The Worlds Energy Production Uses Of Non Renewable

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 a 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. Overall, the buyer power within the North American oil and gas market is assessed as 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 from 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 non-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 assessed as moderate.

New entrants

It is complicated to analyze the threats of new entrants into the oil and gas market by the fact that it is possible for companies to operate in one or more parts of the supply chain. Leading oil companies, namely Exxon Mobile, Chevron or ConocoPhillips, are typically large, highly vertically-integrated, multinational companies, which use the large scale of their production and distribution networks to reduce costs and enhance profitability. Such players have invested heavily in their fleets of drilling rigs, other equipment, and technology, including product innovation. To keep up with the leading players, utilizing their scale economies, strong research and development (R&D) capability is required. The presence of such powerful incumbents acts as a significant barrier to entry and the need for substantial initial investment to set up facilities, such as drilling rigs, also reduces the threat of new companies establishing themselves in this market. There is also a significant regulatory environment within the oil and gas market, which is restrictive to the entry of players.

Permission to explore new fields and extract oil and gas is generally given by national governments, and obtaining it may be a lengthy process. As well as regulations surrounding taxation and the issue of whether oil and gas exploration is permitted, there are also restrictions regarding environmental impact. Overall, the threat of new entrants is assessed as weak within the US oil and gas market.

Threat of substitutes

Substitutes in the oil and gas market can be considered in terms of increasing meaning of alternative energy sources (those other than oil and gas such as nuclear, solar, coal, wind). Certain substitutes can be seen to offer notable benefits in terms of environmental impact and sustainability, although shifting to renewable energy sources is costly and will take time. The production and demand of renewable energy is increasing as climate change becomes a growing issue.

However, currently, the majority of the world’s energy production uses of non-renewable sources, primarily oil, gas and coal. While power companies can alter their primary energy mix to a small extent without incurring many costs, a thoroughgoing transition to these substitutes would require investment in new facilities, which constitutes a very high switching cost. Overall, the threat of substitutes within the oil and gas market is moderate. However, as reserves of oil and gas decline over the following decades, it is expected that this will increase substantially as alternative fuels become more readily available and oil and gas products become increasingly expensive.

Degree of rivalry

Oil and gas companies are typically large, integrated players that benefit from the scale of their operations. The presence of such incumbents intensifies rivalry in the market. Due to the fact that oil and gas operations are highly energy and labor intensive, fixed costs are also high and the market is hard to exit as leaving would require significant divestments of assets specific to the business. Main players’ activities are usually geographically and vertically integrated. However, most of them present similar business models. However, the estimations for the next 20 – 30 years show the decline in use of oil and gas that should be caused by switching to more environmentally friendly, cheaper and renewable alternative sources. These combine to produce strong rivalry within the oil and gas market.