FAQs - Profitability

Q:	The oil companies complain of how little money they make from selling petrol. Is this really true?
A:	The combined financial figures (based on published accounts) of the oil companies which are UKPIA members, show that for 1998-2007 they averaged a return on their capital tied up in refining and marketing of about 9.8%. Although returns on refinery operations have improved during this period, the experience of the past decade has been one of volatile results with short term improvements one year often reversed in subsequent years. The overall return on capital for the sector also compares very poorly with other industries. In fact, over the same period, the average return on capital employed for all UK manifacturing companies was 9.7%, whilst that of the service industries was 16.4%.

Q:	Judging from recent reports, oil companies make lots of money from other activities. Why not use some of these profits to reduce pump prices?
A:	While it is true that oil companies which have oil exploration and production activities (commonly called upstream) have seen an improvement in profitability since 2004 as crude oil prices have risen sharply, there have been long periods in previous years when the price of crude oil has been under $20 per barrel with consequent poor earnings and unacceptable profitability. UKPIA ‘s member companies are engaged in refining and in some cases marketing of petroleum of petroleum products. Some of these companies may also be part of a larger group that includes upstream oil and gas activities, as well as refining and marketing. However, they are very different activities and are run as separate businesses. For example the Return on Capital Employed is much lower for downstream oil than many other manufacturing sectors across the UK, and significant losses were made as recently as 2001. Oil companies engaged in petrol retailing compete on the same basis as other major petrol retailers who don't have an upstream. If an integrated company (one with exploration as well as refining/marketing interests) cross-subsidised its UK petrol retailing business, this might be regarded as anti-competitive and detrimental to the longer-term interests of consumers. For information on 'Upstream Oil Industry Profitability', click here.

Q:	If that's the case, why stay in the business?
A:	The industry has long recognised the need to respond to the market forces affecting the sector. There is a continuing drive to increase efficiency by investment in new equipment, as well as through merger of companies and rationalisation or sharing of facilities. With all this hard work returns have started to improve but are still unsatisfactory. By its very nature, the business is a long-term one with substantial sums tied up in plant and capital equipment. The costs to a company in pulling out would be very high both in financial terms and impact on employment and communities. Furthermore such a step would be pretty much irrevocable for any company embarking on this course of action.