Shell reports record profits

The point is fine. I never argued that. I only quibbled with a minor means to make it.

I will also state that it sometimes takes more than the incentive of the potential to make billions.

They should create a reality television show about it like American Inventor.

 

Sorry to dredge this up (oil patch humor!), but I've often thought about chiming in on these threads. In what seems like another lifetime ago, I worked as an investment banker. In the oil and gas group. And while it's been a long time since I've followed the industry closely, I do remember a few things.

One is that Shell didn't record record profits because they're screwing you at the pump. They made their money because the oil that they extract from the ground fetches such a huge price now, a price set by an international market over which they have very little control. If anything, they did so well this quarter *in spite* of the fact that they aren't making a killing selling gasoline, not because of it.

If you read the story, you'd see that profits at the refining and marketing division ("marketing" is indsutry speak for gas stations and the like) were down 20%. But profits from "exploration and production," the unit that takes the oil out of the ground or ocean floor and sells it, were through the roof (thanks to the price of oil), and accounted for about five times as much as the refining division made.

One rationale for the major oil companies to be integrated, i.e. go from the oil well all the way to the gas pump, is that in theory the different businesses are hedges against the oil price. When the price of oil is high, the "upstream" (getting the oil out) goes gangbusters. But that environment tends to not be as good for refining and marketing, because oil is the main "ingredient" for refineries, and thus the main cost. And while companies can and do pass much of that cost on to their customers, they don't pass it all on, in part because gasoline customers tend to freak out at high prices, and gas stations can undercut each other, etc. All other things being equal, a high oil price is bad for the refining and marketing business. Kills the margins.

But if the oil price was low, the margins on the R&M side improve, which compensate in part for far crappier results on the upstream side. There are other reasons for a major oil company to be fully integrated, but that's one of them.

Frankly, from what I recall, the refining and marketing business on a standalone basis (and there are some companies that just do that) is pretty crappy. It's kind of like the airlines. High fixed costs (refineries vs. planes), potentially high variable costs over which they wield little control (price of oil/jet fuel), very price-conscious customers and a "sticky" price that's hard to just jack up with impunity. That's why a company like Southland (7/11) began to focus more on selling Slurpees than the gas. In many respects it's a better business. More stable, anyway. Far better margins, I believe.

Now, you could argue that because the major oil companies are in fact rolling in cash because of the price at which they sell their crude oil, that they should give everyone a break by selling gas for less even if it hurts their overall business, either to help out the country given that the price of gas really does hit consumers square in the pocket book, or to be good corporate citizens, or to buy political/public goodwill, or what have you.

But the fact remains that Shell and the other major oil companies aren't minting money right now because they're making a killing selling gasoline. They're simply not.