Are we paying for oil profits?

Apr 28, 2005 02:00 AM

by Adrian Lowery

As the oil giants report another set of massive profits, many motorists will be murmuring familiar grievances and calls for a windfall tax will re-emerge.
The level of UK fuel tax is the greatest bete noire for the car and transport lobby. Protests around England and Wales, with the Farmers For Action Group and haulier firms' trucks blockading refineries, have provided a fresh reminder of the nationwide action at fuel depots of 2000.
Motorists pay roughly 80 pence in tax on every £ 1 they spend on petrol, and this in spite of the fact that Chancellor Gordon Brown has frozen fuel duty in the last two Budgets -- but a 1.22 pence increase can be expected in September when the freeze thaws.

Unjustifiable profits?
There is also the perception that petrol companies reap mega-profits from ever-higher oil prices as they exploit their near-monopoly power and people's dependence on cars. BP, the world's second-largest oil company, earlier reported a profit of $ 4.95 bn (£ 2.59 bn) in the first quarter of the year, equivalent to £ 1.3 mm an hour and above City forecasts.
Shell has also exceeded expectations with group profits of £ 2.92 bn for the first quarter -- up 28 % from a year ago. Martin O'Neill, chairman of the Commons Trade and Industry Select Committee, earlier this year called for a windfall tax on North Sea oil and gas producers.
Meanwhile, a few weeks ago petrol prices at UK pumps reached their highest-ever levels, when a litre of unleaded petrol reached 86 pence in some regions of the UK, as world oil prices soared. The price reached 85.3 pence in 2000, the year of the blockades.

Anger at the pumps
So is anger at the super-profits justified? How much of the remaining 20 pence in the pound represents pure profit for the oil companies?
The oil majors' profits stem largely from the selling of crude oil, rather than petrol prices - fuel retailing and wholesale oil production are run as two separate businesses and cross-subsidising is illegal. Shell claims it makes virtually nothing from petrol retailing in the UK and a recent survey has shown the UK has the cheapest pre-tax pump prices of 11 main EU countries.
Esso has said that a retailer makes only about 5 pence for every litre sold and most of that is taken by costs. The oil companies therefore argue that any windfall tax will simply drive investment away from the UK and put jobs at risk.

The ratchet effect
But critics say that oil companies exploit rising oil prices in a ratchet effect: they are less likely to reduce petrol prices when “the volatility is downwards”.
The price of US crude is now around $ 52 a barrel, having reached nearly $ 58 in early April, six times the level at which it traded in the late 1990s. This has provoked calls, from Gordon Brown among others, for OPEC to free up supply. However, analysts and OPEC members allege the bottleneck is not in crude oil supply but in refining capacity -- and it is this, together with China's booming demand and recent fears over US reserves, that is pushing up prices. This, more than fuel duty, is the single biggest factor that might eventually see motorists paying £ 1 a litre.

Impasse
The petrol price debate is intractable because there are so many parties involved and their various agendas are irreconcilable -- OPEC with its control over oil supplies, the oil companies maximising profits, petrol retailers working on tight margins, drivers and haulage firms hammered by soaring pump prices and the Government with its need for tax revenue and to answer a strengthening environmental lobby.
As far as fuel duty is concerned, it could be argued we are paying the price for previous generations' laxity: fuel taxation has merely played catch-up throughout the 1980s and 1990s from luxuriously low levels previously when the price of petrol simply did not reflect the cost of its use.
But this is scant comfort to businesses and drivers who have little alternative but to pay up.

Source: Associated Press
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