We are in the midst of the second great
energy crisis. The first one ran from 1974 to 1982. The current one began in
2003 and is still underway. While the differences are significant, the key
similarity lies in the high price of crude oil. To understand what’s going on,
let’s consider what happened in creating each crisis and how the first crisis
was resolved.
To do so, we’ll rely on Michael Porter’s
tried-and-true “industry forces” framework. This framework tells us that the
competitive dynamics of every industry determine its profitability and the
prices that it can charge for its products. Porter initially identified five
forces, then added a sixth. The six forces are:
- The rivalry among
producers.
- The power of those
who supply the producers.
- The power of the
customers who buy the products.
- The availability of
substitute products.
- The degree to which
new competitors can enter the industry.
- The power of
non-market forces — such as governments — to distort markets.
Before we explore these six forces, let’s
identify the producers and customers in the energy industry. Most of the producers of energy are state-owned oil companies, which often outsource day-to-day
operations to multi-national energy companies headquartered in the U.S. and the
EU. The largest of these producers is Saudi Aramco.
Their customers are the
multi-national oil companies. Those customers are responsible for shipping,
refining, and marketing the finished products, ranging from gasoline to
petrochemical feed stocks. Companies like Shell, Exxon-Mobil, and BP often own
oil leases in North America and the EU, and they profit from the production of
that crude. But, the vast majority of the crude oil they handle today is
bought from the foreign, state-owned producers. The multi-national oil
companies have their own customers: The businesses and consumers who use the
refined products to run their vehicles, homes, and factories.
That brings us to the first of the six
forces: the rivalry among producers. The global oil market is
extremely capital-intensive, with huge economies of scale and long lead times
between a decision to add capacity and the actual addition of that new
capacity. ...
