Wednesday, April 30, 2008

Petrol Prices and Profits From Oil Companies

The average petrol prices in UK have reached 109p a litre, one forecourt in Kent is charging 129p. The rising price of oil, petrol, diesel and Natural Gas (which is linked to the price of oil) have meant average consumers are paying more for energy bills than ever before.

The government has been criticised for the high rates of tax. Not only do the government place excise duty on petrol at (roughly 50%) of the price (see: Fuel Duties in UK and Europe), but they also receive VAT at 17.5% With the price of petrol increasing, the Government are making an estimated £123m more from VAT revenues.

However, if the Government were to cut fuel tax, they would have to make the shortfall up for elsewhere. The average consumer would not be any better off for a fuel tax cut; they would merely pay for the tax cut elsewhere.

Profits of Oil Companies.

  • Shell and BP recently announced record profits. The figures are staggering.
  • BP made an astonishing $73m (£37m) a day.
  • Shell did better still, pocketing a cool $86m per day (that is $31,390m per year or $31.3 billion)
In their defence oil companies say:
  • We make most of our profits in extracting oil. Profit at forecourts is relatively low
  • We need high profits to discover new oil fields. This is becoming increasingly difficult with dwindling supplies.
  • We pay alot of corporation tax already
  • The fact that they make most of their profits at the extraction level doesn't really matter. The oil companies merely use their market power to squeeze out competition from the petrol pumps. Because they have monopoly in the supply of oil, they sell petrol to petrol stations at very high prices, enabling the high profits. This means the profit margin at petrol stations is low, but this suits them because they have already made the extravagant profit and now they can keep competitors from petrol retail away.
  • Profit is needed for the risky business of investment in discovering new oil supplies, but, not necessarily £37m per day. Most of the profit goes to shareholders not for investment.

  • Higher rate of corporation tax for firms making more than £1billion a year. Like higher rate of income tax for high income earners.
  • In the long term, we need to focus on alternatives to a petrol based economy. Using more renewable energy sources. We could also focus on more efficient transport such as public transport rather than cars.

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