The world’s oil industry is one of the substantial components of the world economy and has a significant impact on other sectors’ development. According to Mu (2020), since 2017, the USA is the largest oil-producing country globally; before the United States became the world’s largest oil producer, Saudi Arabia held the top spot for several years. Therefore, the last two decades have been characterized by changes in the world oil market associated with fluctuations in petrol prices and changes in the amount of its production by different countries.
Saudi Aramco, which the government of Saudi Arabia owns, is the world’s largest oil producer. Mu (2020) affirms that the reserves are estimated at 270 billion barrels, which is about a quarter of the world’s total. Moreover, in 2018, Saudi Aramco was named the world’s most profitable company, ahead of Apple and the Industrial & Commercial Bank of China, with $ 111 billion in profit, on a total of $ 355 billion in revenue (Mu, 2020, p. 54) Thus, this company has one of the highest performances in the oil sector.
Industry leaders include companies worldwide and are owned by both the public sector and private investors. These companies account for an impressive share of global oil production. According to Mu (2020), the main competitors of Saudi Aramco are Exxon Mobil Corp., Royal Dutch Shell, and Chevron Corporation. Such indicators as the level of oil production, profit, and the size of capitalization are singled out as comparison criteria. Exxon Mobil Corp is the largest American privately-owned oil company globally, and one of the world’s largest corporations in terms of market capitalization. Moreover, the Dutch-British oil and gas company Royal Dutch Shell competes with Saudi Aramco. Mu (2020) claims that it has over $ 5 billion in annual profits and an estimated market capitalization of $ 250 billion, making it one of the world’s largest private companies. An equally significant competitor is the American energy company Chevron Corporation, which has annual revenues of $ 4.1 billion. Mu (2020) notes that a $ 220 billion capitalization gives it a place at the top of the largest oil companies. Thus, the main competitors of Saudi Aramco are the greatest petrol producers in the world. producers in the world.
Nevertheless, no matter how impressive production and profit indicators the above companies have, their capitalization sizes are significantly inferior to Saudi Aramco. According to Mu (2020), in 2019, the size of Saudi Aramco’s capitalization amounted to a record $ 1.88 trillion. Simultaneously, Mu (2020) asserts that the similar figure of its competitors is notably lower than the Saudi company and amounts to Exxon Mobil – $ 0.33 trillion, Royal Dutch Shell – $ 0.25 trillion, and Chevron Corporation – $ 0.25 trillion. Thus, despite the impressive performance, these Saudi Aramco competitors are vastly inferior to the Saudi company in terms of capitalization.
Porter’s Five Forces Framework
Porter’s methodology is used to analyze and predict the profitability of Saudi Aramco. Using five aspects specific to each industry, Porter described how a company could maintain its profitability and remain competitive over the long term. According to Grant (2018), these five forces include competition from substitutes, the threat of entry, the rivalry between established contestants, the power of suppliers, and the power of buyers. Thus, the power of each of Porter’s forces is defined by several vital structural variables.
Competition from Substitutes
In the oil industry, a substitute product is an alternative energy source to petrol, which is used to generate electricity and as fuel. These contain nuclear energy, coal, hydrogen, and other renewable energy sources, including solar and wind power. According to BP Statistical Review (2016), consumption of alternative oil sources has increased over time between 2000 and 2015. However, their expansion faces many challenges, including a vast dependence on natural conditions. Thus, Clemente (2018) asserts that the advent of vehicles operating on an alternative power source did not show significant changes in the demand and consumption of fuel oil. Therefore, problems associated with threats to substitute products, while highly likely in the long term, seem less likely, at least in the short to medium term.
Threat of Entry
The oil industry has a low threat of new entrants. Thus, Malik (2018) claims, the primary reason for this is the need for huge capital to enter the market. The creation of extractive enterprises and the development of mechanisms for a global supply network require significant investments, making it difficult for newcomers to start a business in the oil industry. Moreover, according to Grant (2018), Saudi Aramco, with access to the largest and most affordable reserves globally, has an undeniable cost advantage over newer entrants. Thus, these aspects are severe barriers to entry into the oil industry, limiting the pool of potential participants and allowing firms already in the industry to generate economic profits.
The rivalry between Established Competitors
On the one hand, the oil industry competition is very intense because the incentives to fight are relatively high. According to Chandler (2018), the major oil companies are relatively equal in size, capacity, and capability, heightening competition. On the other hand, cooperation in the oil industry can have many positive effects. Malik (2018) notes that oil companies work together to minimize risk, facilitate access to capital and technology, and expand market power. Thus, despite the intense competition, which can negatively affect the industry’s profitability, cooperation can mitigate the adverse effects of competition.
