Define the relevant industry: The Oil Service Industry The oil/energy industry is one of the largest industries in the United States. According to the Department of Energy (DOE), fossil fuels (including austral, oil and natural gas) makes up more than 85% of the energy consumed in the U. S. As of 2008. Oil supplies 40% of U. S. Energy needs (DOE, 2014). There are two major sectors within the oil industry, upstream and downstream. Upstream is the process of extracting the oil and refining it.
Downstream is the commercial side of the business, such as gas stations or the delivery of oil for heat.
Oilfield service companies assist the drilling companies in setting up oil and gas wells. In general, these companies manufacture, repair and maintain equipment used in oil extraction and transport. More specifically, these services can include: Seismic Testing which involves mapping the geological structure beneath the surface; Transport Services is operative given both land and water rigs need to be moved around at some point in time; Directional Services becomes relevant because not all oil wells are not drilled straight down, some oil services companies specialize in drilling angled or horizontal holes.
The Organization of Petroleum Exporting Countries (OPEC) is an intergovernmental organization dedicated to the stability and prosperity of the petroleum market. OPEC has 11 member countries. The world’s top exporters of petroleum are Saudi Arabia and Russia (OPEC, 2014). Identify the participants and segment them into group, if appropriate: The balance of power in the oil industry is shifting toward buyers. Oil is a commodity and one company’s oil or oil drilling services are not that much different from another’s. This leads buyers to seek lower prices and better contract terms.
While there are plenty of oil companies in the world, much of the oil and gas business is dominated by a small handful of powerful companies. The large amounts of capital investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There isn’t a lot of cut-throat competition between them, but they do have significant power over smaller drilling and support companies. Substitutes for the oil industry in general include alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even nuclear energy.
Oil is used for more than just running our vehicles, it is also used in plastics and other materials. When analyzing an energy company it is extremely important to take a close look at the specific area in which the company is operating. Also, companies offering more obscure or specialized services such as seismic drilling r directional drilling tools are much more likely to withstand the threat of substitutes. Slow industry growth rates and high exit barriers are a particularly troublesome situation facing some firms.
Until quite recently, oil refineries were a particularly good example. For a period of almost 20 years, no new refineries were built in the U. S. Refinery capacity exceeded the product demands as a result of conservation efforts following the oil shocks of the sass (Cross, 2014). At the same time, exit barriers in the refinery business are quite high. Besides the scrap value of the equipment, a refinery that does not operate has no value- adding capability. Almost every refinery can do one thing – produce the refined products they have been designed for (Investigated, 2014).
Assess the underlying drivers of each competitive force to determine which forces are strong and which are weak and why: Success in business depends on whether firms understand the market structure in which your company operates. Their ability to map the contours of a market, and then maximize profit given that structure, is just as important as understanding demand, production, and costs (IW1518 WWW LA). Oil and gas prices fluctuate on a minute by minute basis, aging a look at the historical price range is the first place you should look.
Many factors determine the price of oil, but it really all comes down to supply and demand. Demand typically does not fluctuate too much (except in the case of recession), but supply shocks can occur for a number of reasons. When OPEC meets to determine oil supply for the coming months, the price of oil can fluctuate wildly. Day-to-day fluctuations should not influence investment decisions in a particular energy company, but long-term trends should be followed more closely (OPEC, 2014). Determine overall industry structure:
The energy industry is not any different than most commodity-based industries as it faces long periods of boom and bust. Drilling and other service firms are highly dependent on the price and demand for petroleum. These firms are some of the first to feel the effects of increased or decreased spending. If oil prices rise, it takes time for petroleum companies to size up land, setup rigs, take out the oil, transport it and refine it before the oil company sees any profit. On the other hand, oil services and drilling companies are the first on the scene when companies decide to start exploring (Energy. Ova) . Analyze recent and keel future changes in each force, both positive and negative. The oil industry is easily influenced by economic and political conditions. If a country is in a recession, fewer products are being manufactured, not as many people drive to work, take vacations, etc (Cross, 2014). All of these variables factor into less energy use. The best time to invest in an oil company is when the economy is firing on all cylinders and oil companies are making so much money that using excessive amounts of energy themselves has little effect on their bottom line.
Some analysts believe that rather than analyzing energy companies, you would just predict the trend in energy prices. While more analysis is needed for a prudent investment than simply looking at price trends in oil, it’s true that there is a strong correlation between the performance of energy companies and the commodity price for energy. Additionally, an aging workforce coupled with a boom in new oil and gas development is creating challenges for energy companies in the areas of recruitment, retention, and training.
The oil and gas industry is facing a shrinking talent pool for those with specialized expertise. A large percentage of the individuals who have the institutional and technological know-how’ of their organization’s specific risks and operations are looking toward retirement. Nearly 90 percent of senior human resources executives at 22 top international oil and gas companies believe this problem is one of the top business issues facing their companies (Cross, 2014).
Identify aspects of industry structure that might be influenced by competitor, by new entrants, or by your company: Barriers to entry like patents, licenses, and economies of scale are a few of the factors that create an advantage for existing companies over new arrivals OWE WAS LA). There are thousands of oil and oil services companies wrought the world, but the barriers to enter this industry are enough to scare away all but the serious companies. Barriers can vary depending on the area of the market in which the company is situated.
For example, some types of pumping trucks needed at well sites cost more than $1 million each. Other areas of the oil business require highly specialized workers to operate the equipment and to make key drilling decisions. Companies in industries such as these have higher barriers to entry than ones that are simply offering drilling services or support services. Having ample cash is another barrier – a company had better eave deep pockets to take on the existing oil companies. Conclusion: The oil and gas business continues to be one of the most dynamic and critical industries in the world.
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