Shell profits nearly triple as oil prices surge | Hacker News Reader

Shell profits nearly triple as oil prices surge

bbc.com

51 pointskitkat_new66 comments

This video explaining why prices are so high might be valuable to this discussion: https://www.youtube.com/watch?v=AQbmpecxS2w

I just knew it'd be that video. His content on the war in Ukraine, and pretty much everything, is very good.

I’m a little surprised at the vitriol towards market forces here. What would happen if we fixed prices? Make things even worse longer term as no incentive exists to reduce consumption and increase production. The shale boom has made oil companies reluctant to increase production only to see them get screwed down with low prices later.

Even more ironic when tech companies have far more market power and fully exploit it, both to the benefit of shareholders and their employees. (Not arguing against that either, those stratospheric returns drive new companies to try and improve to take their place)

The idea that "market forces" is a neutral thing we can only accept, like the weather, is a particular ideology that is widely, but not universally, accepted.

There are people behind these forces and people beneath their consequences. The balances here are the result of choices we've made and vitriol is a valid reaction to those results.

Personally I'm very comfortable directing that vitriol at the actual people who benefit from the exploitation of these market powers at the expense of others. But everyone isn't there yet so you have to give them a little room to be proxy mad at the "market forces" in the mean time.

Why not tax say 20% of the new profits and help the poorest who are most hit by gas price inflation?

Can anybody suggest why normal competition isn't working here? One would expect providers of an identical product to push their prices down to the minimum profitable level to compete with others doing the same.

From a consumer point of view, why is Texaco (for example) not charging significantly less for its fuel (while still retaining a healthy margin) and capturing all the market, triggering similar in other providers and a general downward price pressure?

Is it in fact a demand vs supply thing, and even if they had a bigger market they couldn't supply it due to limitations on production and refinery capacity?

Because in a resource and capital intensive industry the good years pay for all the costs to date. In bad years you might break even in terms of variable costs but contribute nothing towards capital costs.

Gasoline variable costs might be [cost of oil] + $6/bbl, while full baked in fixed and variable costs are [cost of oil] + $25/bbl.

It looks like profit now only because the capital expenditures were in prior years.

It’s like building a house for $500,000 cash and asking the landlord why they charge $2,000 a month in rent when their costs are only $500 per month in property taxes, maintenance and insurance.

The oil industry and many other similar industries couldn’t survive if they only charged the marginal cost of extraction and refinement and ignore the fixed costs of operation.

The constraints are in the shipping and refining. When demand goes up exploration and production (firms who find and get it out of the ground) get to charge more as end users fight over the limited supply.

Due to environmental regulations it is very difficult to build refineries, pipelines, import / export terminals, etc.

This is why when prices go up from $65 to $105 you do not see production companies increase supply further to get the extra sales, there's no way for them to get another barrel to the end customer.

I don't buy this argument. Assume the oil has already been dug up and refined. Two gas stations next to each other: Shell & BP should compete on price to the point that minimum profit margins are established. This doesn't happen because it's not in their interest to compete. Instead it's in their interest to collude and maintain prices as high as possible knowing full well that a new player won't enter the market any time soon.

The oil cartel is alive and well.

Gas stations are almost never owned and operated by a major oil company. It is quite famously a business that immigrants get into due to its low barriers to entry, and they set the prices at the pump of their gas station.

Location is the most important factor in how much more a gas station owner can charge relative to other gas station owners. If you want to see how much gas costs at near zero margin, open up the Costco app and you can see all the fuel prices nationwide. Although Costco only sells Top Tier gas, but that should be comparable to other brand name gas stations such as Shell and BP and Exxon.

California offers good data here going back 20 years:

https://www.energy.ca.gov/data-reports/energy-almanac/transp...

It's not just that they're not owned/operated by the oil companies in the US; they don't even obtain their supply of fuel directly from the oil company. Every gas station takes delivery of commodity-standard fuel from midstream distributors that operate pipelines and storage terminals. The only thing that differentiates between the Texaco gasoline on one side of the street and the Shell on the other is the proprietary additive blend that is mixed in at the storage terminal when an order is filled.

Gas retailers in a given region are generally all beholden to whatever the market dictates the 'generic' fuel pricing will be. The majors have a lot less control over that than most folks think they do.

BP and Shell are vertically integrated and mostly definitely do own a large number of gas stations at least here in Europe.

However the owner doesn't really matter in this hypothetical example as long as BP and Shell actually control the price at which oil is sold.

Q: The gasoline stations in my area have increased their prices the same amount and at the same time. Is that price fixing?

