Oil company profits are not the problem

Shell has just announced a record profit of $25bn. The knee-jerk reaction to this is to gasp and ask how they dare rip us off. In fact, oil companies make very little money at the petrol pumps.

Cost of a barrel of oil (159 litres) - £ 42
Petol yield per barrell 51.4% - 82 litres
Net earning at the pump per barrel of oil - £ 74 *
Estimated profit for oil company - 1.5p per litre (£2.39 or $4 per barrel)

The price of petrol is mostly comprised of >50% tax charged by the government. The oil companies make most of their money in the speculative and dangerous business of extracting the oil from the ground.

So where do the oil companies spend their profits? A small percentage of the profit goes into shareholder dividends and bonuses for employees. Most of the money is invested back into infrastructure and finding new oil reserves.

The profit margins aren't all that big either. To work this out divide net income by total revenue. This will give an indicator of the fraction of earnings that are lost due to costs and taxes. The graph below shows how the profit margin of the energy industry compares with other businesses
Banking comes out top. Banks do provide a useful service but there is a dark side. How many people have been charged a fine because bills have been deducted from their bank account before their cheques have been paid in? If this does happen don't let them get away with it. In most cases the charges can be appealed quite easily. Go to your local citizens advice office. They are experienced in dealing with cases such as this and will help you draft letters that will get your money back. It works, trust me.

Anyway, the knee-jerk reaction to oil company profits should be avoided. Get onto the chancellor about the price of petrol. The real problem with the oil industry is in the environmental damage caused by its day-to-day procedures and by accidents and, of course, by the contribution to global warming. Oil companies do not pay for the oil they take from waters owned by the UK. They pay for a license to operate but what they extract they keep. It all amounts to subsidy. And I haven't mentioned the practices used by oil companies to destabilise oil rich regions. The behaviour of oil companies in countries such as Nigeria is a whole other can of worms which you can open here.