This report is an industry analysis on the United States oil & gas industry but does not delve into the industry related exploration and production pre-refining activities.
The focus will be on the major producers such as Shell, Mobil, Texaco, Gulf and Exxon and how they are affected by the 5-forces model analysis. The report also analyzes the competition structure of the major competitors to see if there is a strategic group mapping in the industry. And finally, the future trends of the macro-environmental factors such as the economy, technology and governmental regulation are reviewed to see how they influence the industry and what opportunities or threats are presented for future trade.
The media today has guaranteed that everyone knows that oil prices are hitting new barrel highs and the world demand is stellar - but, does that equate into industry profitability? One recent television news show stated that only the recent string of hurricanes that have wreaked havoc over the southern and central United States and other Mother Nature related occurrences could bring to an end another year of record profits due to oil rig work stoppages, rerouting of oil transports, spill clean up and other disaster relief related costs. This report tries to answer if assumptions such as these could be true.
The oil and gas industry are driven by the price of crude oil. The industry was shaped in the late 1990's when the price of oil lagged around $10 a barrel forcing many smaller independent companies into seeking bankruptcy protection and the larger oil companies like Shell, Mobil, Texaco, Gulf and Exxon to look for partners through acquisition or merger. This entailed reduced refining and exploration activities and also less gas production. However, today, the industry must contend with a new global economy that has increased demand for energy to record levels which has allowed a robust rebound in the oil and gas industry. "Oil prices advanced closer to $50 a barrel Monday as domestic and foreign supply concerns persist amid strong global demand." (Foss, 2004)
The rebound can be traced at all levels of the oil industry. "Leading the charge are the world's largest integrated oil companies: Exxon Mobil, BP, and Royal Dutch/Shell. But aggressive independent exploration and production companies such as Apache and Devon Energy are also well-positioned to take advantage of improving prices." (Oil Industry) In most cases, new investments in the oil industry sport high Returns On Investment as can be seen in the integrated company list (See Appendix A) which provides profitability indicators for the oil industry giants.
Five Forces Model
Michael Porter's concept known as the "five forces model" provides insights into the relationships between competitors within an industry; in this case the oil industry.
Michael Porter Five Forces Model)
There is little threat of new entrants cutting into Shell, Mobil, Texaco, Gulf and Exxon's market share. The industry is fairly oligopolistic where only a few giant firms control the majority of the industry. There are international companies to contend with, but even on the global scale, the oligopolistic holds true. In the oil industry, each organization can be significant in size and power but the industry has only a few dominant firms. As mentioned, the lower oil prices of the 1990's consolidated the hold by the larger organizations on the industry.
The world oil producing nations are very influential in the supply and demand factors associated with oil production and consumption. Saudi Arabia is the world's largest supplier of oil and combined with the Organization of Oil Producing Countries (OPEC) having consolidated, the supplies are even more controlled. "The OPEC Statute, written when OPEC was formed 1960, declares that OPEC is dedicated to providing a stable petroleum market, with steady supplies to consumers, reasonable prices and fair returns to investors in the oil industry. In pursuit of these aims, OPEC has for many years maintained a limit on the oil produced by its Member Countries. This has provided for a relatively stable oil industry, with reasonable prices. But OPEC is concerned that factors outside of its control may disrupt this stability. This includes taxation, which now constitutes the largest part of the price of oil products in some countries." (Home Page OPEC)
Crude oil reserves
United Arab Emiratest
Source: OPEC Annual Statistical Bulletin 2001
Home Page OPEC)
The world consumption and buyers outlook have increased dramatically in recent years as the new global economy creates new nation of producers and consumers, each trying to move into the twenty-first century as an economic power of their own. With the anticipated third world nations desire to expand production of their own, new oil demands will be even greater in the future. "With global oil demand roughly 82 million barrels a day, the amount of excess oil production available is only about 1%, according to many analysts, leaving the industry a slim margin for error in the event of a prolonged supply interruption." (Foss)
The question looms, will the world eventually run out of oil? "Oil is a limited resource, so it may eventually run out, although not for many years to come. OPEC's oil reserves are sufficient to last another 80 years at the current rate of production, while non-OPEC oil producers' reserves might last less than 20 years. The worldwide demand for oil is rising and OPEC is expected to be an increasingly important source of that oil." (Home Page OPEC) Therefore, eventually substitute products will be needed.
The world does contain enormous caches of unconventional oils that could be substituted for crude oil if necessary. For example, the Orinoco oil belt in South America has been said to hold staggering amounts of a sludge known as heavy oil but it contains heavy metals and sulfur that would need to be extracted prior to use. Thus, as of today, the oil industry seems to be in a secure position that no new substitute options will become available unless at a limited basis at best. Surprisingly, these lack of substitute products and supply controls have the industry giants very amicable. Rivalry is not the same as it is in the airline industry for example. The companies are not cutting each other's throats so to speak. In fact, governmental regulation has to constantly monitor the oil industry giants for collusion and other price fixing screams. The oil industry giants like Shell, Mobil, Texaco, Gulf and Exxon therefore can be considered as having the ability to work well together. The industry objective is to search the earth geologically in search of new reserves of the black gold so that everyone can profit.
Major Competitors & Strategic group mapping
The oil industry giants like Shell, Mobil, Texaco, Gulf and Exxon have to think and act in an entrepreneur's global marketplace. The roles of international institutions like the oil industry giants must contend with multiple world trade rules and regulations. In this case, globalization and entrepreneurship on a world scale could be considered a positive development yet it could also be seen as a threat to the strategic group mapping of the oil industry. Today, whole nations are utilizing the entrepreneurial line of reasoning which allow the oil giants to open competition on a global scale. Shell, Mobil, Texaco, Gulf and Exxon have to contend with the whims of the OPEC nations and other pricing fluctuations. Situations such as the war in Iraq, tax concerns for Russian oil producers, scenarios throughout Africa where entrepreneurial methods of oil manipulation are controlled by corrupt or incompetent governments all tear at the infrastructure of the oil industry.
As globalization increases the world's demand for oil, it will be critical for the oil producing nation's to maintain a steady cost per barrel while at the same time meeting the high production demands. There are few new technological advances or regulatory controls available to overshadow the basic economic formula of supply and demand. OPEC promises to control pricing for the industry.
The problem with that statement is that OPEC has not been particularly effective at controlling prices through previous crunches. "The United States has lost more than 10 million barrels of oil production in the past two weeks due to Hurricane Ivan, which shut down and damaged platforms in the Gulf of Mexico. The blow to domestic output, while expected to be short-lived, comes as analysts worry about OPEC's inability to swiftly and sharply increase production in the event of a more significant and prolonged supply disruption." (Foss) Companies such as Shell, Mobil, Texaco, Gulf and Exxon will use these price fluctuations by passing on new costs to the consumer. "The price of oil is up roughly 75% from a year ago, while gasoline is 22 cents per gallon more expensive than last year at $1.85 per gallon." (Foss)
In other words, since the oil companies have the ability to fix prices to match supply and demand…