Wednesday, Aug 06, 2008 at 22:27
Hi Eric
I’m not going to defend oil companies; but I’ll defend the facts!
Exxon announced net income of US$11.68 bln not US$30 bln (facts always get in the way of a good story!), but as we have discussed before that tells you nothing other than it is a big number. What was the return on capital invested? Quoting big numbers and arguing it is excessive is the stuff of the talk-back radio jocks. Makes for good ratings, but the story is usually devoid of any meaningful analysis.
The largest part of Exxon’s profits came from pumping oil out of the ground. Now if people are willing to pay US$ 145 per barrel for it, than it stands to reason they will make money. After all the Saudis have been selling it to the world in years gone by at US$ 20 per barrel and they still made a small fortune, so at US$120 plus it is fair to say producers will be doing exceptionally
well. Short of telling the Chinese they can’t buy anymore, extra supply coming on stream or some other energy source competing with oil I guess we are stuck with the price where it is. Why would Exxon sell it for anything other then what people are willing to pay for it? They don’t set the price; they get what people are willing to pay.
Oil is the major input into refined petroleum products so it stands to reason that if the price of oil has risen 7-fold over the past few years than the price of refined petroleum products will be higher.
What gets so confused in the fuel ‘debate’ is what oil producers earn selling crude oil, and what refiners make from refining crude oil into petroleum products. Not all oil producers are refiners;
Caltex is an example, they pay whatever the going rate is for crude oil and make it into something you can put in your fuel
tank.
Now Exxon is actually a refiner, as
well as an oil producer. But if you take the time to look at the company’s revenue and where it is generated you will see that its earnings from refining and marketing activities fell by around 55% this quarter. That flies in the face of claims that refiners are profiteering at the expense of consumers during this time of high prices.
Whether the price of fuel should be 5 cents higher or lower today then they should be is academic; if you look at the average price paid versus our regions benchmark for both diesel and ULP you will see that the earnings margin is consistent. But don’t expect the same price falls in diesel as it does not get the same marketing discounts that ULP does; the reality is that volumes sold to retail consumers in Australia is nominal in terms of overall fuel sales.
Over time falls in the price of oil will feed into the price of refined products, but there are many other factors that will influence the price of refined product. The Australian dollar, for example, has fallen almost 6 cents in the past two to three weeks and this has a negative impact.
I’ve said before that the fuel debate takes on shades of the argument that the world is flat; plausible theory, lots of people agree so it must be right. So believe what you will, but rest assured the fact is that there is very little money made from refining crude oil into petroleum products. I’ve highlighted before that
Mobil (of Exxon-
Mobil) closed its Port Stanvac refinery in
Adelaide because it simply could not get a suitable return from upgrading it to meet new standards.
In the future the arguments won’t be about price, it will be about security of supply……but that’s another story!
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