A: A uniform, simultaneous price change could be the result of price fixing, but it could also be the result of independent business responses to the same market conditions. For example, if conditions in the international oil market cause an increase in the price of crude oil, this could lead to an increase in the wholesale price of gasoline. Local gasoline stations may respond to higher wholesale gasoline prices by increasing their prices to cover these higher costs. Other market forces, such as publicly posting current prices (as is common with most gasoline stations), encourages suppliers to adjust their own prices quickly in order not to lose sales. If there is evidence that the gasoline station operators talked to each other about increasing prices and agreed on a common pricing plan, however, that may be an antitrust violation.

https://www.ftc.gov/advice-guidance/competition-guidance/gui...

It's not about price increases, it's about the increase in profit margins. Oil prices can go up and down due to supply constraints but profit margins can remain constant.

If you're a producer (extractor...) of oil, and the price of oil goes up, then you're going to make more profit unless your costs went up too. Why would you keep selling for a lower price, when you have pricing power?

Are these not constant enough?

https://news.ycombinator.com/item?id=31272505

Surely there is some time allowance for extreme changes in supply and demand for margins to settle down again.

Why would Texaco lower their prices?

Oil companies know if they restrict the supply the price skyrockets and they directly benefit

The world is so reliant on oil and cars that people don't lower their dependencies they just pay the new price

More context here:

https://www.youtube.com/watch?v=AQbmpecxS2w

Also, see: Enron, California power market manipulation

Or the Tesla battery in Australia that paid for itself incredibly quickly, not because it was physically needed by the grid, but because it stopped gas power stations from dicking with supply and demand to maximise their own profit.

Glibly, because the theory of self-correcting markets only works in economists' minds, not in real life.

Oil price is affected my many variables including speculation, supply & demand, latency and panic buying, but the supply is artificially controlled to maximise price and political leverage. If OPEC decided to announce a significant increase in production then the price would drop. But there is no real incentive for them to do this as they are maximising profits already and selling more for less doesn't benefit them long term. some of the oil producing countries want to exert political influence via oil supply (especially Saudi Arabia), essentially forcing forgiveness for bad governance and human rights abuses.

But actually the underlying price of crude hasn't been ridiculous, whereas the price of petrol at the pump has skyrocketed. It's the gap between the two that has grown and hence oil company profits.

Crude price is historically high:

https://www.macrotrends.net/1369/crude-oil-price-history-cha...

But apply the same logic to any other product.

If you made widgets, and you knew demand was 5 units, would you make 20? Of course not.

The power of OPEC has also decreased over time as other sources of oil have made up a larger percent.

Self correcting markets work. They dont work like you think they should. The timeline is longer and the correction may not be fuel prices going down, rather alternative solutions popping upbto replace a no longer affordable solution.

It's across the industry -- they're all rocketing vs the market. Collusion? Or maybe they just came to the same conclusion that scare-quotes "inflation" is in the media so it's a swell time to pretend.

Or the media is pumping out rage/click bait as usual.

Which is why you see articles reference profit, rather than profit margin.

Self correcting markets work, when the government doesn't reduce the supply, reduce exploration, close down pipelines, and then make the oil company's out to be the bad guys.

I mean the simplest explanation is that there's a price fixing cartel where everyone benefits by not trying to undercut each other.

No; the simplest explanation is that increasing demand for a product with limited supply increases in price. That's literally Econ 101 - no cartel required.

Cartels are also econ 101. And OPEC is quite famously a price fixing cartel. and 101 means "so simple it's basically wrong but we have to start somewhere" anyway.

Also, why did it take oil companies this long to figure out they could collectively charge whatever they want? Why did we ever have low prices after having high prices years ago?

Because outside of OPEC, they are not colluding with each other, and in general, the more they extract and sell, the more profits they earn.

One reason is because although the short-run price elasticity of demand for fuel is almost zero, the long-run is not.

i.e. if fuel prices stay high for months, consumers keep filling up their cars, keep buying the same fuel-inefficient cars they always have, keep making the same number of trips

If prices stay high for years, consumers start looking for other transport options, start buying more fuel-efficient (or electric) cars, etc.

Also: when oil companies make outsize profits during normal times, you get people with pitchforks calling for heads which is bad PR; and you get certain stripes of politicians calling for price controls etc.

Because it’s difficult to verify how much who extracts, so very easy to extract more than agreed upon and earn more at the cost of others. This case is literally used as an example in an economics class.

The theory advanced in the video someone else posted is that they always knew they could push it too far and get blowback. But now it's their last throw of the dice so they're going all in.

Previously they had to care about the next 40 years worth of profits, now they know there's a cliff edge coming, which brings new strategies to the fore.

