MSE News: Petrol market 'working well', despite high prices

kar999

I accept they may not be making much of their profit on the forecourts but, as you point out, they have already taken huge slugs of profit on the mark-ups at every stage of the production process from extraction through refinement to the (alledgedly rigged) wholesale price ( http://blogs.spectator.co.uk/coffeehouse/2012/09/how-oil-companies-could-be-inflating-petrol-prices/ )


Perhaps in this Global Oil Market it comes as no suprise that Australia has a similar rocket and feather experience to ourselves....

http://www.bigpondmoney.com.au/petrol-price-rip-off

.... estimates that production costs for a barrel of oil can be as little as US$2 in Saudi Arabia. While other cheaper sources such as Venezuela or Azerbaijan are around the US$5 to US$7 mark. On top of this is US$5 to US$7 in capital costs per barrel. For the more expensive fields, like the deep water wells in the Gulf of Mexico, the average combined production and capital costs vary from around US$12 to $US25 per barrel.

If the current price of oil is US$107.71 back of the envelope calculations, for crude produced in the Gulf of Mexico, seems to suggest that they are making a Gross figure of just shy of US$82 a barrel. So with US taxes and royalties around 40% the after tax profit is just shy of $US50 a barrel.

Everyone knows the worlds biggest Cartel is OPEC but high oil prices, and consequently high fuel prices, benefit the oil companies and governments of producing and non producing countries alike (including the taxes on oil company profits!).

steve-L

kar999 wrote: »

I accept they may not be making much of their profit on the forecourts but, as you point out, they have already taken huge slugs of profit on the mark-ups at every stage of the production process from extraction through refinement to the (alledgedly rigged) wholesale price ( http://blogs.spectator.co.uk/coffeehouse/2012/09/how-oil-companies-could-be-inflating-petrol-prices/ )


Perhaps in this Global Oil Market it comes as no suprise that Australia has a similar rocket and feather experience to ourselves....

http://www.bigpondmoney.com.au/petrol-price-rip-off

.... estimates that production costs for a barrel of oil can be as little as US$2 in Saudi Arabia. While other cheaper sources such as Venezuela or Azerbaijan are around the US$5 to US$7 mark. On top of this is US$5 to US$7 in capital costs per barrel. For the more expensive fields, like the deep water wells in the Gulf of Mexico, the average combined production and capital costs vary from around US$12 to $US25 per barrel.

If the current price of oil is US$107.71 back of the envelope calculations, for crude produced in the Gulf of Mexico, seems to suggest that they are making a Gross figure of just shy of US$82 a barrel. So with US taxes and royalties around 40% the after tax profit is just shy of $US50 a barrel.

Everyone knows the worlds biggest Cartel is OPEC but high oil prices, and consequently high fuel prices, benefit the oil companies and governments of producing and non producing countries alike (including the taxes on oil company profits!).

Halfon has spent the summer compiling a hefty dossier which he says shows how oil companies are charging motorists more than they should. You can read the full document here, but it says there is a three week delay between a fall in oil prices and a drop in petrol prices at the pump, and that cheaper oil was not passed to UK motorists in full for most of 2011 and 2012 even when this delay was taken into account.

It also includes a statement from a whistleblower, who approached Halfon’s Petrol Promise campaign to allege that prices are being kept artificially high in the oil market. His allegations (on p9 of the dossier) are worth a read in full. The key line is this:

‘I trade the oil market on a daily basis and every day the price is manipulated – not just the daily benchmark price but the calendar spreads that make up a large part of the daily volume. All through July, for example, there has been a massive buying-pressure on oil futures for August and September 2012. Both were trading at around a $0.5c to $1 dollar premium. This gives a false impression of the market and inflates the price of the nearby oil price, making prices higher on retail markets so pushing up the price of petrol at the pumps.’

This is far closer to the truth (its accurate, it just misses a lot of reasons)... however it has that final skewed statement because that is what 'the plebians' (voters and newspaper/magazine buyers) want to relate to.

