Energy Crisis 2.0

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Energy Crisis 2.0

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.  It's also a business that's subject to depletion — that is, while the world is awash in untapped oil reserves, any one oil field has a finite life and that life can range from short to very long depending on the technologies used to extract the oil, and the geology of the oil field itself...

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