>One would expect providers of an identical product to push their prices down to the minimum profitable level to compete with others doing the same.

That is not a definition of "normal competition", unless production capacity is free and infinite and barriers to entry and exit are zero.

Transportation fuels have almost zero short-run price elasticity; so of course supply shocks cause swings in prices.

> Can anybody suggest why normal competition isn't working here? One would expect providers of an identical product to push their prices down to the minimum profitable level to compete with others doing the same.

Is there evidence it is not working? Ramping up production and refining capacity takes time. Barriers to entry might be higher too due to drastic increases specifically in the hard, manual labor required for gas to get to the pumps. And of course, simple inflation would cause nominal prices to rise.

These profit margins do not look they have spiked unreasonably. A little spike is to be expected as there is a lag between when demand ramps up and supply catches up.

https://www.macrotrends.net/stocks/charts/SHEL/shell/profit-...

https://www.macrotrends.net/stocks/charts/BP/bp/profit-margi...

https://www.macrotrends.net/stocks/charts/XOM/exxon/profit-m...

https://www.macrotrends.net/stocks/charts/CVX/chevron/net-pr...

In oligopoly theory there's the kinked demand curve idea.

Basically, you know that all of your competitors have some control over their price.

If you drop your price, not because you're cheaper to produce but just willing to take less of a cut they can all match you on price, leaving you all back at square one but poorer.

You know that, they know that, you know that they know that you know that. Still think a price war is a good idea? Your boss probably doesn't.

Which is why nobody competes heavily with Texas Instruments over their absurdly priced calculators—sure, you could come out with a better product, at a lower price, and still make a healthy product. But TI's prices are only so high because they can be, and they're very able to drop their prices if need be to price you out of the market.

Casio :heart: (and even those seem overpriced for the components they use).

This is an industry the government is actively fighting. Short term there are profits but long term the outlook is bad and these projects need to pay off over decades to make sense.

Take Keystone XL as an example. Billions were spent only for it to be cancelled on the eve of construction by a new president. This is not a good industry to invest in long term.

The correct response is to milk existing infrastructure until it is no longer serviceable rather than trying to add new capacity.

I think it is because the supply of oil is ultimately limited. Current estimates are that we have oil left for about 47 years. Nearly all of that is already owned by some oil company, but not counted as an asset. Therefore, oil companies can profit immensely if the price of oil increases.

It's called https://en.m.wikipedia.org/wiki/Tacit_collusion#Conscious_pa...

Gee, what a surprise. Last time I checked, the oil producing regions of Canada aren’t providing their product to Canada at a discount to help reduce gas prices here. That would reduce their profits, violate fiduciary duty, blah blah blah.

Oh but they are. Alberta's producers are forced to sell at a discount due to low/no pipeline capacity.

What keeps Canada's gas prices high are lack of refining capacity. Much of Canada's oil is shipped down south, refined in America, and sold back to Canadians.

I would check this as there is refining capability throughout Canada to handle local consumption. Shipping refined gas is a problem as it goes boom too easily, Canada needs the pipelines to get their product to market as Alberta is landlocked. Newfoundland has open access but it’s at the back of beyond.

Edit: https://www.cer-rec.gc.ca/en/data-analysis/energy-commoditie...

Turns out that building key pipelines in other countries is stupid as a Canada to Canada pipeline went through the us. Probably cuz it was cheaper and who would have thought there’d be a difference of opinion between neighbours.

Nice reference. It even has a page with historical graphic data showing the gradient in gasoline prices.

In 2019, the newest year, it lists Edmonton at 118.9cents and Vancouver at 167.4cents. A rather massive gradient considering in theory these two markets are connected by pipeline. Note how Kamloops, also in BC and subject to the same taxes, is at 139cents.

It’s also tougher to refine. Heavier than the good stuff which frustrates the producers.

If you own producing wells the cost is mostly constant other than transportation; if the price goes up, you make more money. Pricing for gas is different, the price is dependent on the price of crude, the availability of refining, the distance from refining to the pump, and demand for driving. Thus the price fell off of a cliff during the pandemic since no one went anywhere.

The price of crude is dependent on demand and supply. The price of crude was $20-25 lower before the war started which is likely more economic; it went up because Russia is a large supplier and losing/reducing that supply caused the spike.

People love to blame a market when the price goes up and forget to blame the market when the price goes down. At one point during the pandemic the futures price crashed below zero. No one complained.

You may not like oil companies, but oil is about as basic a market as you can get as long as there is no collusion (aka cartels like in the 70's).

