I was trying not to get drawn into a discussion about the oil companies, in part because I work for one of them, but the proposition that gas prices are increasing so that oil companies can make more money is at best, simplistic, but in truth, demonstrates a complete lack of understanding about how the industry works or the factors that influence the pricing. For better or worse here are some things to consider….
First up, you will be aware from your newspaper and TV that commentators always talk about oil in terms of what is costs per barrel. The price of crude oil this morning in the US is $64 per barrel. A barrel contains 159 litres (or 42 gallons). How much profit do the oil companies make on that? The answer is around 5%. It varies depending on where the crude oil is coming from. If it’s the Middle East the margins are higher than say Russia or Nigeria.
I posted earlier about what the production costs are so the next question is where does the bulk of that $64 a barrel go? In fact it goes to the Government of the country that owns the oil. Oil companies pay a levy to extract oil. I work for the Chinese company Sinopec and we extract oil in Siberia and pay over half the barrel income to Russia. The rest of the barrel price after profit/costs goes in tax and the agents fees in handling the sale of the oil.
So if what I say is true, why is it that oil company profits are rising? Two reasons. One is that more oil is being sold, so although profit margins are reducing, the volume of sales gives the impression of increasing profits. The second factor relates to the way in which commodities are traded. Although the oil price is $64, to buy it you make a bid. The oil companies then weigh up the offer and consider the volume, the frequency of order and where they are shipping it and work out the most favourable bid to them. Sometimes they sell well below the barrel price because of the size of order. However around two years ago the United States made a decision to significantly increase it’s oil reserves and has encouraged US refineries (who turn the crude oil into gas etc) to outbid other countries in the market place. This surge in demand as any economist knows will drive up price, particularly when only 77 million barrels of oil can be on the world market each day. No oil company is going to turn down an extra $20 a barrel if someone is stupid enough to offer it.
A couple of other things to consider. China used to sell alot of cheap oil but now it needs to buy to sustain its economy. So there is less cheap oil coming onto the market but more demand. This allows countries (not just oil companies) to make a few more dollars. Also the quality of crude oil outside of the middle east is more expensive to turn into gas and increasingly refineries are having to buy this because they can’t obtain enough ‘light’ crude for the reasons above.
But finally, the most immoral act happens at the end of this sorry chain of money making. Governments add tax to the gas price. In the US 30 – 50% and in the UK about 80%. That’s the real scandal not the oil firms.
...but hey I'm an engineer not an economist
