Recently, the Iraq War and the War on Terror have caused some surges for the energy industry; oil prices have been heavily fluctuated. Ironically, the solid performance in overall oil industry suggests that oil companies are heading with decent momentum.
‘The surge in oil prices, from $10 a barrel in 1998 to above $50 in early 2005, has prompted talk of a new era of sustained higher prices. Even so, an unusually loud chorus is now joining Messrs O'Reilly and Chavez, pointing to intriguing evidence of a new "price floor" of $30 or perhaps even $40. To see which camp is right, two questions need answering: why did the oil price soar? And what could keep it high?’
The energy industry has experienced the tumultuous era domestically and internationally. This paper will apply STEEP and Porter’s five forces to determine competitive strategies in order to respond to two questions: why did the oil price soar, and what could keep it high?
Porter’s Five Forces
1. Bargaining power of suppliers
The oil companies have exposed to price fluctuation risk. Additionally, currency exchange risks have increased the cost of capital and worsen the debt ratio in the oil industry. As a result, oil companies might enter into long-term sales contracts for the oil and gas suppliers and establish long-term hedging agreements to protect against currency volatility. However, the question is whether the industry has succeeded in finding its way to organize alliances between oil suppliers and oil producers. Although bringing down the costs of developments through common practices has already been established, the achievement breaks down some barriers which have existed between oil companies and their contractors for such a long time.
Additionally, the profits from oil reservoirs have caused political turmoil in Venezuela and the Middle East region. OPEC (the Organization of Petroleum of Exporting Countries) is confident to defend its stated high price policy at any costs. Furthermore, high-sky oil prices have been helped by the strong demand from China. Coupling with these events is the sharp downturn of the U.S. dollars. Thus, the global downstream market has undergone pressure; the oil industry has high power of suppliers.
2. Threat of Substitute Products
High gasoline prices drive efforts to increase ethanol consumption and ethanol related products. Additionally, propane, methanol, natural gas and especially ethanol are most widely uses gasoline-alternatives. Besides, electricity, hydrogen and palm oil become among substitute fuels which car producers and chemical companies are developing.
Europeans cut their dependence on oil suppliers by switching to substitutes, such as coal, nuclear power, and natural gas. Nevertheless, the Euro currency now appreciates against U.S. Dollars. Since Europeans usually purchase oil in U.S. currency, their profit margins become narrowed. The fuel prices are so high that it would take a quick drop to make ethanol unprofitable and stunt the growth of its use.
On the other hand, gasoline prices at high record can help biotech companies achieve a breakthrough in reducing cost of ethanol. It might take a few years before reasonable prices for ethanol could be commercially available, and cheaper ethanol might not take much of a dent in gas price. Thus at this time the threat of substitutes is low for the industry.
3. Bargaining power of buyers
As mentioned, gasoline at this time does not have many alternatives although many nations have tried to reduce dependences on oil suppliers. However, these substitutes also require suitably designed devices, which might cause higher cost of finished goods. As a result, in the mean time, the cost incentives will discourage the purchasing power.
The oil industry is defined as a basic commodity. The outlook for the energy industry is given high commodity prices, high growing demand, and lack of alternatives to oil as the primary transportation fuels. The oil industry has efficiently squeezed from operating assets, such as untapped resources and refineries. The growth of oil price will lead to increase transportation and energy in price, driven by market forces inflamed by infrastructure shortage.
Despites of many impacts, oil industry has low bargaining power of buyers due to a few substitutes.
4. Threat of New Entrants
The oil industry requires more financial investment for reservoir allocation. Many major oil companies have fended off the advances of these unbranded foes. However, the “upstarts” have inroads with marketing strategies. One of the criteria is to focus on brining down drilling costs to keep the pace of activity. A combination of high oil price and uncertainty of oil price might bring about several government reviews of energy sector. Thus, this will have a marked impact on exploration operation in oil industry. They have applied different strategies from those of the past, enjoyed superior returns and captured value from the integrated giants.
Thirty years ago oil companies were primary operators of service stations, enjoying exclusivity in the gasoline market. Now, many factors have combined to put pressure on margins. The consumers’ ties to the stations, operated by major oil companies, have been weakened. The convenience stores have begun selling gasoline and provided new services. But, major oil companies have not yet considered these retailers as a major threat. They still view these unbranded offering as inferior in terms of quality and consumer appeal.
However, since the petroleum industry merged, consumer attitudes and the impacts on the brand choice have been changed. Unfortunately, those factors now stay largely inside the stores, not with the major oil companies. The drivers of brand choice have evolved, especially when the new consumers define brand value; these “upstart” marketers have already developed the systems and processed to stay abreast of these major oil companies. The upward trend in convenience store sales will lead to higher profit margins.
In short, the threats of new entrants are increasing in oil industry.
5. Intensity of competitive rivalry
Oil crisis during the end of the 1990’s help oil investors and executives understand what conditions are driving this wave of mergers. Foremost is the chronic glut of oil that has driven crude prices to near-historic lows. Some of the oversupply are derived from flattening demand in mature markets and economic difficulties in many emerging markets.
‘In recent deals such as British Petroleum (BP) and Amoco, Total and Petrofina, Exxon and Mobil, and currently BP/Amoco and ARCO, the stated goal has had a familiar refrain: to increase profits by dramatically cutting costs, reducing inefficiencies, and expanding geographically.’
During early the 1990’s, major companies have to fight back and watch their market shares for gasoline reduce at the hands of the upstarts. “In addition to the majors, in 1997 alone, an increasing number of c-store acquisitions by Amerada Hess, MAPCO Express, and FINA, to name a few, were announced. In Atlanta, Amoco, BP, and Texaco have begun to battle aggressively to maintain market share and repulse QuikTrip and RaceTrac.” As a result, these competitors are aggressively selecting choice properties and investing in facilities. They are also pursuing and pushing programs to increase profit margins for their branded dealers. If a backdrop of growing global economy becomes uncertainty, investors in oil industry get jittery.
As of July 26, 2005, ‘in a report published last week, Merrill Lynch & Co. said the aggregate net income of the 70 largest companies in the sector is expected to rise 26% this year to $230 billion, on sales of $2.57 trillion, up nearly 10%. The reasons: high oil prices and fat refining margins, plus a pickup in oil-field services, particularly in rates for drilling rigs.’
The increased competitiveness of major oil companies can be observed in their willingness to see joint ventures or any other alliances to reduce their operating, refining and marketing costs. Furthermore, under aggressive competition, major oil companies continue to decoupling their value chains, breaking explorations and production. Merge and acquisition as well as marketing into separating different business units help reinforce efficiency and compete as standalone entities.
The intensity of competitive rivalry is high in oil industry.
STEEP (Societal, Technological, Economic, Ecological, and Political)