Examination of external environment of Oil industry and evaluation of major challenges the industry is faced to

Executive summary

Oil industry is facing difficult times because of pressure from all around. This examination of macro environment of oil industry will help to understand what the present challenges in oil industry are. The analysis will show that oil industry is heavily influenced by many sides which include political, environmental, ecological and price leverage.

The author argues that oil industry is based on two main factors. One factor is world stability and political status, the other is future importance of stock level and new technologies which will affect prices. Oil is one of the most important energy in the world. It drives world’s macro economy and affects the GDP. The biggest change in oil industry started in 70’s of 20^th century when OPEC became one of the most important factors for balancing oil market. Oil industry challenges derive from:

1. changes in world map (wars, political influence on oil producers, mergers in industry)
2. changes in technology (new techniques in drilling, substitute energy)
3. Changes in environment (world warming, education of people...)

The author will focus on external environment of oil industry with influences from external factors and evaluation of major challenges which can and will affect oil industry future.

Introduction

The main fact is that the oil industry will end someday. It’s just a matter of time. Oil consumption is rising but nobody knows for sure what the level of stocks of oil under ground is. Oil as a source of energy started with establishment of Anglo Persian Oil Company in 19^th century. Important forces soon found out the importance of oil for economical and industrial development. The importance of access to oil was found in the 1^st world war when oil was driving the war.

After the war was formed first cartel “seven sisters” which included Exxon, Shell, BP, Gulf, Texaco, Chevron and Mobil. Those companies were main column in oil industry until the country producers didn’t agreed on its own cartel OPEC which is important today. OPEC is today’s most important organization at setting price level and oil quantity on the market. They produce 90% of all oil.    

The industry is affected heavily and it’s necessary to review their current strategy and search for future advantage.

The report will present an overview of oil industry and give conclusions for seeking opportunities for future development and strategy changes in the future.

The report is based on information’s provided on the data from the articles of oil industry changes and from other sources found on web and in books.

The author will first examine the macro environment with STEP analyses to help to understand the macro environment of the industry and shows the relevant specific factors.

The second part focuses on major challenges and the author will for examination of industry environment use Porter’s five forces framework, strategic group analysis and identification of competitors.

The report finishes with conclusion with recommendation for oil industry strategic options.

Examination of macro environment of oil industry

 Macro or external environment can be analyzed through several factors. The factors are:

-      social factors

-      technological factors

-      political factors

-      economic factors

For assessing the importance of context and dynamic the author will use Fahey and Narayan’s model of microenvironment

Figure 1: Fahey and Narayan’s microenvironment model[1]

To analyze the macro environment with Fahey and Narayan model we have to use four stages:

1. scanning the environment
2. monitoring specific trends
3. forecasting the future dimensions
4. asses current and future changes

Because of specifics of oil industry the examination of Sociological, Technological, Economic and Political factors[2] will have to be extended with Environmental factors [3]which heavily affect the oil industry.

Figure 2: STEEP analysis of oil industry

Conclusion on steep analysis

Oil industry is largely affected by technological factors with respect to substitute energy which are at the moment still not very influenced, but there are huge investment in research for comparable energy such is oil. Despite announcements of end of oil reserves the new techniques for drilling in few decades ago unimaginable places in oceans are very efficient and costs for searching are lowering since the companies are using gps, scanning the surface and other new technologies which are almost 100% sure.

Sociological factors are affected with ecological factors. Life stile is changing; people are aware of effects from global warming and are changing behavior. Despite that the new countries such are China, are not affected with global warming climate changes and the life stile for using oil is growing. Sociological affects are different in developing countries which are shown in ecological factors which are important in developed countries and not so important in third world countries.

Political factors are probably one of the most important. Because of importance of oil industry in US, where the use of oil is the most important driver of the economy the influence from politics are affecting and changing map of the world. The power from controlling oil fields is strategically important for developed countries and those countries are ready to do anything to control oil industry.

Those changes also affect economical factors which are drivers for price. Price of oil was very cheap when the “seven sisters” cartel was controlling the market. Changes arrived in 70’s when OPEC started operate and the effect of price changes became strong in 80’s.Economiclas factors are very affected with political ones.

Conclusion of external environment

OPEC as a consortium of countries which produces oil are with level of production setting the global oil price which is affected also with political decisions of countries controlling other producers. Until there is no substitute for oil the oil industry will have big influence on prices and world map. At the moment oil industry is still oligopoly. With new technologies developed, the market will become more stabile and the prices of will be set by market and not by politics or consortiums.

Description of challenges

Major challenge in oil industry is control over the market. Challenges derive from external environment, near environment and from organization. The cycle of challenges in external environment is in controlling resources which were changed in 70’s when OPEC started to operate

Figure 3: Oil industry life-cycle curve[4]

Past challenges

Because of the control over all oil production and transport the prices were low. In US was the consumption of oil in huge quantities and there were no need to watch over it. The main challenge in oil industry at that time was control over production.

Current challenges

Since the OPEC organization establishment the major challenge is balance between price and production and global economy status. Oil producers have everything under control and there were no substitute products, stocks were high.

Also challenges in near environment which will be analyzed with Porter’s five forces model

Figure 4: Porter’s five forces model for analysis of near environment[5]

The model is used as a model for analyzing the near environment and was basically meant for analysis for new entrants to assess whether or not entry into an industry is efficient and possible.

The extent to which new entrants could enter into industry is very low. The barriers of entry price and political control are very difficult so there is almost no possibility for new entrants to achieve successful entry in industry. Between the players which are already in the game there is just a matter of investing in new technology and drilling options. But there is big possibility for substitutes. Substitutes could be new energy such are biofuels, GTL, ethanol, fuel cells… It’s just a matter of time when those alternative fuels will be complementary to oil.

