Oil Drilling and Gas Extraction Industry in the US Analysis

DATE September 16, 2012 TO Patricia Bennett, Supervising Principal FROM Connor Sims, Associate SUBJECT Oil drill & Gas Extraction perseverance in the US Analysis (21111) This report presents information regarding the assiduity, the primary operator of inunct and gas field properties. The constancy supplys its key buyers, the immanent Gas Distribution (22121) and the Pet functionum fine-tune (32411) industries, with crude oil and natural gas. The industry continuously battles a shortage of available oil. In addition, many major oil fields have been in use for decades, slowly waning.Currently, the industry grosses among the most profitable in the US despite these and similar obstacles. The benefits of investing here potentially outweigh concerning risks. Because of the esteemed nurse of the industrys products, consistent pray for its products, and its positive near-future outlook, diversification into this industry may produce rewarding profitability in the short-term. High P roduct determine Crude Oil Prices The key economic driver for the Oil Drilling & Gas Extraction Industry, crude oil prices, determines much of its profitability according to deliver and demand.Price trends in West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, display the growth of its cheer in the past 3 geezerhood and past decade. An average barrel of crude oil grew from $26. 18 in 2002 to $61. 95 in 2009, $79. 48 in 2010, and $94. 87 in 2011 (Airlines, 2012). JP Morgan analysts project average annual prices above $99 in upcoming years (Sethuraman, 2012). Such upward growth points to lucrative profits. Natural Gas Outlook Natural gas production accounts for 41. 6% of industry revenue in 2012. Prices n natural gas reached a 10-year low in April this year, but have erupted by more than 70% since (Hargreaves, 2012). Natural gas has seen an abundantly large output due to recent discoveries of natural gas in the Appalachian Basin this large supply has kept prices relatively low recently, leaving opportunity for even higher profitability in future years. reproducible Demand Fueling US Industries The Oil Drilling & Gas Extraction Industry is the sole supply industry for its two demand industries, Petroleum purgation and Natural Gas Distribution (Hersch).The US internally consumes 19,150,000 barrels of oil per day, doubling the worlds second largest consumer, China (Index, 2012). IBIS innovation describes the industrys demand industries as mature, assuring the stable demand for our industrys products (Hersch). Rising Exports, Foreign Buyers Current international relations appear conducive to this industrys profitability. In 2011, for the first time since 1949, the US exported more refined oil than it imported (Winters, 2012) this evidences the success between the supply industry and its demand industries flesh out above.Additionally, oil exports to China will surge as it industrializes quickly. Chinas exponentially growing demand leads to worldwide price emergences (Hersch). Any increases, particularly increase this substantial, raise the WTI average price per barrel, increasing profitability. Positive Current Standing Favorable Market Concentration The four largest firms in the industry comprise of about 30. 0% of total revenue (Hersch, 2012). Market share concentration is low, allowing firms of any size to portion the industrys $345. 9 billion revenue this year.The militant aspect of entering this industry would not be a difficult obstacle to overcome. Profit Margin The Oil Drilling and Gas Extraction Industry reels in a significantly larger margin in comparison to related industries. 46% of all industry revenue goes to profit, higher than the average for the stainless mining sector, 39. 2% (Hersch, 2012). In 2008, the industry returned the 7th highest profit margin among US industries (Hargreaves). Profit margins have increased in the past 5 years as result of rising crude oil prices. Risks and Concer ns Barriers of EntryMost major oil and gas producers integrate services beyond drilling and extracting many dualize as shade or distribution firms, circumventing demand industries en route to more direct profitability. New firms lacking this versatility may find an obstacle upon entry to the industry (Hersch, 2012). Additionally, firms in this industry must specialize in exploration and discovery for oil and gas resources. Firms may struggle finding initial success in this role due to the limited nature of resources. Long-term Resource Depletion Peak oil refers to the prime of any fields production, after which goes into terminal decline.Most major US oil fields are beyond peak oil. The largest US oil field, Prudhoe Bay, has been depleting since 1979 (Prudhoe, 2012). The US Energy Information Administration indicates much production, particularly in the Alaskan North Slope, depends on world oil prices (Energy, 2012). Geophysicists and politicians debate over specifications regardin g overall US peak oil, arguing the year in which US peak oil occurred. International Comparison In addition to the US peak oil situation, the US Oil Drilling and Gas Extraction Industry faces heavy distant market competition.In 2011, the US ranked 3rd in oil production, behind Saudi Arabia and Russia (Energy, 2012). Saudi Arabias OPEC governor expects Saudi output to rise steady beyond 2030 with a 1. 5 million barrel per day spare production capacity then (Energy, 2012). Russia holds the worlds largest natural gas reserves, and its fuel exports have steadily increased since each year since 1999 (Energy, 2012). Conclusion Despite entry risks and threats of limited resources, evidence supports the likelihood of success for us to diversify into the industry under certain stipulations.A new firm will implicitly face the challenge of exploring for land not already claimed by another firm. Additionally, alternative methods of goose egg will irrefutably have to replace oil drilling and g as extraction within an uncertain future the quelling supply simply cannot match the demand forever. Two central obstacles hesitate immediate diversification a barrier of entry and a negative long-term outlook. However, we must decide whether the benefits outweigh the concerns. World prices of oil and gas and Chinas growing demand directly affect profitability.Because evidence above shows substantial progress in both of these drivers with a very positive short-term outlook, diversification must be considered. If presence in the industry can be established quickly and will remain only until profitability falls, I recommend diversification. References Airlines For America (2012). Annual Crude Oil and Jet Fuel Prices. http//www. airlines. org/Pages/Annual-Crude-Oil-and- Jet-Fuel-Prices. aspx.. Retrieved September 16, 2012. Energy Information Administration (2012). invent Alaska North Slope oil production at risk beyond 2025 if oil prices drop sharply. Today In Energy. http//www. ia. gov/todayinenergy/detail. cfm? id=7970 Retrieved September 16, 2012. Prudhoe Bay Fact tabloid (2012). British Petroleum. www. bp. com/assets/bp us /A03_prudhoe_bay_fact_sheet. pdf Retrieved September 16, 2012. Hargreaves, Steve (2012). Natural gas prices surge 70%. CNN Money. http//money. cnn. com/2012/07/24/investing/natural-gas- prices/index. htm. Retrieved September 16, 2012. Hersch, Laura. (2012). IBIS World Industry Report 21111. Oil Drilling & Extraction In the US. Retrieved September 16, 2012 from IBIS World Database. How the US Uses Oil (2012). Alternative Energy. Retrieved September 16, 2012. ttp//alternativeenergy. procon. org/view. resource. php? resourceID=001797 Index Mundi (2012). http//www. indexmundi. com/g/r. aspx? c=us&v=91. Retrieved September 16, 2012. Sethuraman, Nathan (2012). diadem Increasing numbers see oil below $100 in 2013, 2014. Reuters. http//www. reuters. com/article/2012/06/27/us-oil-poll- idUSBRE85Q14720120627. Retrieved September 16, 2012. Winter , Michael (2012). U. S. Exported more gasoline than imported last year. the States Today. http//content. usatoday. com/communities/ondeadline/post/2012/0 2/us-exported-more-gasoline-than-imported-last-year/1. UFav7BhGhgI