Digging At Oil
By Richard Hunter | 01 May, 2008
Accompanying the quarterly results from oil companies recently, comes the inevitable outbursts in the press.
“Prices at the pump are an outrage”, “Surely given their bumper profits they could afford to lower the cost of petrol?”, “Why does it cost so much in the UK compared to abroad” and so on – a three monthly tirade, which is usually backed up with broadcast business reporters standing forlornly in a petrol station forecourt.
This time, perhaps the myth has been put to bed once and for all.
There was a large element of balanced reporting yesterday (following on from the extremely impressive numbers from BP and Shell, consolidated today by British Gas) making the quite simple point that in terms of the price at the pump, customs duty (and then VAT on this) accounts for about two-thirds of the price. The remaining fraction is split between the oil company and the retailer. Indeed, the oil companies have been maintaining for some years now that these particular parts of their businesses are a small percentage of what they do and, in any event, are usually run flat or at a small profit margin.
Oil is a finite resource and as the oil price continues to test new highs, of course the oil companies will benefit. The fact remains, though, that it is becoming increasingly difficult to locate new oil, get to it and then avoid paying an even higher price than at present to the country in which it is being mined. Add political unrest and the irony that it takes oil to get oil out of the ground (machinery and so on) and the performance of these oil majors becomes more impressive.
From a wider perspective, there is every chance that either BP or Shell (or both) forms a core part of our portfolios and, even if not, they will almost certainly form part of our pension plan, if it is being managed in the traditional way.
Given the fact that the shares have underperformed over the last few months and it is currently something of a breath of fresh air to hear of a British brand continuing to excel, perhaps the perspective becomes a little clearer.
