The barriers to entry in the oil and gas sector are extremely strong and include high resource ownership, high startup costs, patents and copyrights in association with proprietary technology, government and environmental regulations, and high fixed operating costs.
Barriers to Entry
Barriers to entry are aspects of an industry that include any institutional, government, technological or economic restrictions on the entry of potential participants into that market or industry. There are two types of barriers to entry: supply-side and demand-side barriers. Companies in the oil and gas sector make a product that virtually everyone needs and the sector is faced with supply-side barriers to entry, so it's hard for a potential oil and gas company to enter the sector as a supplier.
Demand for oil and gas is high, and the number of suppliers remains low due to the high barriers to entry. This gives existing oil and gas companies a huge advantage and huge profit potential.
The specific barriers to entry faced by the oil and gas sector are as follows:
- High startup costs mean that very few companies even attempt to enter the sector. This lowers potential competition from the start.
- Proprietary technology forces even those with high startup capital to face an immediate operating disadvantage upon entering the sector.
- High fixed operating costs make companies with startup capital wary of entering the sector.
- Local and foreign governments force companies within the industry to closely comply with environmental regulations. These regulations often require capital to comply, forcing smaller companies out of the sector.