The force of the “bargaining power of the buyer” describes a buyer’s
strength and power to influence the price and the quality a product or service
is sold at. Buyers´ power is highly dependent on the market and industry a
seller is acting in, the sellers´ individual market position and products and
the sellers´ location and distribution channels. Furthermore, a group of buyers
hold a lot of power if products are homogenous and switching costs are low.1
The main buyers of oil and gas can be divided into two groups: buyers
from the oil industry and non-industry buyers. Industry internal buyers are for
example refineries and other oil companies, whereas non-industry buyers are for
instance countries, distribution companies, traders or the normal person buying
fuel at a gas station.2 These
two groups have different bargaining strengths.
The bargaining power of non-industry buyers is relatively small:
Non-industry buyers are usually not able to affect the prices for oil
and gas, since for the pricing of oil, mainly three important benchmarks are
used: the Brent Blend, the West Texas Intermediate (WTI) and Dubai/Oman.3 These
benchmark prices already take oil quality and distribution costs into
Brent Blend is the benchmark used for around two-thirds of the worldwide oil trade.
It refers to oil from the North Sea, which is used for refining diesel fuel and
gasoline. The required sea-based extraction enables cheap and easy distribution
This oil is mostly sold in Europe, Australia and Africa.5
The WTI is the main benchmark
for oil extracted from wells in the United States and North America in general.
It refers to oil, which is primarily used for gasoline refining. The WTI price
is influenced by the fact, that distribution is quite expensive, because the
oil is land-locked and needs to be transported to harbors via trucks or
pipelines first, before it can be shipped elsewhere.
The Dubai/Oman oil benchmark covers
oil from Dubai, Oman or Abu Dhabi. The crudes are sour and therefore their
quality is not as high as for the other benchmarks. This is the main benchmark
for oil delivered to the Asian market.6
Prices for oil extracted from other sites than the ones included in the
benchmarks are usually pegged to one of these reference prices, depending on
the location of extraction and if the oil is land-locked or extracted on high
sea, the quality of the oil and the market it is sold at. The reason for that
is, that these benchmarks are relatively stable and already include the most
important considerations for trading oil: quality, original location and
Therefore, the non-industry buyers are only able to affect the oil and
gas prices, if they buy in large quantities (e.g. countries) or if the oil/gas
company is legally or economically depending on the buyer (e.g. Gazprom in Russia).8 Although
the commodity oil is quite homogenous and the buyer does not have any switching
costs (no difference between buying from company/gas station A or B), the
linkage of the prices to the benchmarks still prevents the buyers to exercise
too much power through preferences. For that reason, price and quality, both
covered by the benchmark prices, are the main premises for a purchase decision.
Industry internal buyers generally have a higher bargaining power than
non-industry buyers. Refineries and oil companies are able to dictate prices
and oil quality due to the fact, that they usually own parts of the extraction
company, the extraction rights or form a Joint Venture with other oil or infrastructure.
Joint Ventures also built an opportunity to cope with legal or political restrictions
or problems and to gain other location related advantages (like extraction
M. (1998), p. 24-26.
Pitatzis, A. (2016).
4 Kurt, D.
R./Breul H. (2014).
6 Kurt, D.
Pitatzis, A. (2016).
M. (2014), p. 78.