Equally, the trader doesn't actually understand (or if he does acknowledge) HIS role in the wider company.

The WHOLE ISSUE IMHO is the TAX.... when you are dealing with a product that has 70% plus TAX applied anything else is background noise!

This might take some explaining ....
I guess we agree that petrol pump sales are actually a very minor part of a supermajors profit. The markup on bottled tap water or vended 'tea' is orders of magnitude HIGHER.

The same is true of utilities (gas/electric)... Why do Centrica or BG Group or GDF Suez even bother?

In some of these companies (I read all energy company annual reports for my work but I'm not going to extract all the info, please check if you don't believe me or simply want to see the context) ..
well over 50% of the profit is generated by under 10% of the staff!

Of all the supermajors only Exxon makes a significant profit from downstream and that is refinery and chemicals.

We also need to separate historical reasons from present reasons.
Historically - We had Standard Oil and it's reasons were to control the whole supply chain and hence dictate pump prices. This however is ancient history in business terms. I'm not going to go further in ancient history since there are many good reads on this like "The prize" and its no longer relevant.

The other reasons:
image
Believe it or not the oil companies want to be seen as good corporate citizens by the consumer! Given todays google and amazon tax situations the oil companies pay staggering amounts of tax, employ hundreds of thousands of people (adding income tax) and have the continual environmental lobby to content with in terms of IMAGE... I'm not arguing the merits and demerits of the environmental issue here except to point out that given the HUGE TAX the governments are benefitting MORE than the oil companies!

risk management
Most profit is in Exploration and Production and Trading.
These are also the riskiest areas....
Some risks can be controlled (or not).....
Some can be technically mitigated (dry wells)
Some are hard to mitigate (FOREX risk, political risk in developing nations and even closer to home in the form of windfall profit tax)

A dry offshore well might cost on average say US$ 50,000,000 ... the average exploration hit rate is 1/4 so for each success they drilled 3 dry or non commercial wells.

Building a production facility (such as Cygnus currently in development in the UKCS) costs upwards of 5 billion US$

There is a real risk that having spent 5 billion on a gas field development that GAS PRICE, TAX or a whole load of other non controllable risks change making the whole field non economic.

There is also a real risk that the Geoscientists have actually got it wrong (it is not even a risk but a certainty) and instead of containing the expected 18 billion cubic metres of gas it contains 10 (or 25) .....If its 10 billion it will never repay the investment!

The same goes for trading, RWE and DONG (not familiar UK names but significant companies) both posted multi-billion trading losses last year! (In the annual reports) ....

This then brings us to the more stable part of the 'business', refinery, power and pump sales!

A major reason these are kept (as well as employing people = image) is because if oil price drops and E&P lose money they can get more profit in pump sales to mitigate.

Hence the reluctance to drop prices as quickly as the crude price drops! Crude price dropping means billions of loss of predicted earnings but of this is propped up by a billion of extra revenue in pump sales the shareholders may not DUMP shares and undermine the company share price!

Now the crux.....
The whole FREE MARKET actually relies on their being more than one supplier! In the last 20 years the majority of the oil companies have actually disappeared!

its a free market and if company A do not prop up their share price they will cease to exist!
The general public might be aware of BP and Amoco.... but are they aware of Oryx or the other 20 companies that have been adsorbed in the last 20 years while Exxon-Mobil and Total-Fina-Elf have been doing the same!

If they do not keep some extra profit in pump sales following the drop in oil price they will cease to exist as a company as some other company simply does a takeover... either hostile or not!

Meanwhile.... regardless the Chinese are quite happy to increase their share capital in energy companies. Over the last 10 years a very considerable percentage of European assets are increasingly owned by the Chinese investment companies and CNOC... and given China is communist this means by the Chinese people (or in other words government).
While Europe has de-nationalised oil companies we have actually just transferred 'nationalisation' to China.