Arguing we should no longer use crude for burning is different; I'd rather see renewables to provide energy and heat.

Tax payers are paying for this war in the form of higher energy bills. The oil cartel and major shareholders (Vanguard, BlackRock, Chase etc) are getting the rewards.

It is, frankly, disgusting.

Oil prices were 50% above prepandemic levels even before the war. The war is just one more element to the puzzle, not the primary reason oil prices are high.

A developing structural gap between supply and demand is the primary one. Despite hopes about a green world, oil demand increases globally every year. If we don't invest in new production, prices will continue to increase

Biden has clearly taken a hit for these high energy prices. Here's my sincere hope: that people start to realize this is nothing more than unjustifiable, opportunistic greed by oil companies that would be no different in any other administration.

Just like with foreign policy, there's absolutely zero difference between the US political parties here. None.

The conversation we should have as a consequence of this is why are we giving away natural resources to allow private companies to make massive profits paying the government just a token for the privilege?

The US (and every other country) should have a model like Norway where they get the lion's share of the profits from resource extraction.

As an example of how far we are from this, look no further than the case of Steven Donziger. He is an American lawyer who helped Ecuador obtain a $9.5 billion judgement against Chevron for the massive pollution Chevron caused in Ecuador. As a result of this, Chevron found a friendly US judge to appoint a private oil law firm to criminally prosecute Donziger for fraud (in the US). He has been disabarred in New York for his "extravagant" pursuit of Chevron and charged with criminal contempt. Donziger had a bail set of $800,000 for a misdemeanour contempt charge and spent over two years in home detention.

I bring this up as a stark example of just how beholden the US government is to corporate interests.

> that people start to realize this is nothing more than unjustifiable, opportunistic greed by oil companies

i assume no one was complaining when petrol was below 2015 levels during the 2020-2021 covid period.

or when the US spent close to $10 trillion on covid.

or when shell made a loss in 2020.

sources:

https://www.statista.com/statistics/262860/uk-brent-crude-oi...

https://www.statista.com/statistics/260287/shells-net-income...

https://www.covidmoneytracker.org/

> no different in any other administration

disagreed.

This is a pretty bizarre comment section. Oil companies have a fixed extraction cost and the market sets the price of the commodity they produce. Should Google arbitrarily force the price of ads lower when the instant bid happens for ad placement?

I saw no tears shed for the oil industry when prices completely collapsed in 2015 causing the bankruptcy of thousands of companies over the following six years.

Bankruptcy? As in them legally not paying the debts they owed? And yet here they all are making record profits.

Weird that they couldn't plan well enough to deal with the ups and downs. Though it's a nice, unanticipated bonus for them that they get to ditch their debts with bankruptcy every so often. Wouldn't want those record profits going to pay off debts.

Oil companies aren’t silos where everything is done in house. Supermajors depend on tens to hundreds of service companies to accomplish literally anything. For example on the exploration side almost 100% of the companies who do offshore surveying have gone bankrupt in the last 6 years. And they continue to go bankrupt! Ion geophysical went into chapter 11 just two weeks ago with prices at an all time high. As far as I know there is just one company left who can do deep water surveys and they’re busy for years to come.

Think about how that affects the ability for a supermajor to drill new oil wells.

This is a known strategy used by big players in every industry. You can bully small suppliers and contractors into bankruptcy and basically get free work at their (and then societies) expense.

The ex-president was a big fan of this tactic.

https://fortune.com/2016/09/30/donald-trump-stiff-contractor...

Apparently US law encourages this and relies on repeat business to keep it in check, so watch out if you deal with an industry that looks like it's coming to an end. People will try to cash out while still owing you money.

I don't think you understand. This isn't supermajors welching on contracts to get free work. The work stopped coming in because of the commodity price collapsed and the only oil being produced is from wells that have already been drilled. Those wells eventually run dry and aren't being replaced.

Sometimes I wonder what an alternative timeline would look like had Tesla not existed. Would the auto-makers have made a move by now to EV?

...they did, several times before tesla.

Yes, as half-heartedly as GM's EV1. Musk and the boys were really committed to the cause.

Absolutely absurd that consumers are expected to stomach huge COL increases so that these companies can triple their profits.

Wind fall taxes are the remedy to price gouging, excessive profits, runaway exec compensation, etc.

Let the belligerents have their fun in the "free market". Publicly recognize all the "winners" with Presidential Medals of Awesomeness, karma, and ambassadorships. (Bravo, well done. Now please go away.)

Then claw it all back with repeated radical cashectomies.

"The secret of great fortunes without apparent cause is a crime forgotten, for it was properly done." -- Honoré de Balzac

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