Bargaining Power of Buyers
Oil producers control oil prices, so the bargaining power of buyers is relatively weak. Pitatzis (2016) states that until consumers can use an alternative energy source instead of oil, buyers’ market power will be substantially low. However, as a rule, the buyers of hydrocarbons are national and international oil companies and countries. According to Malik (2018), such influencers are in a strong position to bargain on prices, demand better quality or value-added services, and set industry players against each other at the expense of industry profitability. Thus, while oil producers retain significant control over pricing decisions, oil buyers have relatively low bargaining power, which is increasing.
Bargaining Power of Suppliers
The suppliers to the oil industry and consumers are large international and national oil companies. According to Pitatzis (2016), these companies’ ability, including Saudi Aramco, to influence oil prices and the industry is high due to their involvement in all business segments of the oil industry. Therefore, their market power is significantly higher than that of buyers. Mu (2020) notes that an equally important player on the supplier side is the Organization of the Petroleum Exporting Countries (OPEC), an organization that includes the major oil-producing countries, which own at least 70% of the world’s proven oil reserves. Nevertheless, in this regard, it is worth mentioning buyers’ bargaining power, which affects the influence of suppliers. Thus, according to Malik (2018), national governments, that is, consumers, can have a particular impact on suppliers’ corporate decisions, which can reduce their bargaining power. Therefore, an oil-based economy is hung upon the operations of oil corporations, thus, they are capable of only exercising some degree of control.
Thus, based on the oil industry analysis according to Porter’s Five Forces Model, the following conclusions can be drawn. First, there are significant barriers, including high capital requirements and high sunk costs, to enter the industry. Second, although substitute products are entering the energy market at an ever-increasing pace, they can only affect the industry’s profitability in the distant future. Third, there is intense rivalry between the existing players in the oil industry, but at the same time, there are opportunities for cooperation. As for buyers’ and suppliers’ bargaining power, these characteristics are significantly dependent on each other since large international and national oil companies act as both suppliers and petrol consumers. Both aspects have a modest impact on industry profitability. In general, it can be concluded that, despite the above risks, the profitability of the industry has average indicators and does not significantly depend on the negative trends in the oil market. Accordingly, Saudi Aramco’s profitability will be moderate until an alternative energy source that can replace hydrocarbons is discovered in the future.
Competitive Strategies of Oil Companies
A competitive strategy is essential for a company to reduce the harmful effects of rivalry and increase profitability. According to Mu (2020), for this, the largest oil companies increase investments in projects for exploration and production of oil, equip drilling platforms and oil refineries, and conclude long-term contracts for the supply of oil. Furthermore, among the stated goals of the most influential companies, including Saudi Aramco, there is a significant growth in investments in the development of alternative energy and a gradual increase in the share of alternative energy sources in companies’ total resources. Mu (2020) asserts Saudi Aramco’s full use of its production capacity in the oil industry requires the company to design its products’ logistics better, as every stage needs sizable investment. Moreover, one of the critical challenges in the oil industry is the environmental issue, which has recently attracted particular attention. That is why Saudi Aramco’s challenge is to show its commitment to preserving the milieu and contributing to the improvement of the environment. Thus, developing an effective strategy can bring a company success and increase its competitiveness and income.
Key Success Factors of the Company
To identify the key factors for the company’s success, it is necessary to determine the consumer’s desires and its methods of resisting competition. The consumer makes specific requirements for the quality of the oil production and, accordingly, its price. However, the customer market is quite large, as oil is one of the world’s vital energy sources, so Saudi Aramco has no difficulty selling its product. According to Mu (2020), in 2019, the company’s volume of oil exports amounted to $ 159.7 billion. Thus, the consumer’s desires meet the capabilities of the supplier, which is one of the key success factors of Saudi Aramco.
A significant measure of countering competition is government incentives for Saudi Aramco. Mu (2020) argues that since this only oil producer in Saudi Arabia mainly forms the country’s budget, the government, interested in strengthening the company’s position in world markets, has reduced its tax burden from 85% to 50%. Thus, against the background of other competitors for whom taxes are continually increasing, this step is beneficial. Moreover, according to Mu (2020), Saudi Aramco is one of the most advanced and technically competent oil companies globally, making it nonpareil for a privileged position in the global transition to clean energy. Therefore, the Saudi company has many comparative advantages over its competitors.
BP. (2016). Statistical review of world energy. Web.
Chandler, J. A. P. (2018). Petroleum resource management: How governments manage their offshore petroleum resources. Edward Elgar Publishing.
Clemente, J. (2018). The link between crude oil and gasoline prices. Forbes. Web.
Grant, R. M. (2018). Contemporary strategy analysis (10th ed.). Wiley & Sons.
Malik, T. (Ed.) (2018). Competitive analysis of the global oil and gas industry using Porters Five Forces Model. The 7th annual conference of economic forum of entrepreneurship & international business. Library & Archive Canada. Web.
Mu, X. (2020). The economics of oil and gas. Agenda Publishing.
Pitatzis A. (2016). Porter’s Five Forces Model for oil and gas industry. Energy Routes. Web.