based economies are dependent on the operation of these
corporations so they can only exert control to some extent.

3. 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 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 newcomers can face is the volatile international
politics and geopolitical tension in the oil rich regions. The fluctuating oil
prices poses another risk to the business in petroleum sector, making
the industry more difficult to enter for new companies

4. 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. 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. 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.

5 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. The presence of
these few large-scale entities makes 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 resulting in highly competitive rivalry