The bargaining power of suppliers is very high because the OPEC is controlling most of production and setting prices, and there is a low barging power of buyers, because they have to use oil and there are no alternatives yet.

Major future challenges

The challenges from internal part of oil industry are very problematic. The organization capabilities are almost unlimited. It’s just a question how much the pipe should be open.  The problem will arise in future challenges because oil is unrenewed source. When it will stops there will be only chance to find alternatives or looking for those sources out of earth.

Oil industry structure

	Perfect competition	Oligopoly	Monopoly
Concentration		A few firms
Entry and exit barriers		Significant barriers
Product differentiation	Homogeneous product
Information		Imperfectly available information’s

Figure 5: Oil industry structure[6]

As already discussed, there are few firms controlling the industry. The barriers to entry are significant, producers are connected so there are few information’s available but there is very homogeneous product. The differentiation of products is limited.

Changing nature of industry boundaries

In 1970’s oil represented 45% of all energetic sources in the worlds. Despite big changes in new technologies is today’s share still 40, 8% of all energetic sources.[7] Despite this data, there is still big demand for oil, especially because new markets like China are opening. The impact of technology is the key driver to those numbers. Substitutes will rise but this shouldn’t affect oil production because the global market is rising.

Figure 6: Worldwide energy resources[8]  

Strategic group analysis

The term strategic group is defined a s a cluster of firms within an industry following the same or a similar strategy[9]

Membership rest upon configuration of resources which are common to group members. These configurations of resources come to act as mobility barriers[10]

Figure 7: Mobility barriers[11]

Because of similarities in strategic group in oil industry there is small number of groups:

Strategic group 1: Main oil producers

In first strategic group the author would put actors who are connected with OPEC. In this group are oil producers who are connected in one organization. They are old players from Middle East, Africa and from South America. They held 78% of oil reserves

Strategic group 2: Other oil producers

Non-OPEC which include US producers, Russia, Canada and other companies which were dominating before 1970’s. They are holding 22% of oil reserves.

Strategic group 3: Other energy producers

Producers of gas, coal, nuclear fuel, renewable and either alternative fuel.

Strategic group 4: Alternative energy producers

New technology research/production of alternative fuel to oil. AT the moment they are not important players, but they will become big and important very fast.

Figure 6: Strategic group map of energy producers: Present situation

As we can see from strategic group map the main group is OPEC group which is controlling most of the world with energy. Other energy producers are not so geographical covered, but are still very important players. Other producers are more on the side of the OPEC producers and are delivering its products mainly in the region for local consumption. The biggest question is strategic group 4. They are still very small but they could be very fast on down-right corner. This could posses a threat to OPEC oil producers and all producers of non-ecological fuels.

Key success factors

Key success factors are meant by

-      functionality

-      quality

-      safety

-      delivery

-      price

Figure 6: Identifying key success factors (Grant 2005, p.93)[12]

Analyzing oil industry through Key success factors shows us again how difficult the analysis of oil industry is. Functionality of the product is meant only for one purpose, quality is the issue which is difficult to measure, but most of the companies are using this part for marketing and for contrast as ecological fuel. Buyer is the last and buyer demands only lower price and delivery. Key success factors in oil industry are only delivery and price which are important. Quality is just a matter of differentiation.

SWOT Analysis

Figure 8: SWOT Analysis for Oil industry

Conclusions on oil industry analysis

Statistical information’s shows that oil consumptions are raising. On one side this is due to population growth, on the other side this information is contradictive to tendencies of developed countries on lowering energy consumption, safety and ecology. Those data are showing dependence of economy efficiency and access to one of the most important energy in 20 and in 21^st century.

Oil industry is facing difficult times making strategic conclusions for the future. Most of the earth was researched and the technology is so good that there are small spots uncovered reserves of oil. Oil industry has to make plans for time when oil will stop. This is not only oil industry problem but this is also mankind problem. Oil industry has to invest heavily in search for alternative fuels. At the moment they have enough resources to support that research.

Second point is what industry will do when this moment arrives. One of solutions is investing the money in other industries such is tourism. Saudi Arabia is already investing huge amount of founds into development of tourist structure. It’s obvious that the time for this is coming soon. There are skeptics who are saying that there are reserves for less than 40 years. If this is true, companies in this industry have to find solutions for this industry and find its way in new energy industry.

References

(2006) OU Business school UNIT 1

(2006) OU Business school UNIT 2

(2006) The Strategy reader, Second edition

(2005, April) Oil in troubled waters, Economist.com

(2005, April) Consider the alternatives, Economist.com

(2005, April) The bottomless beer mug, Economist.com

(2005, April) Not so schocking, Economist.com

(2005, April) The incredibile shrinking companies, Economist.com

(2003) OPEC Public release, opec.org

(2006) Crude oil future prices, opec.org

(2006) EIA Annual Energy review eia.doe.gov

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[1] Unit 2, p.10

[2] STEP analysis

[3] STEEP analysis

[4] The life-cycle curve Unit 2, p. 31

[5] Unit 2, p 20

[6] Adopted from Grant 2002, Unit 2 p.28

[7] Crude oil supply, www.eia.doe.gov

[8] Economist article: Consider the alternatives, April 2005

[9] McGee, 1985; McGee and Thomas, 1989 1986

[10] Caves, Porter, 1977

[11] Caves and Porter, 1977, Unit 2 p. 50

[12] Unit 2, p. 60