Oil firms: Excessively high profits?

Shell claims its UK petrol stations have not made a profit for three years

With the world's oil giants reporting record profits, it might be reasonable to assume the Exxon Mobils and Shells of this world would be celebrating.

But the past few months have been distinctly uncomfortable for the big oil companies.

First, they feared being blamed for the high fuel prices which led to scores of protests around the world.

Next, they faced the wrath of governments for appearing to collude with protesters, whose main gripe in the UK had been the level of tax imposed on fuel.

Now, with pump prices for the motorist remaining high, the oil companies stand accused of profiteering.

It is a charge to which they are acutely sensitive.

Low public profile

Shell, which on 2 November announced record third-quarter earnings up 80% at $3.254bn (£2.24bn), declined to offer any senior officials for interview by news organisations that day.

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 - but the appearance to outsiders was one of coyness at reporting such a strong performance at a time of such high political tension.

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' principal 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 five pence for each litre of unleaded petrol sold for 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 five pence 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 one pence a litre, according to Esso.

Intense competition among retailers in the UK over several years has additionally squeezed margins so tightly that now they barely exist.

Shell says it hasn't 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.

This year, with crude prices high, profits will be much improved.

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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, most oil firms have been keen to stress they expect average crude prices to fall next year.

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 if this situation was 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.

Some 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 beginning to tell.

For example, Exxon Mobil said its third quarter profits had been boosted by $200m in cost savings as well as a further $430m in net after-tax gains from asset sales required by regulators as a condition for approving the merger.

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.