Industry Insight: Energy's Money Machine

With relatively few major competitors and individual control over price, much of the profitability for an individual company comes from operating efficiencies and economies of scale. Due to this, Exxon Mobil has an advantage because of its sheer size. After all, revenue almost reached half a trillion dollars last year.

Threat of substitutes: This force will be of increasing importance as the world begins to push for alternative-energy sources to replace fossil fuels. This won't happen soon, though, so there's only a slight risk. Alternative energy is too expensive to compete with oil or natural gas.

Switching costs are also extremely high at this point. Converting homes and cars to accept alternative forms of fuel is too expensive or simply unavailable for most people.

Some players have begun to develop alternative-energy technology in hopes of staying ahead of the curve. Chevron and BP have started solar, wind, biodiesel and geothermal projects. Exxon and ConocoPhillips seem more stubborn to adapt.

Bargaining power of customers: Customer power is an interesting topic in the oil and gas industry. Price sensitivity is extremely high. However, customer dependence is also extremely high. While customers may not enjoy paying high prices for gas for their cars or to power factories, they have no other choice.

Since oil is a commodity, switching costs within the industry is non-existent. This reinforces the fact that oil and gas prices are a simple matter of supply and demand. While customers may claim that price increases will lead to decreased consumption, the actual decrease is far too small to have any real effect on profits, which is illustrated by Exxon's record earnings when oil prices spiked to an all-time high a year ago.