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Excessive profits { May 8 2001 } Original Source Link: (May no longer be active)
http://newsvote.bbc.co.uk/hi/english/business/newsid_1167000/1167805.stmhttp://newsvote.bbc.co.uk/hi/english/business/newsid_1167000/1167805.stm
Tuesday, 8 May, 2001, 09:17 GMT 10:17 UK
Oil firms: Excessive profits?
Shell claims its UK petrol stations have not made a profit for three years
At the beginning of 2001, the oil giants enjoyed a profits boom, prompting anger from motorists and accusations of profiteering.
BBC News Online asks whether the outrage is justifiable?
In the first three months of the year, BP enjoyed profits of £2.86bn, Exxon Mobil reaped £3.49bn, while Shell netted £2.69bn.
And although there may be celebrations behind closed doors, the media's high profile coverage of the profits has caused the oil firms to feel distinctly uncomfortable.
They have previously faced the wrath of protesters complaining of high fuel prices at the pump in scores of countries.
Then the government accused the firms of colluding with the protesters to blame fiscal policy for the high pump prices.
Now, in the aftermath of the fuel protests, the oil companies stand accused of profiteering.
It is a charge to which they are acutely sensitive.
Low public profile
Shell, which soon after the fuel crisis in the UK announced record third-quarter profits up 80% at $3.2bn (£2.2bn), declined to offer any senior officials for interview by news organisations at the time.
Oil firms: the sun may set on high oil prices this year
A spokesman said the company only did so when half-year or full-year results were presented.
Then, when the company published its full-year result, it blamed the oil producing exporting countries.
"Oil prices climbed steadily during much of the year due to production restraints by the major oil exporting countries," said Shell.
The appearance to outsiders is one of coyness at reporting such a strong performance at a time of such high political tension and widespread consumer anger at high fuel prices.
Whatever the reason, Shell is far from the only oil company to have kept a low public profile since September's fuel price protests.
But at the same time, usually via their websites, most have conducted detailed and vigorous defences of their positions.
Little profit in petrol
One of the oil companies' main points is that despite high pump prices and strong overall profits, they make very little profit selling petrol in the UK.
According to Esso - the UK brand of Exxon Mobil - a retailer makes only about 5p for each litre of unleaded petrol sold for, say, 84p, with the remainder accounted for by duty, VAT and the cost of production.
Some 61p of each 84p litre sold goes straight to the government in taxes.
The retailer's 5p has to cover the cost of transporting the product from refinery to distribution terminal, storage and processing and onward transportation to the retail outlets.
After that, the retailer has costs including credit card charges, which alone work out at more than 1p a litre, according to Esso.
Intense competition among retailers in the UK over several years has additionally squeezed profit margins so tightly that now they barely exist.
Shell says it has not made a profit selling petrol in the UK for the past three years.
Unpredictable earnings
Most of the oil companies' profit derives from crude oil exploration and production.
But the level of their earnings is highly unpredictable, determined by the volatile movements of a single commodity on world markets.
In 2000, with crude prices at record levels, profits were huge, with for example Shell reporting bumper profits of $9bn, a massive 85% rise on the previous year.
Exxon and Mobil led the rush to merge
But in 1998, when crude slumped to less than $10 a barrel, Shell's profits slid by 36% and Exxon's by 25%.
In their results statements for 2000, when crude oil prices peaked at almost $36 a barrel, most oil firms were keen to stress they expected average crude prices to fall in 2001.
Prices have indeed fallen, though only down to around the $30 mark.
No control of prices
An additional factor to bear in mind is that the oil companies have little influence on oil prices or markets.
Companies such as Exxon Mobil, Shell, BP, Chevron, Texaco and TotalFinaElf together account for less than 15% of world crude oil production.
The Organisation of Petroleum Exporting Countries (Opec) - effectively made up of state-owned outfits such as Saudi Aramco and National Iranian Oil Company - is a far bigger player, with about 40% of world output.
But even Opec has had only limited success in forcing prices up or down.
This is because, aside from supply and demand, crude oil prices are determined by unpredictable factors such as the weather, major political events and market sentiment.
Against long-term interest
As part of their defence of high profits, the oil firms are also arguing that high crude oil prices, although good for profits in the short term, may not be in their long term interests.
Shell profits were helped by selling chemicals units
Shell accepts high crude prices cause anger and hardship among motorists and suggests it would be bad for the company's image when this situation is sustained.
In addition, high prices encourage development of alternative energy resources, which, in time, might damage the oil producers' position as the world's dominant energy suppliers.
No subsidising pump prices
Some campaigners have said the oil firms should use some of their profits from better performing businesses - in this case exploration and production - to subsidise pump prices.
The oil giants claim this would not be allowed under competition laws because smaller, independent petrol retailers would be put out of business.
With tax forming such a high proportion of the pump price, there would also be no guarantee that governments - committed to reducing fuel consumption - would not just increase taxes to take up the slack.
Justifying earnings
Oil companies also claim, with some justification, that greater oil and gas revenue is not the only factor behind the record earnings.
Very low oil prices in 1998 prompted a wave of consolidation and restructuring in the sector as corporations sought to cut costs in the face of tumbling revenue.
About 10 of the world's biggest oil companies have now merged or are merging into five.
For several, the financial benefits of getting bigger are becoming apparent.
For example Exxon Mobil, the world's biggest oil company created through a massive merger in 2000, announced full-year profits totalling $17bn, hitting a world record.
Rationalisation
Shell - the only oil giant to have resisted a merger or acquisition - implemented deep cost cuts of its own and a rationalisation programme that saw much of its chemicals business sold or restructured.
Given the present political situation, it seems mildly ironic that strategies firms put in place to help them get out of one tight spot - low prices - have helped land them in another - that of justifying their now very strong performances.
But in the medium term, says Shell, returns on oil and gas investments are no better than "average" when compared with many other major industries.
It points to a recent Financial Times survey of the top 10 best performing industries in Europe in the past five years in which oil and gas was ranked 10th behind industries such as life assurance, media, banking and pharmaceuticals.
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