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Porter’s Five Forces The Threat of New Entrants (Low) Essay

There is a great amount of economies of learning and scale in the oil industry for Example BP has been searching for oil since 1901. They invest a huge amount in up-to-date technologies making it difficult for new entrants to compete. His obviously requires huge capital investments in R&D as well as start-up cost, for example a truck just to carry the oil costs over $1,000,000.

There is a lot of regulation in the industry especially with regards to inter-continental politics which further reduces new entrants although in the USA there is less which allows for small firms (under 10 staff) to enter in areas such as Alaska and Texas. There is also a history of incumbent response; BP were fined jointly with TNK $35,200,000 for price fixing. Overall these factors lead to a very low risk of threat of new entrants.

Supplier’s Power (High)

A lot of oil in the world which is held in countries which are politically unstable and there is a risk that they may seize oil like Iran did to BP in 1951 or more recently Venezulea seized one of Exxon’s major projects. OPEC is a cartel which controls the amount of oil sold and produced. It controls 40% of the world’s supply of oil and holds a lot of power especially as BP also purchases oil from OPEC countries.

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Buyer Power (Low)

As the good is not perishable oil companies do not need to sell it immediately and can therefore influence the flow of oil and also its price. Customers also have few substitutes so there is always a strong demand for the product. Furthermore individual buyer power is low as there are large amounts of customers who purchase low volumes. Demand is set to rise despite a weakening economy, which is shown by rising energy prices. The saving grace for customers is the low switching costs as products are undifferentiated and customers don’t have to sign a contract when they fill up there tank.

Overall the buyer power is low because even though there are low switching costs OPEC affectively controls the price of oil so will increase this for the oil suppliers.

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