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The Guardian: From traders to tankers: who makes a mint out of $70-barrel oil

From traders to tankers: who makes a mint out of $70-barrel oil

This week petrol prices broke new records in Britain and the US, creating political fallout for President Bush and pushing UK fuel towards £1 a litre. But who is getting rich? We offer a dollar-by-dollar guide to a $2.4trillion global oil industry

Saturday April 29, 2006
The Guardian

Oil production
Oil companies Companies such as BP make the bulk of their money from the “upstream” business: the exploration and production of oil. BP reported earlier this week that it had earned $6.8bn upstream out of a total profit of $8.5bn in the three months to March 31. Saudi Arabia is the biggest oil exporter in the world and rising oil prices have swollen government coffers. Exploiting oil is relatively cheap in Saudi – less than $3 for a $70 per barrel price, and it's all controlled by the state. Last year the country made $133.5bn out of oil and spent $74.8bn on things like education ($18.7bn) and health ($7.2bn), according to figures from the Centre for Global Energy Studies. It also spent on defence: $38.5bn, some of which goes to Britain to pay for BAE systems jets. Some of the $57.1bn surplus in 2005 went to pay off the enormous Gulf War One debt Saudi ran up. The rest? US Treasury bonds and other capital markets including shares of UK stock-listed companies. The princes take personal commissions on big trade deals and their money – estimated in total at $1trillion – is invested in all sorts of assets including London property. Dubai, like other members of the UAE, has put its money into becoming a centre of finance, trade and tourism. Dubai Ports World recently bought one of Britain's best-known companies, P&O. Nigeria has become the first African nation to pay off its outstanding debts using oil revenues: it paid $4.5bn to Paris Club creditors last week. In Nigeria, private oil companies such as Shell pay for the cost of finding oil and then pay a royalty tax to the government. Venezuela is using its newfound wealth in quite different ways. Hugo Chavez, the left-wing president of Venezuela, is promoting a massive new social reform programme. He is also selling oil at knock-down rates to Latin American neighbours in a bid to separate them from Washington's political orbit.
$5.9 billion, Value of oil produced globally in a day

Massive demand for oil around the world has helped fuel the biggest shipping boom in history. Noone has yet secured the recognition of the former maritime magnates such as Onassis and Niarchos but Greeks – and Norwegians – still control the bulk of the world's tankers. The new figures of Greek shipping are men such as Loucas Haji-Iaonnou (father of easyJet founder Stelios), plus the Angelicoussis and Livanos families. Norwegian shipowner John Fredriksen is probably the nearest thing nowadays to Aristotle Onassis but he favours a low profile and is not someone who likes to be seen at society gatherings. Fredriksen has been spending some of his millions in Britain – he did once own London's most expensive property in Chelsea. Shipowners like the usual millionaire baubles such as fast cars, yachts and Impressionist paintings.But many love shipping and historically pile much of their money into even more vessels, fuelling over-capacity and bringing boom cycles to the inevitable bust. Overordering is happening right now. Owners – including BP and the other oil companies – can make $6m on one cargo carried on a typical longhaul journey from Saudi Arabia to the US east coast. The price of vessels has shot up due to heavy demand and it can cost up to $140m now to build a new one. A typical supertanker can carry 2m barrels of oil and at $70 per barrel this means a ship is moving a cargo worth $140m. Big insurance premiums have to be paid to cover the ships and cargos meaning large revenues for Lloyd's of London.
$84 million, Daily cost of oil transportation

The global centres of oil trading are in New York and London. Oil companies and specialist trading firms such as Vitol, Trafigura and Glencore buy and sell crude on the New York Mercantile Exchange and the International Petroleum Exchange in Britain. Up to 1bn barrels of oil change hands every day on NYMEX so this can involve sums of $70bn-plus. But a range of other players have emerged in these markets driving trading volumes up to record levels: hedge funds and other financial groups. They are using oil for speculation – essentially taking bets on the likelihood of oil rising or falling – in the same way as they would in traditional equity markets. This is criticised by traditionalists who believe it is increasing the volatility of the oil markets which are increasingly moving upwards on “sentiment” such as fear of a US attack on oil-producing Iran. UK pension funds have benefited, though. BP estimates its dividends and share buybacks are responsible for £1 out of every £6 flowing into those funds from UK investments.
$70 billion, Value of oil traded on NYMEX in one day

The major oil companies such as ExxonMobil, Shell and BP still control most of the global refining businesses which are centred in Rotterdam, Houston and Singapore. The crude oil is brought by tankers from producing countries such as Nigeria or Iran and turned into “products” such as aviation fuel or petrol. There are some refineries in Britain and their output is delivered often by pipeline to major distribution centres such as the one at Buncefield in Hertfordshire which suffered an explosion and fire. Road tankers then move the petrol from these centres to the motorway service stations. The refining business often moves in cycles with companies making big profits or sometimes losses on this side of the business. There is currently a slight shortage of refineries, one of the reason why the price of oil is so high. Oil companies have not been investing in refineries because they were previously not making any money. The host governments impose no specific tax at this stage in the oil transportation chain but companies pay corporation tax on profits made here and elsewhere. BP claims to have made profits of $1.6bn out of “refining and marketing” in the first three months of this year although this figure includes money made out of selling petrol, a sum said by the company to be negligible.
$210 million Cost of refining oil each day

High petrol prices cause oil companies and government the most grief in political terms but this is, ironically, a side of the business where the lowest profits are made. The supermarkets have also helped keep prices low by entering the petrol retail business, which they see as a way of bringing consumers to shop for food and clothes in their superstores. But the total number of petrol stations in Britain is in fast decline with 11 a week now being closed. Figures from the Energy Institute show the UK now has fewer forecourt outlets than in 1914 – even though combined diesel and petrol sales set a record last year. The British government takes up to 75p from the current £1 per litre in excise duty and Value Added Tax but this has not stopped motorists venting their fury on oil companies as much as Tony Blair. The announcement of record corporate profits in recent years by BP, Shell and others has been met with howls of protests – but only led governments to take even bigger taxes from North Sea production. Since the 1999 lorry drivers' blockade, the government has been careful about implementing petrol tax rises. Companies such as BP always declare they made next to no profits on their petrol retailing but no specific figures are ever forthcoming. United States Tax levels have traditionally been very low – barely 25% of the total pump price – but the right to drive in the world's largest consuming country is as sacrosanct as the right to hold a gun. President George Bush has come under heavy fire in a mid-term from opposition Democrats amid mounting public concern about petrol prices hitting $3 per gallon, very high in local terms. Mr Bush earlier this week called a halt to rebuilding stocks in a Strategic Petroleum Reserve to use in time of emergency, in favour of leaving more oil in the market for other uses. The president has also instructed the Federal Trade Commission, plus the departments of justice and energy, to investigate possible cheating on pump prices by oil companies. In January in his state of the union address, Mr Bush admitted: “America is addicted to oil.”
£24 billion, UK government fuel duty per year

$2, 400, 000, 000, 000 oil industry turnover in one year
Special reports
Oil and petrol

Useful links
International Energy Agency
American Petroleum Institute
Energy Institute

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