Rather than comment directly on what that means or does not consider it has passed from a perhaps unhealthy synergy where at least European governments national interests in providing fuel/European jobs/and European energy security passed into the hands of a government with no such aims or symbiosis.

cheesy*wotsit

Hows about we tax the cyclist instead of the motorist? At least cars can take more than one person, and is providing a payment in vehicle duty, insurance and petrol purchase whereas the cyclist currently pays nothing. They could be insured a minimal figure a year for accident insurance, taxed to use the roads and a service fee to keep their cycle up to scratch (a minimum of working lights, hi vis markers, etc). I could go on...

Tilt

Oh God Cheesy... before you get absolutely ridiculed by the pro cyclist brigade, can I say that I kind of agree with you. I certainly think that a cyclist should have some kind of insurance to cover damage (yes they can clip door mirrors and run into the rear of parked cars smashing tail lights, i've seen them) and even injury. But how would you enforce it?

The only thing that could be done quite easily, is to enforce the law regarding the road condition of the bike itself. I.e. Tyres, lights and brakes. Any infringements should immediately attract a fixed penalty AND, if necessary, the seizure of the bike unless it is in a legal condition to continue.

taxiphil

Tilt wrote: »

But how would you enforce it?

Like they do with cars.

Number plates, mandatory registration, roadworthiness and cyclist proficiency tests, ANPR, random breathalysing, being pulled over if anything appears less than perfect, and so on.

Why not?

cheesy*wotsit

taxiphil wrote: »

Like they do with cars.

Number plates, mandatory registration, roadworthiness and cyclist proficiency tests, ANPR, random breathalysing, being pulled over if anything appears less than perfect, and so on.

Why not?

It's got to start somewhere and the government will realise eventually that there's this new revenue stream in the form of cyclists. I doubt it will make it any cheaper for us car owners but surely with procedures and laws in place it will make it safer for everybody - and that's the point.

Bowling_4_Gold

cheesy*wotsit wrote: »

Hows about we tax the cyclist instead of the motorist? At least cars can take more than one person, and is providing a payment in vehicle duty, insurance and petrol purchase whereas the cyclist currently pays nothing. They could be insured a minimal figure a year for accident insurance, taxed to use the roads and a service fee to keep their cycle up to scratch (a minimum of working lights, hi vis markers, etc). I could go on...

Hahaha. What about that 20% I pay on the things I buy? Just disappears into nowhere, doesn't it. What about my income tax, NI contributions, council tax etc... All just vanishes. ALL money spent on the road comes from the poor motorist's pocket, doesn't it?

Maybe once you see how much a lot of cyclists pay in tax from the above, as well as keeping their car on the road (which a lot of cyclists do) your attitude will change?

I say long live the taxation on motorists. There are so many negative externalities associated with car travel compared to the positive externalities associated with cycling. It's about time the true cost of motoring is realised in the prices that motorists pay. If you can't afford 10p extra per litre in fuel every few months, move closer to work or ditch the car.

This is coming from a cyclist and motorist (doing circa 400 miles a week in my car)

redux

MSE_Jamie wrote: »

"The OFT says steep petrol and diesel prices at the pumps have not been caused by a lack of competition"

Read the full story:

Petrol market 'working well', despite high prices

I wonder if they're going to end up with egg on their faces.

LONDON — Authorities have raided the offices of several oil companies as well as an industry service provider, as part of a broader inquiry by the European Commission into potential price manipulation.

http://www.nytimes.com/2013/05/15/business/global/europe-raids-oil-companies-in-price-manipulation-inquiry.html?_r=0

MPs and motoring groups have called on UK regulators to investigate claims that oil giants may have been linked to price-fixing for more than a decade.

It follows a raid on the offices of BP, Royal Dutch Shell, and Norway's Statoil by European anti-trust regulators.

http://www.bbc.co.uk/news/business-22533993