The Us Petroleum Refining Industry

Published Date: 02 Nov 2017

Buyer power

In the US petroleum refining industry, those large international companies form the oil and gas market. With the highly vertically integrated operations throughout the marketing, production, exploration, transportation and refining, and they act as both the players and the buyers within the different phrases. Due to this complicating situation, there are a huge amount of the buyers weakening the buyer power, not only the individual but also the institutional.

However, the institutional buyers, for example, the chemical companies or the independent retailers, can make large purchases and losing such kind of the institutional buyers would impact the players’ revenues, boosting their power somewhat. The commodities such as the natural gas or the crude oil are relatively undifferentiated products. The prices of natural gas and crude oil are set according to supply and demand in the markets by the mercantile exchanges of London, New York, Dubai and other commodity exchanges, which effectively ameliorate the buyer power on the basis of the price.

The brand loyalty is not likely to be an important factor here, unless there are some kind of loyalty programs in place, so the buyer power is strengthened. The switching costs for the individual buyers are not likely to be very high, they may, however, be increased with the respect to the institutional buyers with the supply contracts. Thus, I think the buyer power in the US oil and gas market is moderate.

Supplier power

The major suppliers are those oil and gas equipment and services providers, such as Schlumberger, Baker Hughes, Smith International, Halliburton, etc. Typically, such suppliers are all large, highly diversified companies which give them greater bargaining power within the market. For example, Baker Hughes has a wide portfolio of its products catering to the global oil and natural gas industry. Baker Hughes manufactures and supplies primarily roller cone bits, drill bits, and fixed-cutter polycrystalline diamond compact bits. It supplies the products to the oil and natural gas industry globally. Baker Hughes also supplies the customers the drilling and evaluation services. These services include the directional drilling, logging-while-drilling, and also the measurement-while-drilling services. The company provides the formation evaluation and wire line completion and production services for the oil and natural gas wells. This kind of suppliers is not too many in the market, which combined with very high demand in the oil and gas industry, increases their supplier power. Supplier power will also be affected by the prices of commodities. When the price is high, oil and gas companies may explore the deposits that were previously deemed too costly, which would boost the suppliers’ revenues. However, when the price is very low, the investment in drilling and exploration could fall, which would definitely increase competition between the suppliers. Also, a lot of larger oil and gas giants have backward integrated with the oil and gas services operations in their own organizations, and use a third-party company to supplement their own business. Combined with the high importance of the industry to supplier revenues, this backward integration reduces the supplier power of the oil equipment and services companies. The company will a have greater bargaining power. Amongst the suppliers there are also a lot of human resources providers, like landowners or governments. Some of them can exert strong bargaining power because they have a big size. While there are many companies providing specialist equipment, it is more difficult to assure adequate reserves, because the coal and metal ores are not renewable. This means that those big landowners, governments, and similar organizations can be viewed as a kind of suppliers, and these may be in a pretty strong position. Overall supplier power in the US oil and gas market is moderate.

New entrants

It is complicated to analyze the threats of new entrants into the US oil and gas market. In fact, it is possible for companies to actually operate in one or more parts of the whole supply chain. Those leading oil companies, such as Exxon Mobile, ConocoPhillips, Chevron, are typically highly vertically-integrated, large, multinational companies, they reduce costs and enhance profitability by using the large scale of the efficient production and distribution networks. Those players have invested a lot in their fleets of drilling rigs, other specialist equipment, and also the technology, including product innovation. In order to keep up with the leading players, strong R&D capability, utilizing their scale economies is required. The presence of such powerful incumbents is a significant barrier to entry. On another hand, the need for substantial initial investment to set up facilities, like drilling rigs, also reduces the threats of new companies establishing themselves in the oil and gas market. There is also a significant regulatory environment in the oil and gas market, which is restrictive to the entry of players.

Permission to explore the new oil or gas fields and extract it is given by national governments, and obtaining it would be a lengthy process. Just like the regulations surrounding taxation and the issue of if oil and gas exploration is permitted or not, there are also restrictions regarding the environmental impact. Overall, the threat of new entrants is weak within the US oil and gas market.

Threat of substitutes

In the oil and gas market, the substitutes can be considered in terms of increasing meaning of alternative energy sources, those other than oil and gas such as nuclear, solar, coal, wind. Although shifting to renewable, green energy sources is costly and will take a long time, certain substitutes still can be seen to offer great benefits in terms of environmental impact and sustainability,. As climate change becomes a growing issue, the production and demand of renewable energy is increasing.

However, today, the majority of the global energy production uses of the non-renewable sources such as gas, oil, and coal. While power companies can switch their primary energy mix to a small extent with incurring low costs, a thoroughgoing transition to these green, clean substitutes would require huge investment in new facilities, which constitutes a extremely high switching cost. Overall, the threat of substitutes in the US oil and gas market is moderate. But, as reserves of oil and gas decline over the next 20 years, it is expected that this will increase substantially as alternative fuels and energies become more readily available and "old" oil and gas products will become increasingly expensive.

Degree of rivalry

Oil and gas companies are typically integrated, large players that benefit from the economic scale of their operations. Such incumbents’ presence intensifies rivalry in the market. Because of the fact that US oil and gas operations are highly labor and energy intensive, fixed costs are very high and it is hard to exit the market as leaving would require huge divestments of assets specific to the business, this would be a big problem to the companies. The main players’ activities are usually vertically integrated and geographically. But, most of them present similar business models. Also, the estimations for the next couple decades show the decline in use of the gas and oil that should be caused by switching to cheaper, renewable alternative and more environmentally friendly sources. These combine to produce strong rivalry within the US oil and gas market.