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| What other industry increases its profits when the cost of its prime raw material increases? An examination of the accounts of the major oil companies such as BP, Shell, Gulf etc will all show significant profit improvements at times when the price of crude oil increases. The starting point of my argument is that the price of crude is governed by OPEC and it follows that whenever the OPEC prices increase the non-OPEC suppliers increase their price in line. Is there any justification for such a price increase? My argument is that there is no justification. Let us start at the beginning for example considering the oil from the North Sea. The cost of extraction is a fixed figure and thus if the price of crude increases in the market the profit of the company owning the North Sea fields will increase. If one considers the situation of company such as BP it then sells on to its wholly-owned downstream operations such as those refining petrol or those producing plastic materials at the new crude oil selling price. These operations increase the selling price to the public to reflect their increased costs. The effect of this is to maintain the profit margins of the downstream operations whilst increasing the margins of the oilfield divisions. If one considers a company like BP has a whole if they maintain the price of the petrol to the public at a time of increasing crude oil costs what will happen within that the company accounts is that the margins of the oilfield divisions will increase whilst the margins of the downstream divisions will be compressed but the overall effect will be neutral to their profitability. The large companies will of course argue that some of the crude that they use has to be purchased from OPEC companies, true but in view of the fact that most of these large companies, if not all, have significant cross shareholdings with the OPEC companies. This means that whilst they have to pay more for their crude they in fact recoup the cost out of dividends or other bonus arrangements. They, of course, at times when they earn quite exorbitant profits do their best to spread this profit in a variety of ways. Stock write-downs, provisions for possible losses and of course by paying senior staff salaries and bonuses at quite indecent levels that are not related to the business risks or their hard work. A.P.Wiseman FIOD.FBIM wisemanapv@aol.com |
Oil Price Increases
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