Thursday, May 15, 2008

Oil Companies Hit by Rising Costs.

CERA, the Cambridge Energy Research Associates, has published a report showing that the costs of capital equipment, ranging from refinery parts to oil-rigs and platforms, has in some cases doubled since 2005. The escalating fuel prices and according huge profits reported by Shell and BP - a total of around $7 billion in the past year - have caused anger among drivers and haulage company proprietors, and yet it seems that some of the apparently generous returns will need to be fed-back into the business to maintain oil and fuel production and to develop new potential oil-fields. Meanwhile, in Russia lurks the spectre of lack of investment, and the oil-companies there are calling for tax-breaks which will encourage the development of the Russian oil-industry.

Major new projects are being put on-hold by their cost-burden, and this may well impact on oil-production across the world and thus on the price of oil, which is now edging toward $130 a barrel. The chairman of CERA, Daniel Yergin, is quoted as saying that production costs are a significant factor in driving-up the price of oil, and a shortage of skilled workers has resulted in rising salary costs too, all of which must be borne by the industry and hence passed-on to the consumer.

The British economy is in a pretty pickle, by the looks of things. The price of basics, particularly food and fuel increases relentlessly, and a U-turn on the 10% tax-rate has cost the government almost £3 billion. I watched an item on the news yesterday evening to the effect that the total amount of money being borrowed by the Chancellor, Mr Darling, is around 38% of the national GDP, a mere 2% shy of the 40% watershed which Mr Brown has pledged not to break.

The price of petroleum products at the "factory gate" has increased by 25% during the past 12 months and the price of fuel "at the pump" has risen by 2.7% per month. As I have commented before, it is an intriguing coincidence that in terms of the numbers, the price of a barrel of oil in $ is about the same as that of a litre of diesel in £, i.e close to $127 and £1.27, respectively.

To compound the price of fuel, there is a shortage in refinery capacity across Europe, due in part to the recent strike at the Scottish Grangemouth facility, along with a serious fire at a refinery in Finland. Goldman Sachs commented last week that we are due for a "super-spike" in the price of oil to $200 a barrel as producers become unable to maintain pace with "blistering demand" from China and the Middle East.

There is a huge contrast in the price of fuel between the UK and the US (which works out to around $8 and $4 respectively for a US gallon), and this reflects directly the tax differential imposed between the two nations. In Britain around 70% of what is paid at the pump ends up in the government's coffers in the form of fuel-duty and VAT. It is reckoned that the average British driver pays £900 a year in fuel-duty.

However, I doubt the government will reduce fuel-taxes despite the pain to motorists' pockets, since it has to get its money from taxes generally to support the economy, banks, welfare system including the NHS, and keep the country stable. Thus we can all simply expect to pay more and more for everything, leading to an eventual destabilisation of society.

Related Reading.
[1] "Petrol prices set to rise as refineries struggle." By James Kirkup.
[2] "Oil companies struggle with spiralling costs." By Robin Pagnamenta.

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